With over 2000 branches and thousands of employees, Allied Home Mortgage was a big and powerful lender. The company may be gone but there are still thousands of former branch managers, underwriters, loan originators and others with a bad taste in their mouth. Since the verdict, we have received several calls from folks wanting more details and wanting to know if they will ever get paid.
In its heyday, Allied Home Mortgage was the 5th largest FHA lender in the nation. It helped hundreds of thousands of people purchase homes. Unfortunately, its leadership was poor and otherwise honest people within the company were forced into compromise. For many, it was tow the company line or risk not getting paid. (Many didn’t get paid anyway.)
By 2006 and 2007, HUD says that almost 55% of the loans coming out of Allied were bad. The compliance department was paper thin and wasn’t interested in compliance. The government’s complaint, which is available here, said, “Allied utterly failed to conduct audits of its branches or review its early payment defaults as it was required to do by HUD… Even while it was operating 600 or more branches at a time, Allied maintained only two quality control employees in its corporate office.”
Later in its complaint, prosecutors said, “Allied maintained a handful of additional quality control staff members in St. Croix, in the U.S. Virgin Islands, but its offshore employees had no mortgage experience and, according to multiple witnesses, “did not even know what a mortgage was.”
For those former Allied Home Mortgage employees reading this post, we are sure none of this comes as a surprise.
Both we and the government said Allied had been lying to regulators for years. As HUD began to crack down on the company, prosecutors say that Jeanne Stell, Allied’s then Executive Vice President, allowed certifications to be sent to HUD even though she knew them to be false.
As things really began to fall apart, Allied began to lose its warehouse lines of credit. For those not in the industry, nonbank lenders such as Allied need a source of capital to make loans. This source of money is called a warehouse line of credit. Like a manufacturer goes to a warehouse to draw down supplies, nonbank lenders go to their “warehouse” to get money.
After Allied’s warehouse lenders cut off capital, Jim Hodge, Allied’s CEO, should have shut down the company or scaled back operations. He didn’t. Instead he spent the money set aside for employee salaries and commissions.
Will that money ever be paid back? Probably not. We have heard dozens of theories as to where Jim Hodge may be hiding money but the sad reality is that much of it is gone and the rest now owed to the government.
Peter Belli’s False Claims Act Case Against Allied Home Mortgage
Former branch manager Peter Belli started the ball rolling in March of 2011 when he filed a False Claims Act lawsuit against the company. Also known as a “qui tam” or whistleblower lawsuit, the False Claims Act allows folks with inside knowledge of wrongdoing involving government funds or programs to file a lawsuit on behalf of the government. Since Allied wrote FHA backed loans, it’s wrongdoing qualified under the statute. (Fannie Mae and Freddie Mac loan programs now qualify too since Congress extended the law to them after the 2008 financial crisis.)
The False Claims Act is quite popular today because the first to file whistleblower can receive up to 30% of whatever the government collects. The law also has anti-retaliation protections.
Once filed, the lawsuit is sealed meaning its secret. This gives the government the opportunity to investigate the claims. Ultimately, the government can intervene and take over the lawsuit, allow the whistleblower’s own lawyers to prosecute or in rare cases, seek the case’s dismissal. Obviously in the Allied Home Mortgage case, prosecutors and HUD picked up the gauntlet and did a superb job in prosecuting Allied. When the government intervened, they also named Stell and Jim Hodge as additional defendants.
Unfortunately, Peter Belli passed away before the case was concluded. He did not live to see his victory.
Allied and Jim Hodge Go to Trial
Jeanne Stell settled before trial but a defiant Jim Hodge and the successor entities to Allied Home Mortgage demanded their day in court. Earlier this week a jury in Houston, Texas found for the government on all counts. A copy of the jury verdict can be found here.
The jury awarded the U.S. a total of $92,982,775 in damages, including $7,370,132 against Jim Hodge personally. Pursuant to the False Claims Act, the court must triple those penalties. In addition, at a separate hearing the court must determine additional penalties of $5,500 to $11,000 for each violation.
The jury found for the government under both the False Claims Act and a separate law called the Financial Institutions Reform Recovery and Enforcement Act (FIRREA). In FIRREA cases, the judge must set damages, not the jury. What does this mean? With interest and triple damages, Allied will owe at least $300 million and Hodge will owe at least $22 million.
The whistleblower share will be determined by the government. Because the government prosecuted the case, the award percentage should be 15% to 25%. The FIRREA violation also has an award provision but those awards are capped at $1.6 million. (There is no cap on False Claims Act awards).
After the verdict was announced, Manhattan’s U.S Attorney Preet Bharara said, “For years, Jim Hodge and Allied lied to HUD in order to fraudulently reap profits from the FHA mortgage insurance program. After a month-long public trial where all their misconduct was exposed, a jury has held Mr. Hodge and Allied responsible for their lies and has made them pay for losses the United States suffered on loans that would never have been insured by HUD absent their lies. This case represents yet another recovery by the United States – this time after a trial – for fraud perpetrated against HUD by participants in the Direct Endorsement Lender program.”
Although the case was tried in Texas, the case was prosecuted by prosecutors assigned to Manhattan, the Southern District of New York. Brooklyn and Manhattan have some of the best financial services fraud prosecutors and Manhattan has secured some of the largest settlements in U.S. history. (Our $16.67 billion Bank of America case was filed there, the then largest single defendant recovery in U.S. history.)
HUD’s Inspector General said after the verdict, “The heart of our mission is to weed out actors such as these that are intent on defrauding federal housing programs. This should serve as a notice to all those determined to engage in illegal schemes such as these that they are not beyond the reach of the federal law enforcement community.”
Future Efforts to “Weed Out” Bad Actors
Jim Hodge isn’t the only bad actor in the loan industry. Today we are investigating claims regarding Ocwen, Freedom Mortgage, Nationstar, Vanderbilt Mortgage and the loan depot. In the spirit of the late Peter Belli, we need more insiders to come forward. Not only can you receive a huge award for your efforts, reporting fraud and greed is the right thing to do. As mortgage industry professionals, we all have a duty to protect borrowers and clean up our industry.
If you have information about underwriting or servicing involving loans backed by the VA, FHA, Fannie or Freddie, please call us. All inquiries are protected by the attorney – client privilege and kept completely confidential. Worried about retaliation? We have an employment lawyer on our team ready to vigorously prosecute any wrongful whistleblower retaliation claims.
MahanyLaw – America’s Financial Fraud and Whistleblower Lawyers
[This post dedicated to the late Peter Belli, his courageous family, our colleague Joe Bird who filed the complaint on behalf of MahanyLaw, the HUD OIG team, U.S. Attorney Preet Bharara, SDNY Civil Fraud Chief Pierre Armand and the SDNY Jim Hodge / Allied Home Mortgage trial team: Assistant United States Attorneys Jeannette A. Vargas, Joseph N. Cordaro, Jean-David Barnea, Caleb Hayes-Deats, and Stephen Cha-Kim.]
BREAKING NEWS: Court denies Allied and Jim Hodge’s demand to overturn the jury verdict and imposes almost $200 million in additional penalties. See full Allied Home Mortgage coverage here.