United States Files Lawsuit Alleging That Guild Mortgage Improperly Originated and Underwrote FHA-Insured Mortgage Loans
The United States has filed a complaint in the U.S. District Court for the District of Columbia against Guild Mortgage Company (Guild) under the False Claims Act for improperly originating and underwriting mortgages insured by the Federal Housing Administration (FHA), the Justice Department announced today. Guild is a mortgage lender headquartered in San Diego, California.
“This case is another example of the Justice Department’s continued efforts to ensure that lenders that participate in the FHA mortgage insurance program act in good faith and conduct appropriate due diligence when committing the United States to insure home loans,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “To protect the housing market and the FHA fund, we will continue to hold responsible lenders that knowingly violate the rules.”
Guild participated in the FHA insurance program as a direct endorsement (DE) lender. As a DE lender, Guild had the authority to originate, underwrite and certify mortgages for FHA insurance. If a DE lender such as Guild approves a mortgage loan for FHA insurance and the loan later defaults, the U.S. Department of Housing and Urban Development (HUD), FHA’s parent agency, is responsible for the losses resulting from the defaulted loan. Under the DE lender program, neither the FHA nor HUD reviews the underwriting of a loan before it is endorsed for FHA insurance. HUD therefore relies on DE lenders to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance and DE lenders must certify that every loan endorsed for FHA insurance is underwritten according to the applicable FHA standards.
The government’s complaint alleges that, from January 2006 through December 2011, Guild knowingly submitted, or caused the submission of, claims for hundreds of improperly underwritten FHA-insured loans. The complaint further alleges that Guild grew its FHA lending business by ignoring FHA rules and falsely certifying compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages. For example, Guild allegedly allowed underwriters to waive compliance with FHA requirements when underwriting a loan. Additionally, Guild used unqualified junior-underwriters who did not have a DE certification to waive mandatory conditions on higher risk loans where HUD required underwriting only by highly trained DE underwriters.
The government’s complaint further alleges that Guild’s senior management focused on growth and profits and ignored quality. From 2006 to 2012, Guild conducted at least 125 branch audits in which almost 40 percent resulted in either a qualified rating or unsatisfactory rating. A qualified rating was defined as having a “significant number of findings, and/or findings noted that have more serious impact or risk to Guild,” or “Knowledge of procedures and controls; however, they appear to be inefficient.” An unsatisfactory rating was defined as one where “serious concerns were noted: lack of knowledge, procedures, and/or controls in branch.” The complaint alleges that, through Guild’s quality control reviews, significant defects were found in over 20 percent of the FHA loans reviewed between 2006 and 2011 and over half the loans had either significant or moderate defects. Significant defects included fraud, misrepresentation and other serious findings while moderate defects included not following guidelines. However, Guild did not calculate or distribute any error rate during the relevant time period, thus management was not presented with these findings. Additionally, for many of the quarters from 2006 through 2009, Guild did not even distribute any of the quality control findings to management. As a result, Guild management often did not review or remediate findings from quality control audits during these years. In the quarters where Guild management actually did review quality control findings, it did so almost a year after the loans closed and failed to timely remediate any identified problems. In 2013, when Guild finally began addressing the quality of its FHA underwriting, Guild’s head of quality control pointed out the ineffectiveness of its past efforts at addressing loan quality: “I’m not optimistic about training reminders and individual follow-ups being all that effective.”
The government’s complaint alleges that as a result of Guild’s knowingly deficient mortgage underwriting practices, HUD has already paid tens of millions of dollars of insurance claims on loans improperly underwritten by Guild, and that there are many additional loans improperly underwritten by Guild that are currently in default and could result in further insurance claims on HUD. For example, the government’s complaint identifies a mortgage loan that was improperly underwritten in violation of HUD requirements, causing the borrower to default and HUD to pay the loss on the loan. Specifically, Guild failed to verify the borrower’s prior rental payments, overstated the borrower’s income, failed to develop a credit history for the borrower who had no credit score, exceeded FHA’s qualifying debt to income ratio without determining whether certain compensating factors were present, and failed to identify the source of a large deposit made to the borrower’s account. The underwriter at Guild improperly waived multiple conditions and allowed an unauthorized junior underwriter to do the same for other conditions. In sworn testimony, the Guild underwriter admitted the loan failed to comply with FHA underwriting requirements.
“The Federal Housing Administration’s insurance program is meant to encourage lenders to expand opportunity for homeownership by providing financing to prospective buyers who otherwise might not be able to enter the housing market,” said U.S. Attorney Channing D. Phillips for the District of Columbia. “To ensure that prospective homebuyers realize the dream of long term homeownership, the program has strict rules and is not a license for lenders to carelessly subject federal dollars to risk. This lawsuit is designed to help the FHA – and American taxpayers -- recoup tens of millions of dollars in losses attributable to a lender accused of improperly underwriting FHA-insured mortgages and committing the government’s guarantee to mortgages that failed to comply with program rules.”
“The decision to intervene in this matter should serve as a reminder of the priority given to pursuing lenders that violate HUD program rules in order to hold them accountable and the value of private citizen participation, including whistleblowers, in pursuing lenders that violate the rules,” said HUD Inspector General David A. Montoya.
“FHA relies on the honesty and integrity of those lenders participating in our program,” said HUD’s General Counsel Helen R. Kanovsky. “The action we take today should send a clear message that we will not tolerate the abuse of our programs or of the families who should benefit from them.”
The lawsuit was brought under the qui tam, or whistleblower, provisions of the False Claims Act by a former employee of Guild. Under the act, a private party may bring suit on behalf of the United States and share in any recovery. The government may intervene in the case, as it has done here. The False Claims Act allows the government to recover treble damages and penalties from those who violate it.
The investigation of this matter was a coordinated effort among HUD, its Office of Inspector General, and the U.S. Attorney’s Office for the District of Columbia and the Civil Division’s Commercial Litigation Branch.
The action is captioned United States ex rel. Dougherty v. Guild Mortgage Company (D.D.C.). The claims asserted in the complaint are allegations only and there has been no determination of liability.