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  • C.D. Cal. Dismisses False Claims Act Qui Tam Suit Against Group of Lenders

    Lending

    On July 15, the U.S. District Court for the Central District of California dismissed a relator real estate agent’s suit against a group of lenders the relator alleged submitted claims for FHA insurance benefits to HUD based on false certifications of compliance with the National Housing Act. U.S. ex rel Hastings v. Wells Fargo Bank, No. 12-3624, Order (C.D. Cal. Jul. 15, 2014). The relator alleged on behalf of the U.S. government that loans where borrowers received assistance from seller-funded down payment assistance programs, such as the Nehemiah Program, did not satisfy requirements for gift funds, and as a result the lenders had falsely certified compliance with the National Housing Act’s three-percent down payment requirement when seeking FHA insurance for such loans. The government declined to intervene in the case. The court agreed with the lenders and held that the complaint could not survive the False Claims Act’s public disclosure bar—a jurisdictional bar against claims predicated on allegations already in the public domain. The court explained that the public disclosure standard is met if there were either (i) public allegations of fraud “substantially similar” to the one described in the False Claims Act complaint, or (ii) enough information publicly disclosed regarding the allegedly fraudulent transactions to put the government on notice of a potential claim. Here, the court determined that claims related to seller-funded down payment assistance programs were part of a “robust public debate” well prior to the time the complaint was filed in this case, and that the debate was sufficient to put the government on notice of the alleged conduct. The court also determined that the relator was not an “original source” of the public disclosures and as such could not overcome the public disclosure bar. Because the court concluded that amendment would be futile, the court dismissed the suit with prejudice.  BuckleySandler represented one of the lenders in this case.

    Mortgage Origination FHA False Claims Act / FIRREA

  • S.D.N.Y. U.S. Attorney Obtains FHA, GSE False Claims Settlement

    Lending

    On July 1, the U.S. Attorney for the Southern District of New York announced that a large bank agreed to pay $10 million to resolve allegations that prior to 2011 it violated the False Claims Act and FIRREA by failing to oversee the reasonableness of foreclosure-related charges it submitted to the FHA and Fannie Mae for reimbursement, contrary to program requirements and the bank’s certifications that it had done so. The government intervened in a whistleblower suit claiming that, notwithstanding FHA program requirements and the bank’s annual FHA certifications, prior to 2011, the bank failed to create or maintain an adequate FHA quality control program to review the fees and charges submitted by outside counsel and other third-party providers to the bank, which the bank then submitted to FHA for reimbursement. The government also claimed that the bank failed to create or maintain Fannie Mae audit and control systems sufficient to ensure that the fees and expenses submitted by outside counsel and other third-party providers to the bank, which the bank then submitted to Fannie Mae for reimbursement, were reasonable, customary, or necessary. In addition to the monetary settlement, the bank was required to admit to the allegations and agreed to remain compliant with all rules applicable to servicers of mortgage loans insured by FHA and to servicers of loans held or securitized by Fannie Mae and Freddie Mac.

    Fannie Mae HUD FHFA DOJ Enforcement FHA False Claims Act / FIRREA

  • Federal, State Authorities Announce Substantial Mortgage Settlement

    Lending

    On June 17 the DOJ, the CFPB, HUD, and 49 state attorneys general and the District of Columbia’s attorney general announced a $968 million consent judgment with a large mortgage company to resolve numerous federal and state investigations regarding alleged improper mortgage origination, servicing, and foreclosure practices. The company agreed to pay $418 million to resolve potential liability under the federal False Claims Act for allegedly originating and underwriting FHA-insured mortgages that did not meet FHA requirements, failing to adhere to an effective quality control program to identify non-compliant loans, and failing to self-report to HUD the defective loans it did identify. The company also agreed to measures similar to those in the National Mortgage Settlement (NMS) reached in February 2012.  In particular, the company will (i) provide at least $500 million in borrower relief in the next three years, including by reducing the principal on mortgages for borrowers who are at risk of default, reducing mortgage interest rates for current but underwater borrowers, and other relief; (ii) pay $50 million to redress its alleged servicing violations; and (iii) implement certain changes in its servicing and foreclosure activities to meet new servicing standards. The agreement is subject to court approval, after which compliance with its terms, including the servicing standards, will be overseen by the NMS Monitor, Joseph A. Smith Jr.

