Fifth Third Bancorp (FITB) will pay $85 million as a part of settlement with the federal government over allegations that the bank failed to self-report mortgages it knew to be defective, causing millions of dollars in losses to the Department of Housing and Urban Development.
The settlement stems from a whistleblower complaint under the False Claims Act that accused Fifth Third of certifying that a number of mortgages were eligible for Federal Housing Administration insurance, then later determining that those mortgages were “materially defective,” making them ineligible for FHA insurance, but not reporting those defects to the FHA.
According to Christy Goldsmith Romero, Special Inspector General for the Troubled Asset Relief Program, and Preet Bharara, United States Attorney for the Southern District of New York, Fifth Third voluntarily disclosed in 2014 that 1,439 mortgages were submitted to the FHA from 2003 to 2013 despite those mortgages containing undisclosed defects.
Of those 1,439 defective mortgages, 519 defaulted, requiring HUD to pay out $85 million in the insurance.
As part of the settlement, Fifth Third will repay $85 million to the government to cover the losses suffered by HUD. Fifth Third will also indemnify HUD for any losses that it may incur on the remaining 914 loans.
“Fifth Third admitted and accepted responsibility for failing to self-report mortgage loans it knew to be defective, contrary to HUD requirements,” SIGTARP and the U.S. Attorney’s office said in a joint statement. Fifth Third has also reformed its business practices and terminated the employment of responsible employees.”
Fifth Third is part of the FHA’s Direct Endorsement Lender program, which authorizes private-sector mortgage lenders to underwrite mortgage loans, decide whether the borrower represents an acceptable credit risk for HUD, and certify loans for FHA mortgage insurance without prior HUD review or approval.
Direct Endorsement Lenders are required to conduct adequate due diligence on loans before certifying them for FHA insurance.
Direct Endorsement Lenders are also required to maintain an adequate quality control program, which includes self-reporting to HUD in writing within 60 days of initial discovery any loans identified during quality reviews that are affected by serious deficiencies, patterns of non-compliance, or fraud.
According to Romero, Fifth Third did not fulfill its requirements.
“Before and during the time Fifth Third was bailed out in TARP, its Quality Control employees made false representations to HUD that residential mortgages the bank originated were of the quality required to be insured by HUD,” Romero said in a statement.
“The bank’s false representations cost HUD millions of dollars to pay insurance claims on 519 of the materially defective loans that later defaulted,” Romero continued. “Fifth Third’s actions to fire those employees, voluntarily disclose its violations of the False Claims Act and FIRREA to law enforcement, and make corporate changes should stand as an example for others who violated the law.”
As part of the settlement, Fifth Thrid will also make an administrative payment to HUD of $2,044,000 as part of a separate indemnification agreement.
“Federal insurers rely on banks when they promise that the mortgage loans they originate are eligible for that insurance,” said U.S. Attorney Preet Bharara.
“When banks discover that some of the loans are lemons and that their promises of quality were false, as Fifth Third Bank did, they must come forward and report it promptly, so that taxpayers don’t get stuck with the bill,” Bharara said. “With this settlement, Fifth Third Bancorp has admitted to originating about 1,400 materially defective loans that were not eligible to be FHA insured and has taken positive steps to reform its quality control program, including terminating the employees responsible.”
As part of the settlement, Fifth Third admitted, acknowledged, and accepted responsibility for its self-reporting violations, including that:
- Fifth Third was required to self-report to HUD any serious deficiencies, patterns of non-compliance, or fraud within 60 days of the initial discovery
- Fifth Third made annual certifications to HUD that it conformed to all HUD-FHA regulations necessary to maintain its HUD-FHA approval, which included the implementation of a mandatory quality control program by which Fifth Third reported to HUD all serious deficiencies, patterns of non-compliance, or fraud
- From 2003 through 2013, Fifth Third’s quality control program identified through post-closing reviews 1,436 residential mortgage loans that Fifth Third had originated and certified to HUD as eligible for FHA insurance that were materially defective and thus ineligible for FHA insurance
- Fifth Third failed timely to self-report these materially defective loans to HUD pursuant to HUD requirements.
“SIGTARP will root out violations of the law related to TARP with our law enforcement partners such as U.S. Attorney Preet Bharara,” Romero said. “It is always better to disclose those violations rather than wait for SIGTARP to find them.”