Archives For loan underwriting

Lender Agrees to Pay More Than $1 Million to Resolve Fraud Allegations

Stephanie Abbott —  June 22, 2022 — Leave a comment

American Financial Network, Inc., a mortgage lender based in Brea, California, has agreed to pay $1,037,145 to resolve allegations that it improperly and fraudulently originated government-backed mortgage loans insured by the Federal Housing Administration (FHA), a component of the U.S. Department of Housing and Urban Development (HUD).

Since at least December 2011, AFN has been a participant in FHA’s Direct Endorsement Program. Through this program, a lender such as AFN is authorized to originate and approve mortgage loans to be insured by FHA without any prior review or approval by FHA. Lenders such as AFN are responsible for carefully underwriting the mortgage to make sure that it meets all FHA requirements. Once a mortgage loan is insured by FHA, if the borrower defaults or is unable to repay the mortgage, the lender that holds the mortgage note can submit a claim for insurance benefits to FHA to cover its losses.

The settlement resolves allegations that between December 2011 and March 2019, AFN knowingly underwrote certain FHA mortgages and approved for insurance certain mortgages that did not meet FHA requirements or qualify for insurance, resulting in losses to the United States when the borrowers defaulted on those mortgages. The settlement further resolves allegations that AFN knowingly failed to perform quality control reviews that it was required to perform.

This case began in March 2019 when a whistleblower, a former loan processor with AFN, filed a qui tam complaint under seal in federal court in Spokane. When a whistleblower, or “relator,” files a qui tam complaint, the False Claims Act requires the United States to investigate the allegations and elect whether to intervene and take over the action or to decline to intervene and allow the relator to go forward with the litigation on behalf of the United States. The relator is generally able to then share in any recovery. Pursuant to the settlement agreement, the relator in this case will receive $228,172 of the settlement, and will also recover her attorney’s fees, expenses, and costs.

Vanessa R. Waldref, the United States Attorney for the Eastern District of Washington, made the announcement.

“FHA-backed mortgages are a critical resource for first-time homebuyers, moderate-income borrowers, and families who have suffered negative credit due to the pandemic or other events out of their control,” said U.S. Attorney Waldref. “By improperly originating ineligible mortgages, lenders take advantage of the limited resources of the FHA program and unfairly pass the risk of loss onto the public.”

“Quality and affordable housing is a critical issue in Eastern Washington and across the nation,” said U.S. Attorney Waldref. “Protecting the resources that support families who dream of purchasing their first home makes our community stronger. I commend the exceptional investigative work by Veterans Affairs Office of Inspector General and HUD’s Office of Inspector General that holds accountable those who abuse housing programs.”

“HUD’s Office of Inspector General is committed to working with the Department of Justice and our law enforcement partners to ensure that federal programs designed to help our nation’s most vulnerable are not abused,” said Special Agent-in-Charge Scott Tanchak. “Today’s settlement demonstrates the Government’s commitment to protecting the integrity of HUD programs.”

“Investigations such as these help safeguard the integrity of the home loan approval process and protect vulnerable veterans from fraudulent lending practices,” said Special Agent in Charge Jason Root of the Department of Veterans Affairs Office of Inspector General’s Northwest Field Office. “The VA OIG thanks the U.S. Attorney’s Office for the Eastern District of Washington and HUD’s Office of Inspector General for their partnership in this joint investigation.”

The settlement was the result of a joint investigation conducted by the U.S. Attorney’s Office for the Eastern District of Washington, HUD’s Office of Inspector General, and the U.S. Department of Veterans Affairs, Office of Inspector General, Spokane Resident Office.

Assistant United States Attorneys Tyler H.L. Tornabene and Dan Fruchter and Special Assistant United States Attorney Frieda K. Zimmerman handled this matter on behalf of the United States. The claims resolved by the settlement are allegations only and there has been no determination of liability.

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Universal American Mortgage Company, LLC Agrees to Pay to Settle for Failing to Follow FHA Rules

Stephanie Abbott —  October 23, 2018 — Leave a comment

Universal American Mortgage Company, LLC (UAMC) has agreed to pay the United States $13.2 million to resolve allegations that it violated the False Claims Act by falsely certifying that it complied with Federal Housing Administration (FHA) mortgage insurance requirements in connection with certain mortgages.  UAMC is a mortgage lender headquartered in Miami, Florida, doing business across the country, including in the Western District of Washington.

The United States alleged that between January 1, 2006, and December 31, 2011, UAMC knowingly submitted loans for FHA insurance that did not qualify.  The United States further alleged that UAMC improperly incentivized underwriters and knowingly failed to perform quality control reviews, which violated HUD requirements and contributed to UAMC’s submission of defective loans.

