Member Article

The False Claims Act (“FCA”) is one of the most powerful anti-fraud weapons available to the U.S. Department of Justice (“DOJ”). It permits treble damages and makes penalties available for each false claim the defendant submitted to a federal payor. The DOJ effectively deployed the FCA against mortgage lenders in the aftermath of the sub-prime lending crisis to obtain, in some cases, billion-dollar settlements. In the wake of the 2008 recession, the DOJ pursued FCA lawsuits against Federal Housing Administration (“FHA”) originators by contending that lenders’ poor loan origination and underwriting practices rendered the loan certifications made to HUD the legal equivalent of a direct false statement to the government in violation of the False Claims Act. From 2009 to 2016, the DOJ has recovered more than $7 billion from mortgage lenders. Consequently, lenders dramatically reduced FHA originations.

On October 28, 2019, HUD and DOJ issued a Memorandum of Understanding (MOU) to provide clarity and quell lenders’ fears about liability for mortgage lending errors under the False Claims Act. In announcing this MOU at the Mortgage Bankers Association’s Annual Conference, HUD Secretary Ben Carson explained, “We know that at least part of the reason for the decade-long decline in depository participation is because of uncertainty about how federal agencies apply the False Claim Act.” Secretary Carson further noted that the MOU “clearly outlines our FHA mortgage program requirements, so they do not impede or discourage lenders from offering affordable FHA-insured loans to credit-worthy borrowers.”

Specifically, the MOU explains that HUD’s Mortgage Review Board will be the primary entity: (1) to take actions against non-compliant FHA lenders and (2) to evaluate whether the alleged violations of the False Claims Act should be referred to DOJ. According to the MOU, actions that are not referred to DOJ will be handled administratively by HUD’s Mortgage Review Board, which has the authority to seek indemnification and levy monetary penalties. Furthermore, FHA is working to simplify the lender certifications for FHA loan originations so that the certifications more clearly follow the requirements of the FCA.

While the MOU is an attempt to encourage participation in FHA-insured loan programs, lenders should continue to maintain the highest quality control, loan origination, and underwriting practices to avoid liability under the FCA. It remains to be seen whether the Mortgage Review Board’s newly clarified role as the primary referral agency for FCA claims will reduce the number of cases against mortgage lenders.

For more information, please contact Jonathan S. Feld (312-627-5680 or [email protected]), Mark Silverman (312-627-8292 or [email protected]), Jason Ross(214-462-6417 or [email protected]), Alex Sweatman (312-627-2534 or [email protected]), or your Dykema relationship attorney.