[Update 1: Updated with a statement from Quicken Loans]
The United States government is suing Quicken Loans, accusing the lender of improperly originating and underwriting loans that were insured by the Federal Housing Administration.
According to an announcement from the Department of Justice, the government alleges that from September 2007 through December 2011, Quicken “knowingly submitted, or caused the submission of, claims for hundreds of improperly underwritten FHA-insured loans.”
The government’s lawsuit comes days after Quicken sued the DOJ and the Department of Housing and Urban Development, saying that it was left with no alternative but to take this action after the DOJ demanded Quicken Loans make public admissions that were blatantly false, as well as pay an inexplicable penalty or face legal action.
Now, the government has indeed taken legal action, suing the Detroit-based lender in the U.S. District Court for the District of Columbia.
According to the DOJ, Quicken was a direct endorsement lender with the FHA, which gave Quicken the authority to originate, underwrite and certify mortgages for FHA insurance.
Under the DEL program, neither the FHA nor HUD reviews the underwriting of a loan before it is endorsed for FHA insurance, the DOJ said. HUD said that it relies on DELs to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance. Additionally, a DEL must certify that every loan endorsed for FHA insurance is underwritten according to the applicable FHA standards.
According to the DOJ, Quicken did not adhere to those standards.
The government’s complaint alleges that Quicken instituted and encouraged an underwriting process that led to employees disregarding FHA rules and falsely certifying compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages.
“The complaint further alleges that Quicken failed to implement an adequate quality control program to identify deficient loans, and that Quicken failed to report to HUD the loans it did identify,” the DOJ said. “In particular, according to the government's complaint, despite its obligation to report to HUD all materially deficient loans, during the period from September 2007 to December 2011, Quicken concealed its deficient underwriting practices and failed to report a single underwriting deficiency to the agency.”
In a statement of response, Quicken said that the government’s lawsuit is “riddled with inaccurate and twisted conclusions” that were pulled from a “handful of emails cherry-picked from 85,000 documents” that Quicken provided to the DOJ.
Here is Quicken’s statement in full:
Quicken Loans is the FHA’s largest lender. By its own objective public reporting, FHA ranks Quicken Loans the highest quality (lowest default rate) lender of any large FHA originator in the United States. The FHA mortgages Quicken Loans originated are projected to generate billions in profits (net of claims) for the government from the insurance premiums on the $40 billion in FHA volume the company has closed since 2007. Today’s DOJ filing is simply the continuation of the abusive actions and a make-good on the DOJ’s threats since their witch-hunt began three years ago, as detailed in the lawsuit Quicken Loans filed against the DOJ last week.
The complaint filed today is riddled with inaccurate and twisted conclusions from fragments of a handful of emails cherry-picked from 85,000 documents that the DOJ subpoenaed. Worse than that, the DOJ appears to be basing their entire case on a handful of out-of-context email conversations skimmed from the communication between Quicken Loans employees. These conversations relate to a miniscule number of loans out of the nearly 250,000 FHA mortgages the company has closed over the past seven years.
The real victims in this unjust claim are the millions of middle class American families who rely on FHA financing to reach their goal of affordable home ownership. For now, Quicken Loans plans to continue offering FHA mortgages to our clients, but like nearly every lender in the country, we will be evaluating the prudence of our continued participation in the FHA program.
Those who work for the federal government must act in accordance with the laws of the United States, including those who work for the United States Department of Justice. The Constitution provides for checks and balances among the three branches of government. The irrational and baseless claims by this powerful federal agency will be exposed in Federal court. We are confident that after examining the facts, the judicial branch will clearly see the outrageous actions of the DOJ and exercise its authority to end this agency’s misuse of power.
According to the DOJ, Quicken allegedly had a “value appeal” process where, when Quicken received an appraised value for a home that was too low to approve a loan, Quicken often requested a specific inflated value from the appraiser with no justification for the increase– even though such a practice was prohibited by the applicable FHA requirements. Quicken also allegedly granted “management exceptions” whereby managers would allow underwriters to break an FHA rule in order to approve a loan, the DOJ said.
The government’s complaint goes on to allege that Quicken’s senior management was aware of these and other problems.
“The complaint alleges that Quicken’s Divisional Vice President for Underwriting, the second most senior executive in Quicken’s Operations Department, wrote in an email discussing the value appeal process that ‘I don’t think the media and any other mortgage company (Fannie Mae, FHA, Freddie Mac) would like the fact we have a team who is responsible to push back on appraisers questioning their appraised values,’” the DOJ said in a release.
Again from the DOJ:
In another email, the same Divisional Vice President for Underwriting wrote to a group of Quicken executives stating that 40% of the management exceptions on FHA’s early payment defaults should not have been granted, adding: “we make some really dumb decisions when it comes to client service exceptions. Example, purchase loan we pulled new credit and the client stopped paying on almost everything and the scores fell by 100 points, we [still] closed it.” In yet another email discussing an FHA loan, the Operations Director, a senior level executive, explained that the loan was approved based on “bastard income,” which he described as “trying to put some kind of income together that is plausible to the investor even though we know its creation comes from something evil and horrible.”
The government alleges that as a result of Quicken’s “knowingly deficient mortgage underwriting practices,” HUD has already paid millions of dollars of insurance claims on loans improperly underwritten by Quicken, and that there are many additional loans improperly underwritten by Quicken that have become at least 60 days delinquent that could result in further insurance claims on HUD, the DOJ said.
From the DOJ:
The government’s complaint identifies a borrower whose bank account statement showed overdrafts in multiple months and during the loan application process requested a refund of the $400 mortgage application fee so that the borrower would be able to feed the borrower's family. Nevertheless, Quicken allegedly approved the loan.The borrower made only five payments before becoming delinquent and as a result, HUD ultimately paid an FHA insurance claim of $93,955.19.
In another example, the complaint identifies a loan where the borrower was cashing out equity through a cash-out refinance. Allegedly, Quicken originally received an appraised value of $180,000, but because the borrower wanted to receive more cash, Quicken requested the appraiser to inflate the value by $5,000. The appraiser allegedly provided Quicken’s requested value of $185,000 even though the only difference between the two appraisals was the appraised value – the comparable sales analysis, and even the date of the appraiser’s signature, remained the same. Quicken allegedly used the inflated appraisal value to approve the loan. The borrower was delinquent on his first payment and as a result, HUD ultimately paid an FHA insurance claim of $204,208.
“Those who do business with the United States must act in good faith, including lenders that participate in the FHA mortgage insurance program,” said Principal Deputy Assistant Attorney General Benjamin Mizer of the Justice Department’s Civil Division. “To protect the housing market and the FHA fund, we will continue to hold responsible lenders that knowingly violate the rules.”