Federal Housing Administration and Department of Housing and Urban Development
Generally speaking, mortgage fraud involves a borrower who employ fraudulent practices to secure a loan he or she cannot afford to repay or to secure a loan that exceeds the value of the home in question. Since these cases do not harm the government financially, they do not implicate the False Claims Act. Yet the government guarantees or insures certain loans, and therefore lenders might be tempted to lend money to an unqualified borrower. Any lender who engages in this kind of fraudulent practice could face FCA liability.
The Federal Housing Administration (FHA) must approve lenders to offer FHA loans. In order for the FHA to insure a mortgage, a mortgage lender must certify certain information regarding the borrower with the federal government, such as his or her amount of income. If a mortgage lender knowingly makes false statements about the borrower or the loan transaction, the lender may be liable under the FCA if the borrower defaults on the loan. Reporting this kind of mortgage fraud helps the government recover funds needed to help honest Americans secure affordable housing and could lead to a substantial share in a potential recovery.
Since the subprime mortgage crisis in 2008, the FHA, Fannie Mae and Freddie Mac, and the Department of Housing and Urban Development (HUD) have become key players in the housing market. More than 40% of newly issued mortgages are backed by the FHA through loan guarantees and mortgage insurance. As such, the potential for this kind of fraud persists. Without the subprime mortgage market, many of the riskiest borrowers ultimately borrowed from FHA, which could suffer losses of up to $100 billion according to Forbes.
The government has become increasingly aggressive in pursuing claims on behalf of FHA. To that end, it has enacted a number of programs to assist in identifying instances of mortgage fraud including the Program Fraud Civil Remedies Act (“PFCRA”), Operation Watchdog, and HUD/Mortgagee Review Board Administrative Penalties and Indemnification.
In May of 2008, Beezer Homes USA Inc. settled a lawsuit with the government over allegations that the company used fraudulent practices in issuing mortgages insured by the FHA. For example, Beezer Homes would often give home buyers cash “gifts” through certain charities so that buyers could afford the requisite down payment. Home buyers were told that the gifts would not have to be repaid, however, the price of the home was increased to make up for the difference of the gift. This and other fraudulent practices caused Beezer Homes to settle FCA complaints for over $50 million.
In February 2014, JPMorgan Chase agreed to pay $614 million for violations of the FCA. The bank admitted that for more than ten years, it approved thousands of FHA loans and hundreds of Veterans Affairs (“VA”) loans that were not eligible for FHA or VA insurance since they did not meet applicably agency underwriting requirements. Furthermore, JPMorgan admitted that it failed to disclose this to the FHA and the VA when its own internal review board discovered defective loans that should never been submitted for federal insurance. As a result of JPMorgan’s actions, the FHA and the VA incurred substantial losses when toxic loans failed.
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