During the period covered by the settlement, UAMC participated as a direct endorsement lender (DEL) in the U.S Department of Housing and Urban Development’s (HUD’s) FHA insurance program.  A DEL has the authority to originate, underwrite and endorse mortgages for FHA insurance.  If a DEL approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD, FHA’s parent agency, for the losses resulting from the defaulted loan.  Under the DEL program, the FHA does not review a loan for compliance with FHA requirements before it is endorsed for FHA insurance.  DELs are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance and to maintain a quality control program that can prevent and correct deficiencies in their underwriting practices.

The announcement was made by U.S. Attorney Annette L. Hayes.

“Mortgage lenders may not ignore material FHA requirements designed to reduce the risk that borrowers will be unable to afford their homes and federal funds will be wasted,” said Assistant Attorney General Joseph H. Hunt for the Justice Department’s Civil Division.  “We will hold accountable entities that knowingly fail to follow important federal program requirements.”

“In a quest for profits, mortgage companies have ignored important lending standards” said U.S. Attorney for the Western District of Washington, Annette L. Hayes.  “Not only does this harm the borrowers leaving them over their heads in debt and underwater on their mortgages, it harms taxpayers because the mortgages are backed by government insurance.  This settlement should serve as a warning to other lenders to diligently follow the rules.”

United States Attorney Joseph Harrington for the Eastern District of Washington said, “FHA mortgages are vital to first-time homebuyers and to families whose credit and assets were damaged by the 2008 economic crisis.  FHA underwriting and other requirements are critical to safeguarding the integrity of the public money used to operate this important program.  We will continue to work with our law enforcement partners to ensure that mortgage lenders and others who profit from this program, while ignoring its rules, will be held accountable.”

“One of our principle responsibilities is to protect and ensure the integrity of federal housing programs for the benefit of all Americans,” said Jeremy M. Kirkland, Acting Deputy Inspector General, U.S. Department of Housing and Urban Development, Office of Inspector General.  “This settlement demonstrates our resolve and should signal to irresponsible lenders that this conduct will not be tolerated.”

“FHA depends upon the lenders we do business with to apply our standards and to truthfully certify that they’ve done so,” said David Woll, HUD’s Deputy General Counsel for Enforcement.  “Working with our federal partners, HUD will enforce these lending standards so we can protect families from preventable foreclosure and to protect FHA from unnecessary losses.”

The settlement resolves allegations originally brought by Kat Nguyen-Seligman, a former employee of a related UAMC entity, in a lawsuit filed under the whistleblower provisions of the False Claims Act, which allows private parties to bring suit on behalf of the federal government and to share in any recovery.  The whistleblower will receive $1,980,000 as her share of the federal government’s recovery in this case.

This matter was handled on behalf of the government by the Justice Department’s Civil Division, the U.S. Attorney’s Offices for the Eastern District of Washington and Western District of Washington, the Department of Housing and Urban Development, and the Department of Housing and Urban Development’s Office of the Inspector General.  case is captioned United States ex rel. Kat Nguyen-Selgiman v. Lennar Corporation, Universal American Mortgage Company, LLC, and Eagle Home Mortgage of California, Inc., 14-cv-1435 (W.D. Wash.).  The claims resolved by this settlement are allegations only, and there has been no admission of liability.

The settlement agreement is being handled by Assistant United States Attorney Kayla Stahman.

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Nomura Agrees to Pay for Misleading Investors in Sale of Residential Mortgage-Backed Securities

Stephanie Abbott —  October 16, 2018 — Leave a comment

Nomura Holding America Inc. and several of its affiliates (“Nomura”) have reached an agreement with the United States where it will pay a $480 million penalty to resolve federal civil claims that Nomura misled investors in connection with the marketing, sale and issuance of residential mortgage-backed securities (“RMBS”) between 2006 and 2007.  Nomura’s investors, which included university endowments, retirement funds and federally insured financial institutions, suffered significant losses due to Nomura’s misconduct.

