On September 13, 2016, the U.S. Department of Justice announced that Alabama-based Regions Bank agreed to pay $52.4 million to resolve allegations that the bank violated the False Claims Act by falsely certifying that mortgage loans insured by the Federal Housing Administration (FHA) were underwritten according to, and complied with, requirements of the U.S. Department of Housing and Urban Development (HUD). Since January 2006, Regions has been a direct endorsement lender (DEL) in the FHA’s insurance program. Under the program, 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 for any losses resulting from the default. However, in order for a mortgage loan to qualify for FHA insurance, it must be underwritten according to certain guidelines issued by HUD. The FHA does not review the loan for compliance, but instead relies on the DEL to certify compliance.
As part of the settlement, Regions admitted that from January 1, 2006 to December 31, 2011, it certified loans for FHA insurance that did not meet HUD’s underwriting requirements related to borrower creditworthiness. Regions also admitted that during this time frame it did not maintain a quality control program the fully complied with HUD’s requirements. Specifically, Region’s quality control department did not review an adequate sample of FHA loans and when deficiencies were identified during this review, Regions employees engaged in a pattern of “curing” the deficiencies, which resulted in an understated defect rate being reported to senior management. Finally, Regions did not completely adhere to HUD’s self-reporting requirements.
FHA insurance and various other federally funded programs exist to make home ownership more affordable and available to lower income borrowers and borrowers suffering from financial hardship. These programs incentivize lenders to make loans to potentially risker borrowers because the federal government essentially guarantees the loan and will reimburse the owner of the loan for losses associated with default. HUD and FHA have issued regulations and guidance that lenders are required to follow to protect the government. Unfortunately, fraud in connection with federally insured loans became widespread, particularly during the housing bubble. And with current cycle of low-interest rate mortgage loans and resurgent thirst in the financial industry for mortgage-backed securities, history could repeat itself.