The federal False Claims Act allows ordinary people with inside information about fraud involving government funds to do something extraordinary. They can become whistleblowers, file a lawsuit on behalf of the government and keep a percentage of what the government collects. By now, a few mortgage bankers are saying what does this have to do with Fannie Mae and Freddie Mac? A 2009 change in the law extends the availability of awards to these entities because they received federal funds and advance a government interest.
Remember the big bank bailout in 2009? Taxpayers shelled out hundreds of billions to big banks to keep them afloat. Congress was fearful that the economy could collapse so it loaned money to banks and other financial institutions to keep their doors open. Two of the biggest recipients were Fannie Mae and Freddie Mac.
For those outside the industry, Fannie Mae is the popular name for the Federal national Mortgage Association. Freddie Mac is short for the Federal Home Loan Mortgage Corporation. Both companies are private but they are not like 99.99% of most other companies. Fannie and Freddie are GSE’s, Government Sponsored Enterprises. They were charted by Congress but as a private company.
Fannie and Freddie guarantee most residential mortgages in the United States. Typically, they are funded by premiums paid by banks and underwriters. When the bottom fell out of the market, however, their reserves plummeted dramatically. Like banks, they received bailout monies (TARP payments). The government believed they were so essentially to the economy, however, that they were placed under conservatorship.
Along with the bailout and conservatorship, Congress did one more thing. They passed FERA. Short for the Fraud Enforcement and Recovery Act of 2009, FERA amended the False Claims Act to include Fannie and Freddie.
The False Claims Act is a Civil War era whistleblower statute that prohibits businesses and individuals from presenting false claims to the government. Hence the name of the law, the False Claims Act. In the context of mortgages, when a bank or mortgage company certifies to the FHA or VA that a mortgage was properly underwritten, it making a claim to the government. If the lender is really cutting corners and the loans are bad, however, the lender has violated the False Claims Act. At that point, the government and courts can impose triple damages and a penalty of up to $11,000 for each such false claim.
Since 2009, Fannie and Freddie are eligible for False Claims Act protections. The law now extends to claims made to recipients of government money. TARP bailed out Fannie and Freddie so they qualify as recipients of government money.
The first big False Claims Act involving Fannie and Freddie loans was probably Allied Home Mortgage. In that case the government seeks $2.4 billion in damages. That case is still on-going, however, so the 2009 law was never tested in that case. [Ed. Note – We are the lawyers who filed that case.]
The biggest settlement to date is also one of our cases, the 2014 $16.65 billion settlement involving Bank of America. That case included allegations relating to Fannie, Freddie and FHA loans.
Very few mortgage cases have gone to trial. Bank of America rolled the dice a few years ago and was ordered to pay over a billion dollars. Prior to reaching a verdict, however, the False Claims Act claims were tossed and the case sent to the jury under a different law.
Are we worried about the lack of case law? No. Congress was very clear when it amended the False Claims Act in 2009 and the law makes perfect sense. Whether taxpayers directly or indirectly insure mortgages, if tax dollars are on the line, the government has a strong policy interest in prohibiting fraud.
There is some reason to pause, however, and that comes from a case filed by whistleblower James Adams. Like the previous successful cases, Adams says that 16 different banks and servicers violated the representations and warranties outlined in their contracts with Fannie and Freddie.
Just like the FHA has rules about underwriting and loan servicing, so do Fannie and Freddie. Often called “selling guides,” these contracts detail the quality control requirements needed before a loan becomes eligible for insurance.
The unfortunate problem with Adams’ case was that it was poorly drafted. We hate to make disparaging comments about other whistleblowers but the facts are thin and confusing at times. It is also a very small case involving narrow issues. This may or may not be the reason the government failed to intervene in the case.
Often when the Justice Department fails to intervene, the case goes away. Whistleblowers, however, have the right to continue to pursue the case even without help from the government. That is what Adams decided to do.
Ultimately a federal judge dismissed Adams case. Not because his facts were weak but because Fannie Mae and Freddie Mac are not instrumentalities of the United States.
Wait a minute. Didn’t Congress fix that problem in 2009? We think they did and believe the court was wrong to dismiss Adams’ case, at least for those reasons.
Fearing that Adams case could disrupt billions of dollars of other claims in more substantial cases, the Justice Department stepped in but not to help Adams and his claim on behalf of the United States. The government claimed that Congress intended the law to extend to Fannie and Freddie. Unfortunately, the court didn’t buy Adams or the government’s arguments.
That case is now on appeal to the Ninth Circuit Court of Appeals. The case has been fully briefed. Everyone is awaiting a decision. Once again the government has just stepped in to protect the law and not advocate for Adams’ specific claims.
If the dismissal of the lawsuit is upheld, the government must either appeal or the law of the land in at least nine states will be that the False Claims Act does not extend to Fannie and Freddie. That would be an open season for bad loans and fraud.
As noted above, we are not overly concerned. Anything is possible in litigation, however.
Despite one bad ruling in Nevada, mortgage industry whistleblowers with inside information about underwriting or servicing fraud are urged to come forward. While some wait to see how cases filed in the Ninth Circuit states (California, Arizona, Idaho, Montana, Oregon, Washington, Hawaii, Nevada and Alaska) will fare, the government still is aggressively pursuing claims involving residential mortgages. Those cases include Freddie and Fannie loans.
Under the False Claims Act, whistleblowers can earn an award of up to 30% of whatever the government collects. The Act also contains powerful anti-retaliation provisions. Since 2008, our whistleblower clients have earned over $100 million in awards. Shouldn’t you get your award?
Earlier today I wrote about the government’s and New York State’s win against Morgan Stanley for bad residential mortgages. $3.2 billion. That case didn’t involve a whistleblower, either. No one stepped forward.
There are major frauds occurring throughout the lending and banking industry. The best line of defense are whistleblowers… So much so that we believe they are the new American heroes.
MahanyLaw – America’s Lender Liability and Whistleblower Lawyers