[Post updated 2020] An underwriter working for Academy Mortgage was given the greenlight to pursue mortgage fraud claims on behalf of the United States. In 2016, Gwen Thrower filed a federal False Claims Act whistleblower claim against Academy claiming the company “encouraged practices that led underwriters to break HUD rules and to approve ineligible loans.” Recently the court said her case could proceed over the objections of the company.
Mortgage Fraud Claims Against Academy Mortgage
Like many mortgage companies, Academy is a direct endorsement (“DE”) lender. That means it can write loans and have them approved for FHA insurance without direct government review. On paper, the DE program makes perfect sense. Investors won’t buy mortgages without a loan guarantee and allowing qualified mortgage underwriters to approve loans speeds the process.
By assuring a quick turnaround, the insured loan can be sold giving the bank the ability to re-loan money to another borrower.
If the loan fails, the lender is not at risk nor is the buyer of the loan (typically institutional investors). Guarantors such as Fannie Mae, Freddie Mac, the VA and FHA expect that a small percent will default and collect premiums to offset those costs.
The dark side of the DE program is the incentive that mortgage companies have to cut corners. The lender and its sales staff want to write as many mortgages as possible. The underwriters, however, have to certify that each loan they approve is eligible for insurance. The success of the DE program depends on underwriters like Gwen following the law.
The independence of underwriters is one of the reasons why underwriters are not paid on a commission basis (although we have seen other mortgage companies try that scheme.) It is also why underwriters shouldn’t be supervised by someone involved in loan originations or sales.
The loan approval process is automated meaning an FHA computer software algorithm actually approves the loan but that approval is only as good as the data entered into the software. Current rules require the underwriter to certify to “the integrity of the data supplied by the lender used to determine the quality of the loan.” Those certifications are essential to protect the government’s insurance fund. When the fund takes a hit, taxpayers foot the bill.
Why taxpayers? The FHA is a government agency meaning it relies on tax dollars. As of 2009, the two big private guaranty agencies, Freddie Mac and Fannie Mae have been under government conservatorship meaning they too ultimately rely on taxpayers for support. In 2008, taxpayers as part of the bailout pumped hundreds of billions of dollars into Fannie and Freddie to keep housing markets liquid.
The company also must make a general certification. In this case, the certification said,
“I [Academy] certify that, upon the submission of this application, and with its submission of each loan for insurance or request for insurance benefits, the applicant has and will comply with the requirements of the Secretary of Housing and Urban Development, which include, but are not limited to, the National Housing Act and HUD’s regulations, FHA handbooks, mortgagee letters, and Title I letters and policies with regard to using and maintaining its FHA lender approval.”
Gwen Thrower has a bird’s eye view of how Academy Mortgage complies with the DE program. According to her, their conduct was reprehensible.
She says Academy completely failed to live up to its obligations under the program.
In her words,
“Academy’s management instituted and encouraged practices that led underwriters to break HUD rules and to approve ineligible loans. These policies and practices included: pressuring employees to approve ineligible loans for government insurance, allowing managers to make “exceptions” to government-required conditions on files, allowing sales employees who did not have the proper Direct Endorsement certification required to underwrite government loans (“non-DE employees”) to remove or override an underwriter’s conditions, improperly paying bonuses to underwriting employees in violation of the government regulations, adversely treating employees who did not approve loans, and repeatedly running the automated underwriting system to ‘work backwards’ to find values that would allow a loan to be approved.”
In the mortgage underwriting field, working backwards with the FHA loan approval system means that one keeps entering different numbers into the system until the loan is approved. If a borrower’s $30,000 annual salary isn’t enough to qualify for a loan, the mortgage company can keep entering fake salary numbers until the loan is approved.
“Working backwards” also means that Academy made improper calculations of borrowers’ income in order to get loans approved. For example, there are very specific rules about using overtime income to estimate the borrower’s ability to qualify for a mortgage. The company would also discount property tax values to make it appear that borrowers had a lower property to income ratio.
At times they even hid bad financial information.
Taxpayers and HUD are the obvious victims but so are borrowers. Putting a person in a house they cannot afford doesn’t help anyone except the mortgage company and the sales rep, both of whom make commissions.
Thrower says that Academy Mortgage “established a culture that valued getting a loan approved and endorsed for government insurance over complying with the government’s rules.” Their goal was to write as many loans as possible even if the borrowers didn’t qualify.
