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US Bancorp pays $200M to resolve FHA mortgage-lending violations

Bank failed to ID problem loans certified for FHA insurance

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U.S. Bancorp (USB) has agreed to pay the United States $200 million to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the Federal Housing Administration that did not meet applicable requirements, the Justice Department announced Monday.

The settlement resolves an investigation relating to the endorsement of mortgage loans under the FHA’s insurance program.

“By misusing government programs designed to maintain and expand homeownership, U.S. Bank not only wasted taxpayer funds, but inflicted harm on homeowners and the housing market that lasts to this day,” said Assistant Attorney General for the Justice Department’s Civil Division Stuart Delery. “As this settlement shows, we will continue to hold accountable financial institutions that violate the law by pursuing their own financial interests at the expense of hardworking Americans.”

USB is having a challenging year in the mortgage space.

USB previously disclosed the investigation, potential claims and the related reasonably possible losses in prior financial statement disclosures.

The company says it cooperated fully with the DOJ investigation and chose to settle this matter for $200 million without an admission of liability to avoid the path of costly and protracted litigation as well as distractions to the business. 

In addition to the False Claims Act issue, during the second quarter and prior to the settlement agreement with the DOJ, the company sold 3 million shares of the Class B common stock of Visa Inc. resulting in a net pretax gain of $214 million. After the sale, the company continues to own approximately 9.6 million Visa Class B shares. The combination of the settlement and the sale of Visa Class B shares is expected to be neutral to earnings-per-share in the second quarter.

During the time period covered by the settlement, U.S. Bank participated as a direct endorsement lender, or DEL, in the FHA insurance program. A DEL has the authority to originate, underwrite, and certify mortgages for FHA insurance.  

If a loan certified for FHA insurance later defaults, the holder of the loan may submit an insurance claim to the U.S. Department of Housing and Urban Development, FHA’s parent agency, for the losses resulting from the defaulted loan. Because FHA does not review a loan before it is endorsed for FHA insurance, FHA requires a DEL to follow program rules designed to ensure that the DEL is properly underwriting and submitting mortgages for FHA insurance.

As part of the settlement, U.S. Bank admitted that, from 2006 through 2011, it repeatedly certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements.   

U.S. Bank also admitted that its quality-control program did not meet FHA requirements, and as a result, it failed to identify deficiencies in many of the loans it had certified for FHA insurance, failed to self-report many deficient loans to HUD, and failed to take the corrective action required under the program. U.S. Bank further acknowledged that its conduct caused FHA to insure thousands of loans that were not eligible for insurance and that the FHA suffered substantial losses when it later paid insurance claims on those loans.

“This substantial recovery on behalf of the Federal Housing Administration should serve as a vivid reminder of the potential consequences of not following HUD program rules, and the diligence with which we will pursue those that violate them, particularly where lenders such as U.S. Bank take actions to compromise the insurance fund,” said David Montoya, Inspector General of the Department of Housing and Urban Development.

The agreement resolves potential violations of federal law based on U.S. Bank’s deficient origination of FHA insured mortgages. The agreement does not prevent state and federal authorities from pursuing enforcement actions for other origination conduct by U.S. Bank, or for any servicing or foreclosure conduct, including civil enforcement actions against U.S. Bank for violations of the CFPB’s new mortgage servicing rules that took effect on Jan. 10, 2014.    

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