Protecting the federal taxpayers from those who submit false or fraudulent claims on the federal fisc is a crucial function of the Department of Justice and that function includes working to protect the Federal Housing Administration (FHA). This work is just one aspect of the department’s broader efforts to combat the type of financial fraud that recently drove the American economy to the brink.
The FHA’s mortgage insurance program was one of the victims of these fraudulent schemes. The mission of the FHA is to help creditworthy low income and first time homebuyers—individuals and families often denied traditional credit—to obtain a mortgage and purchase a home. The FHA puts that mission into practice by insuring qualifying loans against default, thereby reducing the lenders’ risk in making such loans. In furtherance of that mission, the FHA requires a lender to comply with certain rules in originating, processing and underwriting a loan and to sign a certification that it complied with these rules. The purpose of these rules is twofold: first, to ensure that the individuals and families who obtain FHA insured mortgages are able to make the mortgage payments and remain in their homes, and second, to protect the FHA insurance fund, as it is the FHA and not the lender that is financially responsible in the event that a loan defaults.
In a series of investigations that began in 2012, the department – working with its partners at the Department of Housing and Urban Development (HUD) and its Office of Inspector General – uncovered evidence that certain lenders were originating loans insured by the FHA that the lenders knew were not eligible for such insurance. Nevertheless, these lenders submitted false certifications to the FHA that those loans were in fact eligible for FHA mortgage insurance, causing the FHA to pay hundreds of millions of dollars in ineligible claims. This conduct had serious consequences. In addition to the devastating effect that the resulting defaults and foreclosures had on the homeowners, this conduct resulted in sweeping losses to the FHA insurance fund. As a result of this and other factors, at the end of Fiscal Year 2013, for the first time in its history, the fund needed to request an infusion of funds from the federal treasury.
The Justice Department has powerful tools to address this type of misconduct. One tool, a statute called the False Claims Act, allows the department to investigate and sue entities that submit false statements and claims to the government, recover losses caused by those entities and deter similar misconduct by others. In order to protect America’s taxpayers and homeowners, the department has used the False Claims Act in a series of settlements and actions against lenders that knowingly submitted or caused the submission of false claims for FHA mortgage insurance by approving FHA insured loans that the lenders knew were not eligible.
The False Claims Act establishes liability for a variety of false or fraudulent conduct, including when a person “knowingly presents or causes to be presented a false claim for payment or approval,” or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” Key words in these provisions require the false claim or statement to be “knowing” and “material.” The False Claims Act defines “knowingly” to mean that a person or entity “has actual knowledge of the information; acts in deliberate ignorance of the truth or falsity of the information; or acts in reckless disregard of the truth or falsity of the information.” In other words, the False Claims Act requires more than mere negligence or a simple mistake to hold a person liable.
The False Claims Act also defines the term material to mean “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” Thus, insignificant violations that have no effect on a person’s entitlement to the payment of a claim also do not give rise to liability.
The statutory language of the False Claims Act and our FHA investigations make clear that a lender that tries to adhere to FHA requirements and makes an immaterial error, or otherwise acts in good faith, will not be subject to liability under the False Claims Act. The department has settled and brought cases when the lender knowingly submitted loans for FHA mortgage insurance that contained material defects in the underwriting of the mortgage that rendered the loan ineligible for FHA mortgage insurance. Such material defects that have resulted in cases include failing to verify a borrower’s employment, assets, or credit in accordance with FHA’s requirements; materially overstating a borrower’s income, assets, or willingness to repay the mortgage loan; materially understating a borrower’s liabilities or ability to repay the mortgage loans; and failing to ensure the property provides adequate collateral for the mortgage loan.
Below are recent examples of such cases:
In 2014, the department settled alleged violations of the False Claims Act with SunTrust Bank (SunTrust) for $418 million. As part of the settlement, SunTrust admitted that between January 2006 and March 2012, it originated and underwrote FHA-insured mortgages that did not meet FHA requirements and were therefore not eligible for FHA mortgage insurance, that it failed to carry out an effective quality control program to identify non-compliant loans and that it failed to self-report to HUD even the defective loans it did identify. SunTrust also admitted that numerous audits and other documents disseminated to its management between 2009 and 2012 described significant flaws and inadequacies in SunTrust’s origination, underwriting, and quality control processes and notified SunTrust management that as many as 50 percent or more of SunTrust’s FHA-insured mortgages did not comply with FHA requirements. For example, a 2010 internal audit stated that SunTrust had “identified pervasive weaknesses in many controls that…impair continuity and consistency of operations and management’s ability to generate high-quality loans.” Other reports received by SunTrust management described its quality control program as “severely flawed” and “ineffective.” These reports also described to management that the volume of problems in the program was “excessive,” and that the error rates were “elevated” and at an “unacceptable level.”
In 2015, Metlife Home Loans (MLHL) agreed to settle alleged False Claims Act violations for $123.5 million. As acknowledged by MLHL, from September 2008 through March 2012, MLHL repeatedly certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements and were therefore not eligible for FHA mortgage insurance. MetLife Bank was aware that a substantial percentage of these loans were not eligible for FHA mortgage insurance based on its own internal quality control findings. According to these findings, between January 2009 and August 2010, the portion of MetLife Bank loans containing the most serious category of deficiencies, which MetLife Bank called “material/significant,” ranged from 25 percent to more than 60 percent. While the overall “significant” error rate identified by MetLife Bank decreased in 2010 and 2011, during the same time period, MetLife Bank more frequently downgraded FHA loan defects from “significant” to “moderate.” In one instance, a quality control employee wrote in an email discussing MetLife Bank’s downgrading practice: “Why say Significant when it feels so Good to say MODERATE.” Overall, between January 2009 and December 2011, MetLife Bank identified 1,097 FHA mortgage loans underwritten by MetLife Bank with a “significant” finding, but despite an obligation to self-report findings of material violations of FHA requirements, MetLife Bank only self-reported 321 mortgages to HUD.
In the department’s $212.5 million settlement with First Tennessee Bank National Association (First Tennessee) in 2015, First Tennessee agreed that the quality of its FHA underwriting significantly decreased during 2008 as its FHA lending increased. Beginning no later than early 2008, First Tennessee became aware that a substantial percentage of its FHA loans were not eligible for FHA mortgage insurance based on its own quality control findings. For example, in February 2008, First Tennessee had a significant findings percentage of 47 percent. Despite internally acknowledging that hundreds of its FHA mortgages had material deficiencies, and despite its obligation to self-report findings of material violations of FHA requirements, First Tennessee failed to report even a single deficient mortgage to FHA.
The department will continue these enforcement efforts by using the False Claims Act, and will continue to be guided by the language of the act that prohibits the submission of knowing and material false claims. In the FHA context, this means that no lender will face False Claims Act enforcement based on an unknowing mistake or an immaterial requirement. But, at the same time, the department will not hesitate to bring an action where a lender – or any other individual or entity who would defraud the federal taxpayer – submits false statements and claims at the expense of the federal fisc.