[Post updated June 2019] Dan Gilbert is a household name in Detroit. He has poured millions of dollars into the Motor City in the hopes that it can once again be a vibrant city. How he got the money to fund his ambitious redevelopment plan and how he operates the mortgage company he founded is a different story. The government claims his company, Quicken Loans, bullied appraisers and underwriters to fudge numbers simply to close loans. They say he has defrauded taxpayers of millions of dollars.
In April of 2015, the U.S. Department of Justice sued Quicken Loans under the False Claims Act, a Civil War anti-fraud statute. The government wants Quicken to pay tens of millions in fines and penalties.
According to prosecutors, Quicken ignored underwriting red flags, pushed appraisers to boost appraisal numbers and ignored government mortgage guidelines.
In one section of the lawsuit, prosecutors claim Quicken Loan VP of Mortgage Operations Mike Lyon approved a loan that was based on “bastard income.” The complaint says, “In an email discussing the borrower’s income used to approve an FHA insured loan, Quicken’s Operations Director, Mike Lyon, explained the loan was underwritten with ‘bastard income,’ which he defined as ‘trying to put some kind of income together that is plausible to the investor even though we know its creation comes from something evil and horrible.’ Even though Mr. Lyon recognized that the income was ‘evil and horrible,’ Quicken certified the loan qualified for FHA insurance and endorsed this loan for FHA insurance, committing FHA to the risk of the borrower defaulting.”
In another email to other senior management, Mr. Lyon wrote, “I was able to fudge her job income and get that up a bit.” In yet another email exchange concerning a different loan, Quicken’s FHA Operations Director Jeanette Ahles wrote that she had “done all I can with this income,” further stating that she “gave a little OT [overtime],” but that it was “still not enough to qualify.” Ultimately, Quicken approved and endorsed both loans for FHA insurance.
[Lyon can be seen in this YouTube video explaining the appraisal process and particularly, why Quicken has an incentive to get a high appraisal!!!]
In typical Dan Gilbert fashion, Quicken didn’t buckle under and try to quietly settle the matter. Quicken came out swinging.
Immediately after the suit was filed, Quicken CEO Bill Emerson was quoted in the Detroit News saying, “No threat, including high-profile senseless lawsuits from powerful federal officials, will deter our company and its leadership from doing the right thing. We will stand in defense of our impeccable reputation established by thousands of hard-working ethical team members over our 30-year history.”
Anticipating the government’s fraud lawsuit, Quicken filed its own lawsuit against the government. The suit tried to shut down the government’s investigation. Their lawsuit hasn’t been successful but Quicken did manage to get the government’s case transferred from Washington DC to Detroit. Quicken and Gilbert probably hope to get a more sympathetic jury here.
After Quicken filed its lawsuit, the company issued a statement claiming they are simply trying to help middle class families buy homes. “The real victims in this unjust claim are the millions of middle-class American families who rely on FHA financing to reach their goal of affordable home ownership,” Quicken said in a prepared release. “Today’s DOJ filing is simply the continuation of the abusive actions and a make-good on the DOJ’s threats since their witch-hunt began three years ago.”
Where is the truth? Is the government engaged in a witch hunt or is the government really the one protecting middle class families?
If underwriters are inflating income figures simply to close loans, some families may find themselves unable to afford monthly mortgage payments. They could lose their down payment and equity monies too.
Losing one’s equity is a real danger if appraisers are inflating home values. Most buyers want to know the house they are buying is worth what they are paying. Appraisers know best what a house is worth and HUD claims that Quicken pressures appraisers to boost the values.
Quicken Loans and Commissions
Why would Quicken put people in homes they can’t afford? Commissions.
Quicken is not a bank. They make home loans but do not keep those loans. Immediately after the loan closes, Quicken sells those loans. Institutional investors won’t buy the loans, however, unless they are insured. Agencies like the FHA, Fannie Mae and Freddie Mac provide the bulk of the insurance for residential mortgages.
Because Quicken doesn’t keep the loan, the money they make is from the commission. When the loan is sold, they make their commission. If the loan later defaults, Uncle Sam and the Federal Housing Administration is on the hook, not Quicken. (That means taxpayers!)
Quicken Loans Moves to Dismiss Whistleblower Lawsuit
After getting the case transferred to Detroit, Quicken’s legal team tried to get the government’s case dismissed. In March, U.S. District Judge Mark Goldsmith refused.
