Troy, Michigan-based United Shore Financial Services LLC (USFS) has agreed to pay the U.S. $48 million to resolve allegations it violated the False Claims Act by underwriting Federal Housing Administration (FHA)-insured mortgage loans that did not meet FHA requirements.
As part of the settlement agreement, United Shore admitted to pressuring underwriters to approve FHA mortgages, using a compensation plan formula tying underwriter compensation to percentage of loans approved and closed, and falsely certifying that direct endorsement underwriters reviewed appraisal reports before USFS approval and FHA-insured mortgage endorsement, the Justice Department announced Wednesday.
U.S. Investigation Finds USFS Approved Hundreds of Ineligible FHA-Insured Loans
Allegations stem from a January 10, 2014-initiated joint investigation into United Shore Financial Services’ underwriting and quality control practices by the U.S. Department of Housing and Urban Development (HUD), HUD’s Office of Inspector General, the Civil Division’s Commercial Litigation Branch and the Western District of Wisconsin and Eastern District of Michigan U.S. Attorneys’ Offices.
The joint investigation found that, between January 1, 2006 and December 31, 2011, HUD insured hundreds of USFS-approved loans that were ineligible for FHA mortgage insurance due to failed compliance and omissions by the direct endorsement lender (DEL).
As a result, HUD suffered significant losses after paying insurance claims on loans it would never have approved.
Specifically, the U.S. claims that USFS failed to comply with FHA origination, underwriting and QC requirements. Though internal USFS QC reviews found “hundreds of materially-deficient FHA insured loans,” USFS failed to report these issues to senior management.
Likewise, USFS failed to follow HUD’s self-reporting requirements, reporting only three of its hundreds of deficient loans to HUD. Even after the U.S. initiated its investigation into USFS’s conduct, USFS allegedly continued to violate regulations by making discretionary distributions to a company shareholder.
DEL QC Programs Must Detect, Correct and Self-Report Underwriting Deficiencies
DELs in the FHA insurance program have the authority to originate, underwrite and endorse mortgages for FHA insurance. When a DEL approves a loan for FHA insurance and that loan defaults, the holder can submit a claim for losses to HUD.
Once a DEL endorses a mortgage for FHA insurance, the FHA automatically assumes compliance with FHA requirements. Therefore, it is critical that DELs maintain a QC program to ensure they are following rules and regulations when underwriting and endorsing mortgages. When a DEL QC program detects a deficiency in their underwriting practices, they must immediately correct the deficiency and self-report any deficient loans to HUD.
“The federal government insures loans on the condition that lenders comply with certain rules to safeguard federal funds,” said U.S. Attorney Barbara L. McQuade for the Eastern District of Michigan. “When lenders breach their duty of due diligence and make risky loans that go bad, taxpayers pay the bill. By holding accountable lenders who fail to comply with underwriting requirements, we hope to send a message to all lenders that they must comply with government standards for federally insured loans.”
Mortgage Underwriting Fraud Violates False Claims Act
USFS’s faulty underwriting and quality control practices violated the False Claims Act (FCA), a statute put in place to fight fraud against the government. When federal programs like the FHA back residential loans, claims submitted to those programs in non-compliance become false claims.
Individuals or agencies who violate the federal FCA are liable for civil penalties of between $10,781.40 and $21,562.80 per false claim, plus three times the amount of damages and any costs of a civil action brought to recover the penalty or damages.
Whistleblowers with inside knowledge of fraud against the FHA and other government programs are eligible for a cash whistleblower award of between 15% and 30% of any government recovery. Because cases of mortgage underwriting fraud often involve hundreds to thousands of false claims, the cash awards often fall at over $1 million. A whistleblower cash award in this case would range between $7.2 million and $14.4 million.
USFS Admits to Non-Compliance, Pays U.S. $48 Million Settlement Amount
USFS agrees to pay $48 million to the U.S. government, plus interest at a rate of 1%. As part of the settlement agreement, USFS admitted to pressuring underwriters to approve FHA mortgages, using a compensation plan formula tying underwriter compensation to percentage of loans approved and closed, and falsely certifying that direct endorsement underwriters reviewed appraisal reports before USFS approval and FHA-insured mortgage endorsement.
“The settlement announced today holds United Shore accountable for its endorsement of ineligible loans for FHA mortgage insurance,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “Over the past several years, the Civil Division, in collaboration with numerous U.S. Attorneys’ Offices, HUD and its Office of Inspector General, has diligently worked to hold FHA-approved lenders accountable for actions that deprived homeowners of their homes, wasted taxpayer funds, and contributed to the financial crisis. The settlement announced today is yet another success in this continuing effort.”