First Tennessee Bank, N.A., Memphis, Tennessee, has agreed to pay the United States $212.5 million to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s Federal Housing Administration that did not meet applicable requirements.
Between January 2006 and October 2008, First Tennessee, through its subsidiary First Horizon Home Loans Corporation (“First Horizon”), participated in the FHA insurance program as a Direct Endorsement Lender (DEL). As a DEL, First Tennessee had the authority to originate, underwrite, and endorse mortgages for FHA insurance. If a DEL such as First Tennessee approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to the U.S. Department of Housing and Urban Development (HUD), FHA’s parent agency, for the losses resulting from the defaulted loan.
Under the DEL program, neither the FHA nor HUD reviews a loan before it is endorsed for FHA insurance. DELs such as First Tennessee are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance, to maintain a quality control program that can prevent and correct deficiencies in their underwriting practices, and to self-report any deficient loans identified by their quality control program. In August 2008, First Tennessee sold First Horizon to Metlife Bank, N.A. (“Metlife”), a wholly-owned subsidiary of Metlife, Inc., which thereafter originated FHA-insured mortgages under the Metlife name. In February 2015, Metlife agreed to pay $123.5 million to resolve its False Claims Act liability arising from its FHA originations after it acquired First Horizon from First Tennessee.
The settlement announced resolves allegations that First Tennessee failed to comply with FHA origination, underwriting, and quality control requirements. As part of the settlement, First Tennessee admitted to the following facts:
- From January 2006 through October 2008, it repeatedly certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements.
- Beginning in late 2007, First Tennessee significantly increased its FHA originations. The quality of First Tennessee’s FHA underwriting significantly decreased during 2008 as its FHA lending increased.
- Beginning no later than early 2008, First Tennessee became aware that a substantial percentage of its FHA loans were not eligible for FHA mortgage insurance due to its own quality control findings. These findings were routinely shared with First Tennessee’s senior managers. Despite internally acknowledging that hundreds of its FHA mortgages had material deficiencies, and despite its obligation to self-report findings of material violations of FHA requirements, First Tennessee failed to report even a single deficient mortgage to FHA.
First Tennessee’s conduct caused FHA to insure hundreds of loans that were not eligible for insurance and, as a result, FHA suffered substantial losses when it later paid insurance claims on those loans.
The Justice Department announced the settlement.
Assistant United States Attorney Paris A. Wynn handled this matter for the U.S. Attorney’s Office.
The investigation of the allegations in the Government’s complaint was a coordinated effort between the Civil Division of the Department of Justice, the U.S. Attorney’s Office for the Northern District of Georgia, HUD, and HUD’s Office of Inspector General.
“First Tennessee admitted failings that resulted in poor quality FHA loans. While First Tennessee profited from these loans, taxpayers incurred substantial losses when the loans defaulted,” said John A. Horn, the Acting U.S. Attorney for the Northern District of Georgia. “The settlement, as well as the investigation that preceded it, illustrates that the Department of Justice will closely scrutinize entities that cause financial injury to the Government, and, in turn, the American taxpayer.”
“First Tennessee’s reckless underwriting has resulted in significant losses of federal funds and was precisely the type of conduct that caused the financial crisis and housing market downturn,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division. “We will continue to hold accountable lenders who put profits before both their legal obligations and their customers, and restore wrongfully claimed funds to FHA and the treasury.”
“We are pleased that First Tennessee has acknowledged facts that demonstrate its failure to comply with HUD’s requirements and has agreed to settle with the government,” said Helen Kanovsky, HUD’s General Counsel. “We thank the Department of Justice and HUD’s Office of Inspector General for all of their efforts in helping us to make this settlement a reality. We hope this agreement sends a message to those lenders with whom we do business that HUD takes compliance very seriously and so should they.”
“Our investigation found that First Tennessee caused FHA to pay claims on loans that the bank never should have approved and insured in the first place,” said HUD Inspector General David A. Montoya. “This settlement reinforces my commitment to combat fraud in the origination of single family mortgages insured by the FHA and makes certain that only qualified, creditworthy borrowers who can repay their mortgages are approved under the FHA program.”