The settlement stems from allegations that Nomura knowingly securitized defective mortgage loans in its RMBS and misled investors regarding the quality and characteristics of those loans.  For example, the United States alleged that:

  • In presentations regarding its RMBS program, Nomura claimed that its due diligence process was “extensive,” “disciplined” and “carefully developed.”  Nomura also told investors that it only worked with “hand-picked industry leading” due diligence vendors, and that, as a result of its superior standards and due diligence processes, “Nomura’s loan performance should surpass industry standards.”  These claims were false.  Nomura knew, based on its due diligence, that thousands of loans that it securitized in its RMBS did not comply with applicable underwriting guidelines or were supported by inflated and potentially fraudulent appraisals.  Nomura concealed these deficiencies from investors, securitizing many of these defective loans as “favors” to loan originators—including, for example, loans that one originator openly described to Nomura as “dogsh[*]t.”  As stated by a member of Nomura’s RMBS due diligence group: “There is no such thing as a bad loan . . . just a bad price.”
  • Nomura also knew that a significant number of loans that it securitized in its RMBS had not gone through Nomura’s stated due diligence process, and, more broadly, that its process had been compromised.  Nomura’s head of RMBS due diligence (in the context of proposed changes to Nomura’s loan-by-loan buying program) stated that Nomura was “turning into the lemming of the mortgage business,” “following the herd” and compromising its standards “to comply with the masses in p[u]rsuit of volume.”  Additionally, a member of Nomura’s RMBS group’s origination sales team, in an email to the entire RMBS group, remarked that “advertising will be a great career when all these loans finally blow up . . . . (I will be selling vacuum cleaners door to door when the market goes by the way).”
  • Despite this knowledge, Nomura failed to address the weaknesses in its due diligence processes, and continued to do business with originators that, according to its own due diligence personnel, were “extremely dysfunctional,” had “systemic” underwriting issues and employed “questionable” origination practices.  Indeed, Nomura’s securitization of defective loans in the subject deals—in spite of numerous red flags—reflected a conscious decision by senior Nomura personnel to compete for market share in a highly competitive RMBS market.  As stated by one member of Nomura’s RMBS team, Nomura could not just “buck the entire marketplace when [it was] hammered to grow.”
  • Likewise, despite knowing that its due diligence was ineffective and did not remove large numbers of defective loans from its RMBS, in mid-2006, Nomura announced new, “more liberal” underwriting guidelines for its loan-by-loan purchase program.  Although Nomura’s head of RMBS due diligence warned that Nomura had already “loosened guidelines in so many areas” and that it was “at risk of giving away the proverbial store,” the prevailing view, as characterized by Nomura’s RMBS trading desk, was that Nomura’s “box [was] too restrictive.”  Nomura’s new guidelines allowed for the purchase of loans that Nomura’s due diligence personnel previously described as “sheer lunacy.”

These are allegations only, which Nomura disputes, and there has been no trial or adjudication or judicial finding of any issue of fact or law.

Richard P. Donoghue, United States Attorney for the Eastern District of New York, and Jennifer Byrne, Associate Inspector General, Federal Housing Finance Agency-Office of Inspector General (FHFA-OIG), announced the settlement.

“This settlement holds Nomura accountable for its fraudulent conduct in connection with its Residential Mortgage-Backed Securities offerings, which caused substantial harm to investors and contributed to the financial crisis of 2008,” stated United States Attorney Donoghue.  “The Department of Justice, this Office and our partners will continue to aggressively pursue wrongdoing in our financial markets, including, as appropriate, financial crisis-era misconduct.”

“The actions of Nomura resulted in significant losses to investors, including Fannie Mae and Freddie Mac, which purchased Nomura Residential Mortgage-Backed Securities backed by defective loans,” stated FHFA-OIG Associate Inspector General Byrne.  “We are proud to have partnered with the U.S. Attorney’s Office for the Eastern District of New York on this matter.”

The settlement was the result of a multi-year investigation by the Civil Division of the U.S. Attorney’s Office for the Eastern District of New York, pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.  Assistant U.S. Attorney Clayton P. Solomon and former Assistant U.S. Attorney Morgan J. Brennan led the government’s investigation.

 

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The Royal Bank of Scotland Agrees to Pay for Financial Crisis-Era Misconduct

Stephanie Abbott —  August 14, 2018 — Leave a comment

The Royal Bank of Scotland Group plc (RBS Group) has entered into a $4.9 billion settlement today resolving federal civil claims that RBS Group’s subsidiaries in the United States (RBS) misled investors in the underwriting and issuing of residential mortgage-backed securities (RMBS) between 2005 and 2008. The penalty is the largest imposed by the Justice Department for financial crisis-era misconduct at a single entity under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which allows the Justice Department to seek civil penalties for violations of criminal statutes.

