Underwriting fraud is certainly back in the news these days. Earlier this week we posted a story about Regions Bank and their $52 million settlement with the Justice Department. Now the bank in the Justice Department’s crosshairs is Branch Banking & Trust Company, better known as BB&T. Both companies were prosecuted under a Civil War era whistleblower statute known as the False Claims Act.
The Justice Department this week reports that BB&T is paying a whopping $83 million to settle charges surrounding its FHA residential loan program. Prosecutors say that the North Carolina based bank underwrote FHA insured mortgages that didn’t meet quality control standards. That is a big deal since most home loans, including FHA loans, are backed by the government. An that, of course, means taxpayers.
Most of the bad underwriting cases took place in the run up to the housing crash. Banks just wanted to make money and that often meant turning a blind eye to bad loans. No one really worried because as long as housing prices continued to rise, even bad loans could be made good when the house flipped for a profit. Obviously what goes up must come down, however, and housing prices were no exception.
When the market crashed, many bad loans from 2006 and 2007 were suddenly exposed. According to the Justice Department, since January 2006, BB&T was authorized to issue loans that were insured by the Federal Housing Administration (FHA). The government allows mortgage companies and banks to issue these insured loans but only if the lenders agree to strict quality control guidelines.
According to the Justice Department, between January 2006 and September 2014, BB&T certified loans as eligible for government insurance that did not meet underwriting requirements or the FHA’s quality control guidelines.
In the years immediately surrounding the crisis, BB&T more than doubled its loan originations. Of those loans, there was a 600% increase in FHA insured loans. Unfortunately, many of these loans were junk. According to internal documents, even BB&T acknowledged a huge increase in loans rated “Serious-Marketability.” That designation meant the loans were troubled and not eligible for insurance.
Like we noted in this month’s Regions Bank case, most banks learned their lesson after the 2008 crisis. Prosecutors say that the problem loans with BB&T continued into 2011, however. At times the bad loans were as much as 50% of the loans being churned out by the bank. Those huge default rates were an obvious red flag but that didn’t stop the bank from writing poor quality loans or running to taxpayers when the loans defaulted.
A 2010 internal memorandum acknowledged that “increased volume of FHA requests and changes to regulatory requirements have resulted in origination, processing and underwriting errors. Some employees are not applying current and accurate FHA guidelines.” In response to the findings, some BB&T employees developed a plan to improve their loans. That proposal was apparently ignored for four years until 2014.
It is not just poor underwriting controls that plagued the bank. HUD requires robust quality control monitoring and self-reporting. If you are going to issue taxpayer insured loans, Uncle Sam wants to make sure you continuously and careful monitor those loans and quickly report problems
BB&T’s quality control department requested staff to comply with the monitoring requirements but was ignored for years. Loan volume doubled but without staffing increases. That meant problem loans were not reported until 2013.
Many times we see banks simply pay lip service to “QC” guidelines. We have talked with many mortgage professionals that express extreme frustration with the quality control efforts by many lenders. Often these efforts are understaffed. When problems are found, they are ignored by management or in some banks, the underwriters seem to have more power than the compliance folks. When that happens, bad loans get approved.
A senior Justice Department official said of the settlement, “The FHA program depends on Direct Endorsement Lenders endorsing only eligible loans for FHA mortgage insurance, and complying with HUD’s quality control requirements. Lenders like BB&T that participate in the FHA program must make adherence to the FHA program rules a priority. The Department has and will continue to hold accountable those lenders that prioritize profits over program compliance.”
Atlanta’s U.S. Attorney was blunter in his criticism. “While profiting from the FHA program, BB&T exposed the taxpayers to losses by failing to comply with HUD guidelines, and then took the additional step of falsely certifying that it had complied with such guidelines,” said U.S. Attorney John Horn. “This settlement recovers substantial losses caused by BB&T’s decision to place its own profits above its commitment to adhere to HUD underwriting and quality control requirements.
False Claims Act and Mortgage Underwriting / Servicing Cases
The case against BB&T was brought under the federal False Claims Act. That law allows people with inside information about underwriting and servicing problems to report the violation and collect an award for their efforts. With a minimum 15% award, that could mean a whistleblower award of at least $12.5 million in this case.
Those numbers may seem “pie in the sky” but we have helped three lending industry clients collect over $100,000,000.00.
To claim an award under the False Claims Act, the whistleblower must file a sealed complaint in federal court. The complaint must detail losses to a federal program or federal funds. Normally in the lending industry that would be VA or FHA loans. Since the feds had to bail out Fannie Mae and Freddie Mac, however, those loans are also now covered by the law.
Many of our clients worry about retaliation. In many cases we can cloak your identity or at least prolong discovery of your identity. We are also equipped to handle any retaliation that you may suffer from your employer. (The False Claims Act makes retaliation illegal and can result in legal fee awards and additional damages,)
Interested in learning more? Give us a call. We consider ourselves leaders in the lender / banking whistleblower space and have to results to back those claims. We also have a former lending company branch manager / compliance specialist on our team… one with a law degree and real industry experience.
MahanyLaw – America’s False Claims Act Lawyers