[Post updated September 2021] In December 2015, the U.S. Department of Justice settled a whistleblower case brought under the False Claims Act against Franklin American Mortgage Company. As part of the settlement, the Franklin, Tennessee based mortgage company must pay $70 million to the federal government.
The case against Franklin American Mortgage was one of the last under the Obama administration. Not much would happen over the next four years but with new leadership in HUD, we expect things to change. More on that below.
According to court records, Franklin American was a “direct endorsement” lender allowed to participate in the FHA’s insurance program. Most residential mortgages today are quickly sold after the closing and packaged into Residential Mortgage Backed Securities (“RMBS”). These securities are then purchased by institutional investors.
Because there can be thousands of mortgages in each RMBS pool, investors want some assurance of the quality of the underlying mortgages. That assurance is satisfied when the mortgages are insured and backed by the government. The FHA (Federal Housing Administration), Fannie Mae and Freddie Mac are the three largest public guarantors of mortgages.
Because Franklin American is a direct endorsement lender, it has the authority to certify mortgages for guaranty by the FHA. That means Franklin American certified that all its loans and borrowers met HUD requirements.
Every loan approved by Franklin American required Franklin’s underwriters to certify that:
“I, the undersigned, as authorized representative of Franklin American at this time of closing of this mortgage loan, certify that I have personally reviewed the mortgage loan documents, closing statements, application for insurance endorsement, and all accompanying documents. I hereby make all certifications required for this mortgage as set forth in HUD Handbook 4000.4.”
Underwriters are the focal point for the direct endorsement program. The FHA and HUD rely on these certifications.
Under the terms of the settlement, Franklin American admitted that between 2006 and 2012, it set high quotas for underwriters. Underwriters that failed to approve loans were subject to discipline. Those that quickly processed and approved loans were offered bonuses.
Both the negative and positive rewards and the quota system itself are illegal. Underwriters have a duty to carefully inspect each loan application and make a determination on its merits. Threatening employees that don’t meet quota or approve enough loans creates an incentive to simply overlook problem applications. The same can be said for paying bonuses to the underwriters who approve the most loans.
An internal document written by an underwriting manager and obtained by the government said,
“[t]he requirement for new loans used to be 5-6 per day when you still had your [resubmissions] and appraisals to review. Those shifted to another team and your daily requirement became a minimum of 9 per day. Some of you are constantly hitting this number each and everyday and the company is paying you a bonus for your achievements. EVERYONE needs to be hitting this number each and everyday not just a day here or a day there and we need to be consistent. Some of you come in early, stay late, take things home, etc to get the job done….some of you work the regular hours with minimal extra….and this will not work.”
Another manager wrote, “Were [sic] is the accountability? I have put 4 [sales] people on Produce or Perish this month. We need to replace those underwriters who can’t get with the program and produce. No more excuses.”
In addition to the illegal quota scheme, the government also accused the company of employing improperly trained and qualified underwriters.
Ultimately, Franklin American had a disproportionate share of bad loans. The high percentage of bad loans isn’t surprising. An illegal quota system and management’s “produce or perish” mentality created the pressure that resulted in underwriters cutting corners just to save their own jobs. Because the FHA is a federal agency, taxpayers were forced to pay for Franklin American’s bad loans.
Illegal Quotas, Bad Mortgages and the False Claims Act
Under the False Claims Act, whistleblowers who report fraud related to mortgages backed by Fannie Mae, Freddie Mac, the VA or the FHA are eligible to receive hefty awards. (Two of our clients received a total of $100 million in award monies.)
To be eligible for an award, a would be whistleblower must have inside information about fraud related to a federal program or federal funds. Although Fannie Mae and Freddie Mac are private corporations, during the mortgage crisis of 2007, the government had to bail out and take over both programs. As a result, most residential mortgages issued today are backed with federal dollars.
At $70 million dollars, the Franklin American Mortgage settlement is quite small. Even a small $70 billion case can easily generate a whistleblower award of $10 million or more.
Several banks have already paid billions to settle similar claims. Last year, Bank of America paid $16.65 billion to resolve claims related to its residential mortgage business. (We were part of that case.)
In announcing the settlement, A Justice Department spokesperson said,
“This settlement is another step forward in the government’s efforts to hold lenders accountable for the harm caused by years of improper and inadequate underwriting of mortgages insured by the federal government. As this settlement makes clear, we will hold accountable anyone whose conduct results in loss to the government, whether it is a large bank or a smaller mortgage lender.”
Want more information about this case? See the government’s Franklin American statement of facts here.
There is a 6-year statute of limitations on False Claims Act cases. That means that claims relating to the run up of the 2007 mortgage crisis have expired. What makes this case interesting, however, is that even after the crisis, Franklin American continued with its illegal bonus compensation and quota system. It’s now 2021 and unfortunately, many of the lessons learned after the last mortgage crisis have been forgotten. More importantly, new leadership in HUD has promised to once again pursue underwriting violations.
Although the False Claims Act has a 6-year time limit, a different federal whistleblower statute, FIRREA, has a longer 10-year statute. Awards under that program, however, are limited to $1.6 million dollars.
If you have inside information about illegal underwriting practices, quota systems, phony appraisals or the like, act quickly. You may be eligible for an award. Under both FIRREA and the False Claims Act, generally only the first person to report fraud is eligible for the award.
As this case points out, illegal quota schemes and compensation arrangements still exist within the industry. If you have inside information about such a scheme and are interested in becoming a whistleblower, call us.
For more information, contact attorney Brian Mahany online, by email at or by telephone at (414) 258-2375. All inquiries are protected by the attorney – client privilege and are kept confidential. Whistleblowers are also eligible for stringent federal anti-retaliation protections.
Franklin American Mortgage Today
In 2018, Citizen’s Bank acquired Franklin American Mortgage. The company continues to operate as Franklin American at this writing. Their combined mortgage servicing portfolio as of the date of acquisition was a whopping $65 billion. If you know of underwriting or any other bank fraud at Citizen’s Bank or Franklin American Mortgage, contact us for a confidential consultation.
MahanyLaw – America’s Whistleblower Lawyers