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Regions Bank next on DOJ hit list, will pay $52.4 million for FHA-lending violations

Becomes latest lender to be accused of violating False Claims Act

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Over the last few years, the Department of Justice used the False Claims Act as its weapon of choice against the mortgage industry, using the law, which is designed to prosecute vendors the government feels fraudulently represented themselves while doing business with the nation, to extract settlements from lenders for supposedly misrepresenting the quality of loans to the Federal Housing Administration.

In recent months, Wells Fargo agreed to a $1.2 billion settlement, while Franklin American settled with the government for $70 million, Walter Investment settled for $29.6 million, First Tennessee, the regional bank for First Horizon National, settled for $212.5 million, M&T Bank settled for $64 million, and Freedom Mortgage agreed to pay $113 million – all for False Claim Act violations.

That list doesn't include Quicken Loans or Guild Mortgage, both of which are fighting back after being accused of similar actions by the DOJ.

And now, Regions Bank is the latest on the DOJ’s hit list, after agreeing to settle False Claims Act charges for $52.4 million.

According to an announcement from the DOJ, the settlement with Regions Bank resolves allegations that the bank violated the False Claims Act by “knowingly originating and underwriting mortgage loans insured by the Department of Housing and Urban Development’s Federal Housing Administration that did not meet applicable requirements.”

As with several of the other companies, Regions Bank acted as a “direct endorsement lender” in the FHA insurance program, which grants the lender the authority to originate, underwrite and endorse mortgages for FHA insurance without prior approval from the FHA.

Under the direct endorsement lender program, the FHA does not review a loan for compliance with FHA requirements before it is endorsed for FHA insurance.

According to the DOJ, Regions Bank did not comply with certain FHA origination, underwriting and quality control requirements.

While not admitting liability, the bank did admit that between Jan. 1, 2006, and Dec. 31, 2011, Regions Bank certified for FHA insurance certain mortgage loans that did not meet certain HUD underwriting requirements regarding borrower creditworthiness.

Additionally, the DOJ said that Regions did not maintain a quality control program that fully complied with the requirements established by HUD. “Regions’ QC Department did not consistently review an adequate sample of FHA-insured loans,” the DOJ said.

Regions also “understated” the amount of loans that its QC Department discovered during its apparently inadequate review process.

According to the DOJ, when Regions’ QC Department identified deficiencies during its loan review, the bank engaged in a pattern of “curing” QC findings by obtaining documentation that was not available to the underwriter at the time the loan was approved.  “As a result, the defect rate reported to senior management was understated,” the DOJ said.

“Additionally, Regions did not fully adhere to HUD’s self-reporting requirements.  During the period between Jan. 1, 2006, and Dec. 31, 2011, the HUD Handbook required lenders to report ‘findings of fraud’ or ‘other serious violations’ or ‘serious material deficiencies’ to HUD,” the DOJ said. “Although Regions’ monthly QC reviews identified numerous FHA-insured loans for that period that contained material deficiencies, Regions did not begin self-reporting these materially deficient loans to HUD until 2011.”

As a result of Regions’ “conduct and omissions,” HUD insured hundreds of loans that were not eligible for FHA mortgage insurance under the DEL program and that HUD would not otherwise have insured, the DOJ said.  

HUD subsequently suffered “substantial losses” when it paid insurance claims on those loans.

“Mortgage lenders that participate in the FHA insurance program must follow the requirements intended to safeguard its integrity and to protect homeowners,” said Principal Deputy Assistant Attorney General Benjamin Mizer, head of the Justice Department’s Civil Division. “We will continue to hold responsible lenders that knowingly violate these important requirements.”

In a statement, Regions said that it “fully cooperated” with the DOJ inquiry and agreed to the settlement, again “without admitting liability,” to avoid further legal expense.

“Regions is pleased to resolve this inquiry and is committed to maintaining fair, consistent and accurate loan origination practices,” Regions said in a statement. 

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