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Michigan Mortgage Lender Agrees to Settle FCA Lawsuit for $48 Million

detroit-skyl-300x151A Michigan mortgage services company settled a protracted $48 million dollar False Claims Act (“FCA”) lawsuit this week. The U.S. Attorney for the Eastern District of Michigan announced, “the settlement announced today holds United Shore accountable for its endorsement of ineligible loans for FHA mortgage insurance.”

United Shore Financial Services LLC (“USFS”) agreed to pay the U.S. government $48 million to resolve allegations that it violated the FCA by underwriting and originating “bad” mortgage loans that were insured by the U.S. Department of Housing and Urban Development (“HUD”). The loans USFS originated were disproportionality soured by borrowers’ inability to pay, in part, the Government alleged, because of the company’s improper process of approving hundreds of loans that HUD would not normally insure.

The False Claims Act was passed following the American Civil war, after widespread fraud on the Union army frustrated citizens, soldiers, and lawmakers alike. Sometimes dubbed “[President] Lincoln’s Law,” the FCA has become one of the U.S. government’s most effective tools in combating frauds on government-funded programs.

The FCA allows and encourages those who have knowledge of fraud, individuals often referred to as “whistleblowers,” or in legalese, “relators,” to bring law suits against companies doing business with the government.

The lawsuits are “sealed” until the U.S. Department of Justice reviews the allegations against the government contractor. Unlike most private-law statutes, the government may elect to “intervene” in a False Claims Act suit.

If the lawsuit proves successful, or the government contractor chooses to settle claims brought, the whistleblower who originally provided the government with information regarding the fraud is generally entitled to 15-30% of any monies recovered. In 2016 alone, the Department of Justice (“DOJ”) recovered over $4.7 billion dollars from fraudulent government contractors.

In the wake of the 2008 financial crisis and the ensuing recession, some have blamed lax enforcement of lending laws as the root of the meltdown. By intervening in lawsuits against companies that are, and were lax in compliance with promulgated standards, the government is showing their willingness to go after the mortgage services industry, an attempt at ensuring the industry’s compliance with FHA and HUD regulations.

In the period covered by the settlement, USFS participated as a direct endorsement lender (“DEL”) in the federal government’s housing insurance program. DELs have the authority to originate, underwrite, and endorse mortgages for FHA insurance. If a lender approves a mortgage for insurance and the loan later defaults, a business like USFS may submit an insurance claim to HUD for the losses resulting from the problematic loan.

Essentially, the government alleged that USFS knowingly and negligently approved mortgage loans to people that the company knew were likely to default, despite prohibitions against doing so. USFS essentially took advantage of the system by “passing” along bad debt to the government – all while collecting lucrative fees.

The government admits that the FHA does not review a loan for observance of regulatory requirements before it is endorsed for FHA insurance. Even so, the government contended that lenders like USFS are required to follow rules designed to safeguard proper underwriting and certification of mortgages for FHA insurance. These rules require a lender to create a quality assurance program that can prevent and correct deficiencies in the lender’s services, and to report deficient loans identified by that assurance program.

In settling with the government, USFS admitted that it failed to “self-report” all deficient mortgages to HUD. While USFS reviewed and identified hundreds of deficient FHA insured loans during the period covered by the settlement, the company only self-reported three loans to the government.

Specializing in False Claims Act litigation, Greene LLP’s partners Thomas M. Greene and Michael Tabb  each have over twenty years representing whistleblowers. Alleging fraud against the government is often complex and confusing. Speaking with an experienced FCA attorney may help resolve questions about a potential claim and may evaluate the viability of a potential whistleblower’s claims.

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