The settlement includes a statement of facts that details – using contemporaneous calls and emails of RBS executives – how RBS routinely made misrepresentations to investors about significant risks it failed to disclose about its RMBS. For example:

  • RBS failed to disclose systemic problems with originators’ loan underwriting. RBS’s reviews of loans backing its RMBS (known as “due diligence”) confirmed that loan originators had failed to follow their own underwriting procedures, and that their procedures were ineffective at preventing risky loans from being made. As a result, RBS routinely found that borrowers for the loans in its RMBS did not have the ability to repay and that appraisals for the properties guaranteeing the loans had materially inflated the property values. RBS’s RMBS contained, as its Chief Credit Officer put it, “total f***ing garbage” loans with “random” and “rampant” fraud that was “all disguised to, you know look okay kind of . . . in a data file.” RBS never disclosed that these material risks both existed and increased the likelihood that loans in its RMBS would default.
  • RBS changed due diligence findings without justification. RBS’s due diligence practices did not remove fraudulent and high-risk loans from its RMBS. In fact, RBS executives internally discussed how RBS’s due diligence process was “just a bunch of bullsh**.” For example, when RBS’s due diligence vendors graded loans materially defective, RBS frequently directed the vendors to “waive” the defects without justification. One due diligence vendor, which tracked waivers by most major participants in the RMBS industry, concluded that RBS waived material defects 30% more frequently than the industry average. RBS’s waiver of material defects routinely resulted in the securitization of loans with excessive risk. When it engaged in such waivers, RBS never included enhanced “scratch-and-dent” disclosures that would have alerted investors that loans with excessive risks were included in the RMBS.
  • RBS provided investors with inaccurate loan data. RBS’s due diligence frequently found that loan data – which RBS passed on to investors, who used the data to analyze the risks associated with its RMBS – were riddled with errors. Many inaccuracies made the loans look less risky than they actually were. RBS, however, did not require originators to correct the data errors. In one deal, where RBS identified over 600 data errors associated with 563 loans (including debt-to-income ratios understated by as much as 2700%), RBS failed to disclose these errors even to the originator; instead, RBS reassured the originator that RBS had not required originators to correct data errors in the past and did not anticipate doing so for that deal.
  • RBS failed to disclose due diligence and kick-out caps. To develop and maintain business relations with originators, RBS agreed to limit the number of loans it could review (due diligence caps) and/or limit the number of materially defective loans it could remove from a RMBS (kick-out caps). RBS’s scheme reached its height in two deals issued in October 2007. In both of these RMBS, RBS identified hundreds of underlying loans that carried a particularly high risk of default and would cause losses to the RMBS investors. RBS kept these materially risky loans in the RMBS, without disclosing their inclusion to investors, because RBS had agreed to a kick-out cap limiting the number of defective loans that RBS could exclude from the securities in exchange for receiving a lower price for the loan pool. As a result, over the entirety of its scheme, RBS securitized tens of thousands of loans that it determined or suspected were fraudulent or had material problems without disclosing the nature of the loans to investors.

Through its scheme, RBS earned hundreds of millions of dollars, while simultaneously ensuring that it received repayment of billions of dollars it had lent to originators to fund the faulty loans underlying the RMBS. RBS used RMBS to push the risk of the loans, and tens of billions of dollars in subsequent losses, onto unsuspecting investors across the world, including non-profits, retirement funds, and federally-insured financial institutions. As losses mounted, and after many mortgage lenders who originated those loans had gone out of business, RBS executives showed little regard for this misconduct and made light of it.

U.S. Attorney Lelling, Acting Associate Attorney General Panuccio and FHFA-OIG Associate Inspector General Byrne made the announcement.

“This resolution – the largest of its kind – holds RBS accountable for defrauding the people and institutions that form the backbone of our investing community,” said Andrew E. Lelling, U.S. Attorney for the District of Massachusetts. “Despite assurances by RBS to its investors, RBS’s deals were backed by mortgage loans with a high risk of default. Our settlement today makes clear that institutions like RBS cannot evade responsibility for the damage caused by their illicit conduct, and it serves as a reminder that the Justice Department, and this Office, will hold those who engage in fraudulent conduct accountable.”

“Many Americans suffered lasting economic harm as a result of the 2008 financial crisis,” said Acting Associate Attorney General Jesse Panuccio. “This settlement holds RBS accountable for serious misconduct that contributed to that financial crisis, and it sends an important message that the Department of Justice will pursue financial institutions that illicitly harm the American economy and our consumers.”

“The actions of RBS resulted in significant losses to investors, including Fannie Mae and Freddie Mac, which purchased the Residential Mortgage-Backed Securities backed by defective loans,” said Associate Inspector General Jennifer Byrne of the Federal Housing Finance Agency-Office of Inspector General’s (FHFA-OIG). “We are proud to have partnered with the U.S Attorney’s Office for the District of Massachusetts on this matter.”

These are allegations only, which RBS disputes and does not admit, and there has been no trial or adjudication or judicial finding of any issue of fact or law.

Assistant U.S. Attorneys Justin D. O’Connell, Brian M. LaMacchia, Elianna J. Nuzum, Steven T. Sharobem, and Sara M. Bloom of Lelling’s Office handled the matter.

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