    CFPB Mortgage Origination Mortgage Servicing State Attorney General DOJ Enforcement FHA False Claims Act / FIRREA

  • D.C. Circuit Holds Government False Claims Case Not Precluded By National Mortgage Settlement

    Lending

    On June 10, the U.S. Court of Appeals for the District of Columbia affirmed the district court’s decision not to enjoin the federal government from pursuing alleged False Claims Act violations against a bank that argued such claims were precluded by the terms of the National Mortgage Settlement. United States v. Bank of Am. Corp., No 13-5112, 2014 WL 2575426 (D.C. Cir., Jun. 10, 2014). The bank sought to halt a suit filed by the government in the Southern District of New York (SDNY), in which the government alleges that the bank’s certification of loans as eligible for FHA insurance under the FHA’s Direct Endorsement Lender Program violated the False Claims Act. The bank asserted that the National Mortgage Settlement contains a comprehensive release for certain liability with respect to its alleged FHA mortgage lending conduct. The appeals court held that the agreement releases only the narrower category of liability for loans based on allegations that the bank’s annual certification was false without regard to whether any such loans contain material violations of HUD-FHA requirements, , and held that distinct loan-level violations for such loans would provide an independent basis for liability. However, the appeals court agreed that the SDNY must construe the government’s complaint and “ensure that the claims are litigated in a manner that comports with the [National Mortgage Settlement] Release’s limitations.” The appeals court agreed with the bank that some of the government’s claims “tread on the verge of the released claims, referencing false annual certifications explicitly.” The appeals court noted that the government repeatedly conceded that, to comport the SDNY suit with the National Mortgage Settlement release terms, “material violations do need to be demonstrated with respect to individual loans,” and cautioned the government that, should prosecution of its claims depart from that concession, the bank may seek appropriate relief.

    DOJ FHA National Mortgage Servicing Settlement False Claims Act / FIRREA SDNY

  • Congressional Democrats Want Meeting With Attorney General On Mortgage Fraud Enforcement

    Financial Crimes

    On March 17, Senator Elizabeth Warren (D-MA) and Representatives Elijah Cummings (D-MD) and Maxine Waters (D-CA) sent a letter requesting a meeting with Attorney General Eric Holder to review the findings of a recent report on the DOJ’s mortgage fraud enforcement efforts.  The lawmakers state that the report raises questions about the DOJ’s “commitment to investigate and prosecute crimes such as predatory lending, loan modification scams, and abusive mortgage servicing practices.” They are seeking information from the Attorney General about steps the DOJ will take to ensure that its efforts “to identify and prosecute those responsible for fraudulent mortgage practices are equal to the harms such crimes have caused [the members’] constituents.”

    DOJ False Claims Act / FIRREA Financial Crimes Elizabeth Warren Mortgage Fraud Predatory Lending

  • DOJ OIG Report Critical Of Mortgage Fraud Enforcement Programs

    Financial Crimes

    On March 13, the DOJ Office of Inspector General (OIG) issued a report on its audit of the DOJ’s efforts between 2009 and 2011 to pursue alleged mortgage fraud. Of particular note, the report reveals for the first time publicly that as part of a joint effort between HUD and the DOJ related to so-called “high default lenders,” the HUD OIG provided 84 U.S. Attorney Offices (USAOs) with lender default data for potential civil investigations and approximately 40 civil investigations were opened as a result. Much of the report focuses on the DOJ’s limited ability to track its mortgage fraud enforcement efforts. The audit revealed that, as a result of those limitations, the DOJ has repeatedly used inaccurate statistics in public statements about its mortgage enforcement results. Among a series of recommendations, the DOJ OIG suggests that DOJ (i) direct all USAOs to periodically assess any monetary thresholds applied to mortgage fraud cases to ensure they are reasonably based upon the threat within their respective jurisdictions and adequately allow for non-monetary harms that result from mortgage fraud schemes, as well as ensure that law enforcement agencies in their respective districts have a clear understanding of any limiting factors being applied to such cases; (ii) develop a method to capture additional data that will allow DOJ to better understand the results of its efforts in investigating and prosecuting mortgage fraud and to identify the position of mortgage fraud defendants within an organization; and (iii) develop a method to readily identify mortgage fraud criminal and civil enforcement efforts for reporting purposes.

    DOJ False Claims Act / FIRREA Financial Crimes

  • Mortgage Fraud Whistleblower Receives $64 Million Award

    Lending

    On March 7, the U.S. District Court for the Southern District of New York approved a stipulation and order awarding nearly $64 million to the relator in a mortgage fraud case recently settled by the federal government. Pursuant to that settlement, a mortgage lender agreed to pay a total of $614 million to resolve allegations that it violated the False Claims Act by submitting false loan-level certifications that fraudulently induced HUD and the Department of Veterans Affairs to insure ineligible mortgage loans.

