A Southern District of Texas federal court jury returned today a nearly $100 million verdict against Allied Capital and bank principal Jim Hodge for violating the U.S. False Claims Act and under FIRREA statutes.
The case has special significance as it is one of only 2 False Claims Act cases against a lender related to the mortgage meltdown that went to trial and verdict. The other was the well-chronicled HUSL - Bank of America case. All others were settled in some of the largest settlement amounts in U.S. history.
The False Claims aspects of the case relate to Allied’s “shadow branches”. HUD requires banks, mortgage companies, lenders…to have licensed offices, in effect something at risk themselves in the form of salaries, offices rents and other overhead as a government approved loan originator and therefore a motivator for good business practices.
What was happening in the time period prior to the national mortgage meltdown is a number of banks and mortgage companies including Allied were opening Shadow Branches, sometimes called Net Branches. In these circumstances the lender would have an independent party open an office at their own expense with no risk to the lender.
According to sources, at one point Allied reportedly had more than 2000 branches and to get around the HUD licensed-office rules they funneled loans written at the thousands of unlicensed branches through their few licensed offices. Loan documents appeared to HUD as if they came from legitimate licensed Allied offices until a whistleblower filed a False Claims Act lawsuit exposing the ruse.
Under the origination scheme, individual offices that were unknown to HUD although principals reportedly used Allied business cards and signage, succumbed to business pressures and greed and wrote FHA and other government backed or insured mortgage loans with little or false underlying documentation in flagrant violation of HUD underwriting requirements of their lender originators.
Allied was reportedly the fifth largest U.S. FHA lender and the largest non-bank privately owned lender in the country during the pre-crisis mortgage industry heyday. Allied had one of the highest default rates in the country and as they were writing government insured loans, it was the taxpayers who lost when the mortgages went to default.
When the False Claims Act case was filed the government not only intervened (took over prosecution) in the case but also shut down Allied due not only to the facts of the case but also Allied’s horrific history of compliance failures resulting in a suit by Allied against the government which was unsuccessful.
After a lengthy trial the jury came back with a verdict against Allied.
The jury verdict form shows that:
- The jury found by a preponderance of the evidence that Allied Capital and/or Jim Hodge violated the False Claims Act by knowingly representing to HUD that certain FHA insured loans were originated from HUD approved Allied Capital branches and were therefore eligible for FHA insurance when in fact they were not.
- Also by a preponderance of the evidence that Allied Capital violated the False Claims Act by knowingly representing to HUD that certain FHA-insured loans had been written with due diligence and were eligible for FHA insurance when in fact they were not.
The jury found against Allied for $85,612.643 and Hodge for $7,370,132.
In False Claims Act cases the trial judge has discretion to treble the damages.
Department of Justice attorneys were not yet available to comment nor were the relator (whistleblower) counsel at MahanyLaw.