When Mortgage Lenders Act Recklessly, the Government and Whistleblower Lawyers Use the False Claims Act to Recover Funds

On Behalf of | July 25, 2018 | Whistleblower Law

By now we all know the general story of the 2008 financial crisis. Large banks made reckless subprime mortgage loans to people buying homes. These loans were resold to different institutions in various forms until the market eventually crashed when borrowers were no longer able to make their payments.

One reason many banks were willing to make reckless loans is that they were guaranteed by the federal government. The Federal Housing Administration, a part of the Department of Housing and Urban Development, runs a program that allows private entities to underwrite and endorse mortgages that the FHA agrees to insure. This program is intended to expand access to homeownership by helping families obtain mortgages when they would otherwise not be able to.

After the financial crisis, the mortgage practices of banks came under increased scrutiny. It turned out that the banks had not been following the Government’s required standards in originating and underwriting loans. When the loans default, the Government is damaged in its role as an insurer, and these damages may give rise to False Claims Act actions.

Whistleblower attorneys and the Government have utilized the False Claims Act to pursue cases against banks and related institutions for misrepresenting the nature of the loans for which they sought Government insurance.

There have been several eye-popping settlements against mortgage originators in the last few years:

  • Wells Fargo paid $1.2 billion for certifying loans for FHA mortgage insurance that did not satisfy the conditions for certification
  • JPMorgan Chase paid $614 million for originating and underwriting non-compliant mortgage loans that were submitted for insurance coverage and guarantees by the federal government
  • Branch Banking & Trust Company paid $83 million to settle allegations that it endorsed loans for FHA insurance even after they were internally flagged as having “Serious Marketability” issues by their quality control department

These cases have cast a wide net upon companies that have defrauded the FHA program. For example, earlier this year, the Department of Justice entered into a $149.5 million settlement in an action against Deloitte & Touche LLP for knowingly deviating from audit standards and failing to detect fraudulent conduct in its role as an independent auditor of a lender.

Whistleblowers who notice that a company is failing to comply with relevant terms while certifying loans with the Government can contact a whistleblower lawyer (or “qui tam” lawyer) in New York or DC to determine whether there is a basis to file a False Claims Act case under the law.