    HUD DOJ FHA False Claims Act / FIRREA

  • DOJ Obtains Settlement In FHA False Claims Act Case

    Lending

    On February 4, the DOJ announced the filing and simultaneous settlement of a complaint by the U.S. Attorney for the Southern District of New York (SDNY) against a mortgage lender alleged to have violated the False Claims Act (FCA) by submitting false loan-level certifications to HUD that fraudulently induced HUD to insure ineligible mortgage loans. The complaint makes similar claims with respect to loans insured by the Department of Veterans Affairs (VA). This is the first FCA case brought by the SDNY to assert claims based on VA loans. Although the complaint was filed in a whistleblower qui tam case under seal in January 2013, it indicates the U.S. Attorney’s investigation of fraudulent lending practices has been on-going since 2011. In addition to allegations concerning reckless origination practices, the complaint also alleges that the lender’s underwriters manipulated the data entered into the AUS/TOTAL Scorecard system, repeatedly entering hypothetical data that lacked a factual basis with the goal of determining the lowest values that would generate an “accept/approve” recommendation. The U.S. Attorney claims this practice violated HUD guidance and encouraged fraud by both loan officers and borrowers, and also that the lender made false statements in its loan-level certifications when it falsely certified to the “integrity” of the data entered by underwriters into AUS/TOTAL. To resolve the matter, the lender agreed to pay a total of $614 million; $564.6 million to resolve the HUD claims and $49.4 million to resolve the VA claims. Consistent with the SDNY’s recent practice of requiring admissions in civil fraud cases, the settlement stipulation recites that the lender admits responsibility for certain specified allegations. The settlement also requires the lender to implement “an enhanced quality control program,” the terms of which are to be memorialized in a separate agreement still to be negotiated.

    Mortgage Origination Civil Fraud Actions DOJ Enforcement FHA False Claims Act / FIRREA

  • Federal Government Seeks Higher Penalties In GSE Fraud Case

    Lending

    On January 29, the DOJ filed a supplemental brief in support of its claim for civil penalties following a jury verdict it obtained last October in the first case alleging violations of FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. U.S. v. Countrywide Fin. Corp., No. 12-CV-1422 (S.D.N.Y. Jan. 28, 2014). In October, following a four week trial, a jury found a bank liable under FIRREA based on a program operated by a lender that the bank had acquired. The government originally sought damages of $864 million based on alleged losses incurred by Fannie Mae and Freddie Mac. After the judge requested supplemental briefing from the parties focused on the alleged gain rather than loss, the government submitted a brief arguing that the gain was $2.1 billion, and requesting that the court impose a penalty in that amount. The government asserts that the penalty should be calculated using gross gain, rather than net gain, to accomplish “FIRREA’s central purpose of punishment and deterrence.”

    Freddie Mac Fannie Mae DOJ Enforcement False Claims Act / FIRREA

  • Federal Court Dismisses FCA Claims Against Bank's Outside Directors

    Consumer Finance

    On January 3, the U.S. District Court for the Northern District of Illinois held that a relator failed to support allegations that the outside directors of a failed bank misrepresented to the FDIC the quality of the bank’s collateral on real estate loans, and dismissed those claims. U.S. v. Veluchamy, No. 11-4458, 2014 WL 51398 (N.D. Ill. Jan. 3, 2014). The relator alleges that the outside directors, as well as bank managers and employees and the bank’s appraisal company, violated the False Claims Act by engaging in a scheme to defraud the FDIC by misrepresenting the loan-to-value ratios for real estate lending and submitting fraudulent Call Reports based on overvalued appraisals. The court held that the bank’s outside directors were not shown to be involved in the day-to-day operations of the bank, and that the relator failed to demonstrate the directors had knowledge of or contributed to the alleged scheme. The court denied motions to dismiss filed by the other defendants. The court also held that the relator’s claims were not barred by prior public disclosure of the allegations. The court explained that a Material Loss Review issued by the FDIC’s inspector general following the bank’s failure did not include “critical elements” of the relator’s fraud claims, and that a prior state court employment case filed against the bank by the relator also did not reveal essential elements of the current claims.

    FDIC Directors & Officers False Claims Act / FIRREA

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