First Tennessee Bank to pay $212.5 million for faulty FHA underwriting

Settlement with DOJ stems from False Claims Act violations

First Tennessee Bank, the regional bank for First Horizon National (FHN), will pay $212.5 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 Department of Justice announced Monday.

The settlement between the Department of Housing and Urban Development, the DOJ and First Tennessee was first reported in April.

The claims are related to First Tennessee's underwriting and origination of FHA-insured mortgage loans from Jan. 2006 through Dec. 2008.

According to the DOJ, the settlement resolves allegations that First Tennessee failed to comply with FHA origination, underwriting and quality control requirements.

As part of the settlement, First Tennessee admitted that from January 2006 through October 2008, it “repeatedly certified” for FHA insurance mortgage loans that did not meet HUD underwriting requirements.

The DOJ said that as First Tennessee increased its FHA originations in late 2007, the quality of its underwriting “significantly decreased.”

Beginning in early 2008, First Tennessee became aware that a substantial percentage of its FHA loans were not eligible for FHA mortgage insurance due to its own quality control findings, the DOJ said.

“These findings were routinely shared with First Tennessee’s senior managers,” the DOJ said in a release. “Despite internally acknowledging that hundreds of its FHA mortgages had material deficiencies, and despite its obligation to self-report findings of material violations of FHA requirements, First Tennessee failed to report even a single deficient mortgage to FHA. First Tennessee’s conduct caused FHA to insure hundreds of loans that were not eligible for insurance and, as a result, FHA suffered substantial losses when it later paid insurance claims on those loans.”

According to the DOJ, First Tennessee participated in the FHA insurance program as a Direct Endorsement Lender. As a DEL, First Tennessee had the authority to originate, underwrite and endorse mortgages for FHA insurance, the DOJ said.

If a DEL such as First Tennessee approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD, FHA’s parent agency, for the losses resulting from the defaulted loan.

Under the DEL program, neither the FHA nor HUD reviews a loan before it is endorsed for FHA insurance, the DOJ said.

“First Tennessee’s reckless underwriting has resulted in significant losses of federal funds and was precisely the type of conduct that caused the financial crisis and housing market downturn,” said Principal Deputy Assistant Attorney General Benjamin Mizer of the Justice Department’s Civil Division.  “We will continue to hold accountable lenders who put profits before both their legal obligations and their customers, and restore wrongfully claimed funds to FHA and the treasury.”

Similar violations were at the root of MetLife Home Loans’ recent $123.5 million settlement with the DOJ. According to the DOJ, that settlement resolved False Claims Act charges brought by the Feds against MetLife Home Loans stemming from its FHA originations after it acquired First Horizon Home Loans Corp. from First Tennessee in Aug. 2008.

“Our investigation found that First Tennessee caused FHA to pay claims on loans that the bank never should have approved and insured in the first place,” said HUD Inspector General David Montoya. “This settlement reinforces my commitment to combat fraud in the origination of single family mortgages insured by the FHA and makes certain that only qualified, creditworthy borrowers who can repay their mortgages are approved under the FHA program.”

HUD General Counsel Helen Kanovsky said that she hopes this agreement “sends a message” to other lenders.

“We are pleased that First Tennessee has acknowledged facts that demonstrate its failure to comply with HUD’s requirements and has agreed to settle with the government,” Kanovsky said. “We thank the Department of Justice and HUD’s Office of Inspector General for all of their efforts in helping us to make this settlement a reality. We hope this agreement sends a message to those lenders with whom we do business that HUD takes compliance very seriously and so should they.”

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