Quicken argued that the government’s complaint was nothing more than a “kitchen sink” approach of weaving together isolated incidents and trying to allege there was a scheme when there was not. Judge Goldsmith didn’t agree with the company, however.
The court analyzed the government’s complaint and found that it alleged four separate schemes. They include: (i) permitting “value appeals,” (ii) making “management exceptions,” (iii) miscalculating borrower income, and (iv) manipulating data and ignoring “red flags.
Value Appeals Process
HUD and the Department of Justice claim that Quicken created a “value appeals” process which allowed employees to “request specific inflated values from appraisers in order to make a loan eligible for FHA insurance.”
After the mortgage and banking crisis of 2008, Congress and the FHA cracked down on inflated appraisals. Current FHA rules prohibit a lender from suggesting a certain or desired value of a property. Congress believes that keeping appraisers independent insures that home values are not over inflated and home buyers are getting what they pay for.
The court found that emails provided by the government suggested that Quicken was pushing appraisers and that it knew its practice was questionable. One email from a VP of underwriting allegedly said, “I don’t think the media or any other mortgage company [Fannie Mae, FHA, Freddie Mac] would like the fact we have a team who is responsible to push back on appraisers.”
The court said the government presented enough evidence so that it could proceed on its bad appraisal practices claims.
Management Exception Process
The government claims that Quicken allowed underwriters to obtain maintain management approval for exceptions to underwriting guidelines. The FHA claims that no one at Quicken has the authority to override federal underwriting rules.
The complaint listed two examples where Quicken management allegedly allowed bad mortgages to be approved. One of those mortgages went into default resulting in the FHA paying out $487,000. In other words, when a mortgage goes bad, taxpayers are potentially on the hook, and not Quicken Loans.
Once again, the government found emails to back up their complaint. Regarding the management exception process, prosecutors pointed to an email thread between Lyon and Quicken’s director for FHA underwriting, Jeanine Taylor. One email thread said,
“for loan granted a management exception, Jeanine Taylor, operations director of the FHA team, allegedly wrote in an email that the borrower ‘does not have the FHA required docs but we are going to go with it. [A]fter receiving ‘absolute confirmation’ from Bobbi MacPherson, FHA product manager, that a loan would be ‘uninsurable,’ [VP Mike] Lyon granted a management exception, and allegedly wrote in an email, ‘whenever we bump into utterly stupid underwriting guidelines like this, we have to push back hard . . . I’ll put the exception in on this one’”.
Judge Goldsmith was apparently not impressed in the reference to federal mortgage guidelines as “utterly stupid.” Once again, the court said the government’s management exception process claims could proceed.
Miscalculation of Income
In a third type of scheme, prosecutors say that Quicken would miscalculate a borrower’s income yet still certify that a loan was eligible for FHA insurance. While not admitting any wrongdoing, Quicken claimed that the examples cited by the government were an inadvertent mistake and were not evidence of fraud.
Judge Goldsmith agreed with Quicken on one of the examples cited by prosecutors but was unmoved by the second. In fact, he said “the second example contained numerous blatant errors that even the shoddiest recordkeeping would have revealed as income miscalculations… Rather these glaring errors and omissions, at the very least, allow for the reasonable inference that the underwriter acted with reckless disregard in calculating the co-borrowers’ income for the mortgage loan, which supports a plausible claim under the False Claims Act.”
Adding to Quicken’s woes was evidence that in 2008, only 44% of Quicken’s underwriters passed a test meant to evaluate their proficiency in calculating and documenting a borrower’s income.
Manipulating Data and Ignoring Red Flags
The last of the government’s fraud allegation is that Quicken would skew or manipulate data so that underwriting software would approve loans. There were few examples cited by the government in its complaint which resulted in the judge tossing any allegations that Quicken manipulated data. He did rule, however, the government could proceed with its complaints that underwriters ignored red flags.
Quicken Loans Loses Several Battles, But Wins the War?
The judge’s ruling kept intact most of the government’s complaint. Quicken’s case against the government was dismissed, although that dismissal is currently being appealed. Unless the case settles, a jury will determine whether the government can prove its case against Quicken Loans. That trial will likely be in Detroit and take place in 2018.
Update June 2019
Quicken and Uncle Sam have settled. The company will pay $32.5 million, $7 million of that for interest.