Pressure on the Underwriters – Decline is a Curse Word
Thrower says the pressure on Academy Mortgage to approve mortgages was intense. The company had a “no decline” policy.On September 9, 2015 Brandi Anderson, a Regional Sales Manager, explicitly told underwriters “We make loans. We don’t do declines.” She also said “Decline is a curse word. We don’t use it.” Another manager allegedly said to make a loan work even if doesn’t meet federal underwriting standards.
Worse, Thrower says that underwriters who didn’t approve a certain number of loans per day put their jobs in jeopardy.
Another way underwriters were pressured was by giving them just 24 hours to review and approve a file even though that made careful review impossible.
Although underwriters can’t be paid commissions, she says Academy Mortgage found a way around that requirement by offering contests, rewards and gift certificates to the underwriters approving the most loans.
When Thrower attempted to do her job, often a non-DE approved manager would simply override her decision.
Like most whistleblowers, Thrower says she attempted to bring her concerns to management. She says that management was more concerned with profits instead of following the law. Ultimately, she filed a federal whistleblower complaint using a law called the False Claims Act. More on that below. [That law allows whistleblowers to earn huge cash rewards for being the first to report illegal mortgage fraud.]
Academy Mortgage Fights Back
Academy Mortgage didn’t lie down and surrender or attempt to settle. Instead, they asked the court to dismiss her claim because of several technicalities. They say her claims aren’t material nor could she prove how the government lost money.
Not so said the court.
According to Judge Edward Chen, “Under the False Claims Act, a falsehood is material if it has a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. Where the false claim is based on a false certification of compliance with regulations, materiality is not satisfied by “minor or insubstantial” violations.
In a bizarre twist of logic, Academy Mortgage said that any violations they may have committed couldn’t be material because by law, “HUD is statutorily-mandated to pay any claims submitted on” FHA-insured loans. Because HUD could not have refused to pay claims even had it known of Academy’s alleged noncompliance,” they claim their noncompliance had no effect on the payment decision.
Academy tried to convince the Court to apply the materiality requirement narrowly to the payment decision only and not to all the alleged fraud leading to the payment decision. In other words, by writing poor loans and then approving them for loan guarantees, Academy created the subsequent loan defaults.
Judge Chen didn’t buy their crazy logic.
“Here the alleged violations which contravene Academy’s certifications are far from trivial. Violations such as overriding endorsement conditions, manipulating the data to get an otherwise unqualified loan to qualify, hiding adverse documentation, and incentivizing underwriters to facilitate the making of bad loans through payment of commission go to the heart of the DE lender’s duty to the Government under the program. It is highly plausible that HUD would not have continued to insure Academy’s loans if Academy had been forthright about these violations instead of falsely certifying its compliance with HUD regulations.”
The False Claims Act, Whistleblower Rewards and Underwriting Fraud
2008 saw many banks and mortgage companies go under. Worse, the entire economy fell into a recession and millions of Americans found themselves either out of work, underwater on their loans or both. The banks got bailed out but not much of that bailout money trickled down to homeowners.
Banks didn’t get off scot free, however. Several banks that had engaged in bad underwriting and other fraudulent schemes were prosecuted under the False Claims Act. [We brought the successful $300 million action against Allied Home Mortgage for bad underwriting and were an integral part of the historic $16.6 billion recovery against Bank of America.]
Fast forward 10 years and once again, we are seeing bad underwriting claims.
Since President Trump was elected, we don’t see as many False Claims Act fraud recoveries against mortgage companies. The current administration is more inclined to use its regulatory authority to bring bad lenders and mortgage companies in line. We believe, however, that these bad lenders know exactly what they are doing and should be punished.
The Academy Mortgage case is significant because it reveals that underwriting fraud cases are still viable today.
A Civil War era law, the False Claims Act, allows ordinary workers like Gwen Thrower to prosecute claims on behalf of the United States.
The case against Academy Mortgage fraud is far from over. The case is important, however, because it shows these cases are still viable today and that courts aren’t buying the lenders’ nonsensical claims that underwriting fraud isn’t material.
The False Claims Act allows whistleblowers to receive between 15% and 30% of whatever the government collects from the wrongdoer. The law also provides for penalties of up to $20,000 per false claim or certification and triple damages.
Let’s say that Thrower can prove that 100 loans went bad and that the average guarantee claim on each was $150,000. That means FHA shelled out $15,000,000.00 on bad loans that never should have been approved in the first place.
