The largest pending false claims act (whistleblower) case against a lender or bank is United States of America v. Allied Home Mortgage. [Full disclosure – we proudly represent the whistleblower in that case.] HUD claims that Allied and its control person, Jim Hodge, owe $2,400,000,000.00 to taxpayers. That’s right, over $2 billion! Hodge and company deny those allegations and have been fighting for the past two years to have the charges dismissed.
Since the Allied case was filed, several other False Claims Act cases have also been filed alleging essentially the same wrongful conduct. We call this type of case net branch fraud. They are also called “shadow branch” cases.
The recent Allied opinion by U.S. Magistrate Judge George Hanks allowing the government to proceed against Allied is very illuminating and educational. It serves as a blueprint for future whistleblowers who wish to come forward, stop fraud and earn a hefty reward.
Under the false claims act, whistleblowers are usually awarded 20% of whatever the government collects. With several cases settling in the tens or hundreds of millions of dollars, it is easy to see why the whistleblower law is the best tool in the government’s arsenal. (The law also allows triple damages.)
To understand net branch fraud, a little background on the home mortgage industry is necessary.
HUD insures lenders against losses on loans they make to homeowners. HUD directly administers the Federal Housing Administration (FHA) program. Loans insured by Fannie Mae and Freddie Mac are also eligible for prosecution under the False Claims Act since both programs are under government conservatorship.
A fundamental requirement of the FHA, Fannie and Freddie programs is that loans originated by participating lenders must meet stringent underwriting guidelines. Included in these guidelines is a requirement that each branch be separately approved and must meet all legal requirements. For branch operations, there is a requirement that the lender “will pay all operating costs of the branch office.”
Why are these requirements so important?
HUD and the other loan guaranty agencies can’t review every loan. There isn’t the time or the manpower to do so. Instead, the government allows the industry to police itself. The branch requirements are important for two reasons.
First, HUD wants to know that all the people in the field (branch offices) are following the same underwriting and quality assurance protocols. Secondly, by requiring the lender to be responsible for branch costs, the government insures that the lender has a financial stake in their operations.
Notwithstanding these very clear rules, some lenders cut corners when seeking rapid growth and expansion. They essentially allow a franchise type operation where the branch becomes responsible for expenses. These branches, called “net branches” or “shadow branches”, frequently have much higher than average loan default rates. When that happens, taxpayers are often left footing the bill.
Why do net branches typically have high default rates? Because they are operated by thinly capitalized independent owners. When times are tough, quality control frequently suffers. That almost always means higher default rates.
Some banks go to great lengths to make it appear that each branch is a lender owned branch. Often the documentation used to set up these branches is simply form over substance. For example, if branch managers must fund all the payroll, rent and other expenses, the branch is a net branch no matter what the documentation says.
We are currently seeking new whistleblowers with personal knowledge of net branch fraud. We know of many lenders who continue this illegal practice. Not only are taxpayers hurt but so are the branch employees struggling to make a living.
As noted earlier, whistleblowers are entitled to a percentage of whatever the government collects. To qualify, there must be a loss to a government funded program and the whistleblower, called a relator, must have original source information.
We believe that we have filed or settled more shadow branch fraud cases than any other law firm. If you think you may have a case, contact attorney Brian Mahany at firstname.lastname@example.org or by telephone (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and kept in strict confidence.