$25 million may seem like a lot of money but it pales in comparison to the settlements under the Obama administration. In two of our cases, the government was awarded $17 billion (Bank of America) and $300 million (Allied Home Mortgage). By those standards, $25 million ($32 million less the $7 million interest) is small potatoes.
Did the government’s case fall apart? Was the Justice Department outmaneuvered?
The case settled just before heading to trial. The judge overseeing the case, U.S. District Court Gerard Rosen, wanted the parties to settle. We suspect that the same hunger to hold banks accountable after the 2008 meltdown just isn’t there either. This case may have sounded great in 2015, today the economy is doing well and many people have forgotten the evil ways of big lenders.
On the plus side, Quicken is not a Wells Fargo or Ocwen, today’s dirty words in the lending industry. Quicken advertises it has been awarded the J.D. Powers Award for customer satisfaction for 9 years running.
The public gets pissed off when they can’t get calls returned, mortgages modified or find that someone opened unauthorized accounts. They don’t mind as much if an appraiser or underwriter boosted some numbers. Of course that will all come home to roost in the next housing bust. And there will be another bust… history always repeats itself.
The ink isn’t even dry yet and everyone is singing kumbaya. HUD’s Assistant Secretary said the settlement allows “Quicken Loans to continue offering safe and sustainable mortgage financing to qualified, creditworthy borrowers.” Those definitely aren’t fighting words.
For its part, Quicken Loan’s CEO said,
Quicken Loans CEO Jay Farner said that “now that this dispute is behind us, we look forward to cultivating and expanding our relationship with both FHA and HUD so we can increase Americans’ access to home financing and home ownership.” Just a couple years ago, his predecessor Bill Emerson was quoted as saying the company the company would never settle and vowing a fight to the finish.
[Bill Emerson is now Vice Chairman of the company, he is still as unrepentant as ever but slightly more careful in his words. On Friday, in an exclusive interview with Housing Wire he said, “We have said from the beginning we did nothing wrong and the claims were absolutely bogus,” Emerson told HousingWire in an exclusive interview shortly after news of the solution hit. “This case was dismissed and there was zero finding of fault on Quicken Loans’ behalf.”]
The current administration and HUD leadership is not a fan of punishing big banks and lenders. Where that line should be drawn is subject to debate. Suffice it to say, the $50 million whistleblower rewards of several years ago probably aren’t going to be repeated often in the financial sector. At least not until the next banking / housing crisis.
False Claims Act and Mortgage Company Whistleblower Awards
The Justice Department filed its case against Quicken Loans under the False Claims Act, a Civil War era anti-fraud law. If the government is successful, it will be entitled to triple damages and penalties of up to $11,000 per each mortgage improperly certified as FHA compliant. [For cases filed now, the penalty is up to $20,000+.] The damages in this case could have easily been in the hundreds of millions of dollars if HUD was right. Now we will never know.
The False Claims Act allows people with inside information about fraud involving government programs to collect an award for their information. The Quicken case involves FHA loan guaranties. Other popular False Claims Act cases involve Medicaid and Medicare fraud, overbilling by defense contractors, bridge builders using foreign steel and companies skirting tariffs and customs duties. If a government program or funds are involved, there is a good chance that any fraud in those programs false within the Act. And that means cash awards for whistleblowers.
Whistleblowers who are first to file can receive between 15% and 30% of whatever monies the government collects. Because of the triple damages and fines, potential whistleblower awards are huge.
MahanyLaw is the premier law firm for whistleblower cases involving banks and mortgage companies. We proudly served as a lead counsel in the record breaking 2014 settlement against Bank of America that returned more than $16 billion to taxpayers and struggling homeowners and again in 2016 with a $300 million win against Allied Home Mortgage. Our mortgage company whistleblower clients have received over $100 million in awards over the last 5 years.
Our years of experience handling False Claims Act whistleblower cases give us a unique edge with financial services whistleblower cases. Are these cases dead? Of course not. As noted above, however, the amount of fines and penalties are down meaning the rewards are generally lower.
For more information, give us a call. All inquiries are protected by the attorney – client privilege and kept confidential. Even if you never hire us, your information is safe and you never owe us any money unless we collect an award for you.
Mahany Law – America’s Mortgage Fraud Whistleblower Lawyers