For a company the size of Academy, that is not a wild number. Triple those damages and you are at $45 million. And that doesn’t include the penalties.
A whistleblower recovery on $45 million is between $6.75 million and $13.5 million!
Congress clearly wants whistleblowers to step forward. (We remind everyone that this is an illustrative example, if you think you have a claim, contact us and we will help evaluate your potential recovery.)
To qualify for the reward, you must meet a few simple but important criteria.
First you must be the original source of the information. That means you must have inside information. For mortgage company underwriting cases, loan officers, underwriters, managers and quality control specialists are ideal whistleblowers.
Next, you must be the first to file. Wait too long and someone may file first and collect the rewards.
Finally, your knowledge shouldn’t already be in the public domain. That means don’t talk to reporters, post derogatory social media posts or write letters to Congress. All of that can come after you file.
To learn more, visit our False Claims Act whistleblower page. Ready to see if you qualify for an award? Contact us online, by email or by phone at 202-800-9791. All inquiries are protected by the attorney – client privilege and kept confidential. We do not charge for our services unless we are successful in helping you recovery money.
Please note that every day we receive calls from homeowners seeking help with problems involving their home mortgage. We do not practice residential foreclosure defense and cannot provide advice on that topic. Please try calling your state or county bar association, most have a free lawyer referral service. They are most familiar with lawyers in your area.
Since the court declined Academy Mortgage’s motion to dismiss the whistleblower, Gwen Thrower, faced a second challenge. This one from HUD itself!
The government filed an independent motion to dismiss. It’s not that they investigated the case and found no wrongdoing. That would certainly be their right and assuming it was a proper investigation, we would respect their decision. Instead, HUD wanted to dismiss in order to conserve government resources yet Judge Chen found no evidence that they even investigated Thrower’s claims.
We were elated when Judge Chen said Thrower’s whistleblower Academy Mortgage lawsuit could proceed. Little did we know that HUD itself would also throw up roadblocks. As we noted earlier, Since President Trump’s election, HUD has been much more cautious in its approach to badly behaving mortgage companies. That they would try to dismiss this case is a bad sign.
Judge Chen refused to dismiss the complaint, even at the government’s request. Gwen Thrower’s victory, however, may be short lived. The Justice Department did appeal the court’s decision. According to their appeal,
“The government… has the right to undertake a cost benefit analysis and to conclude it is not in the public interest to spend further time and resources on Relator’s litigation of this matter, making clear that [i]t makes no difference whether further litigation would prove that the complaint has merit. The United States explicitly asserted that its motion constitutes a determination by the United States as a matter of its prosecutorial discretion that Relator’s pursuit of this case is contrary to the United States’ interests on whose behalf Relator is supposed to be pursuing the case.
The U.S. Chamber filed an amicus (friend of the court) brief as did a prominent whistleblower group, Taxpayers Against Fraud.
The Chamber says “the simple reality is that most declined qui tam actions are meritless. The government intervenes in a small minority of qui tam actions—about 25 percent over the last several years.” Their argument doesn’t hold water, however. Often the government declines cases because it is doesn’t have the resources or is relying on the whistleblower’s own counsel to prosecute. Billions of dollars have been recovered in declined cases.
The Court of Appeals heard oral arguments on November 19th, 2019. As of this writing, there has been no decision. Unfortunately, most of the trial courts have determined that the Justice Department has unfettered or nearly unfettered discretion to dismiss. The ruling by the Court of Appeals will be important for whistleblowers around the country.
We are living in interesting times. Just last week a state court judge in the same city as Judge Chen, San Francisco, reversed her tentative ruling and allowed the jury’s verdict in the landmark Monsanto case to stand. There is hope for whistleblowers. If some agencies won’t protect the public as much as they should, perhaps the courts will take up the cause.
Keep reading this blog and keep letting courts, elected officials and regulators know that fraud won’t be tolerated.
What saved the Monsanto jury verdict was the jurors themselves. They did what jurors never do, they showed up to a hearing after the case was over and talked to the press. Evildoers hide in the darkness. Shining a light on fraud, greed and corruption is the best way to stop this selfish behavior.
Whistleblowers do it everyday. But readers of this blog can also make a difference. Let folks know that mortgage fraud should be investigated and wont be tolerated. Working as a team we can make a difference.