Franklin American Mortgage fined $70 million for False Claims Act violations

Department of Justice accused lender of originating substandard FHA loans

Franklin American Mortgage Company will pay the United States $70 million to settle allegations brought against the lender by the Department of Justice, which accused Franklin American of violating the False Claims Act by originating substandard Federal Housing Administration loans.

According to the Department of Justice, Franklin American “knowingly” originated mortgages that did not meet the FHA loan requirements.

The DOJ said that the settlement resolves allegations that Franklin American failed to comply with certain FHA origination, underwriting and quality control requirements.

As part of the settlement, Franklin American admitted that between Jan. 1, 2006, and March 31, 2012, the company certified mortgage loans for FHA insurance that did not meet the Department of Housing and Urban Development’s underwriting requirement, the DOJ said.

According to the DOJ, Franklin American participated as a direct endorsement lender in the FHA insurance program, meaning that Franklin American had the authority to originate, underwrite and endorse mortgages for FHA insurance without prior approval by HUD or the FHA.

In the settlement announcement, the DOJ said that Franklin American’s FHA loan production grew substantially from 2006 until 2010. During this time, Franklin American employed “unqualified junior underwriters to perform important underwriting functions,” the DOJ said.

The DOJ also said that Franklin American set high quotas for its underwriters and subjected underwriters to discipline if they did not meet their quotas. The company also sought to incentivize the production of loans by offering bonuses to its FHA underwriters, the DOJ said.

According to the DOJ, after the loans were closed, Franklin American engaged in post-close audits, which often did not meet HUD’s requirements for post-close audits.

Despite not meeting HUD’s requirements for the quality of the audits, “substantial percentages of seriously deficient loans” were identified by Franklin American, the DOJ said.

According to the DOJ, the deficiencies were shared with Franklin American’s management, but very few of the deficiencies were reported to HUD.

“Franklin American’s conduct caused the FHA to insure hundreds of loans that were not eligible and, as a result, the FHA suffered substantial losses when it later paid insurance claims on those loans,” the DOJ said in a statement.

In a statement, Joe Taylor, senior vice president and corporate counsel for Franklin American, said that these types of charges and settlements have now become “customary” in the housing industry, and said that Franklin American chose to settle without admitting fault.

“We chose to settle this matter without admission of fault and negotiated this monetary settlement amount to avoid a protracted and costly legal process,” Taylor said. “Franklin American Mortgage will continue our high standards as a responsible lender and FHA program participant. We are pleased to have resolved this matter which will not negatively impact Franklin American Mortgage’s ability to continue serving its customers and partners.”

As Taylor referenced, Franklin American becomes the latest in a string of lenders who have settled with the DOJ over similar alleged False Claims Act violations.

Earlier this year, Walter Investment Management Corp. (WAC) was fined $29.63 million for violations of the False Claims Act to settle charges brought by the DOJ, which accused several Walter Investment subsidiaries of submitting false reverse mortgage claims to HUD.

And earlier this week, the nation’s largest FHA lender, Quicken Loans, said that it is considering ending its FHA lending program due to the government’s aggressive enforcement policies.

Quicken Loans and the Federal Government are engaged in a legal battle over supposed False Claims Act violations, with Quicken accusing the government of trying to strong-arm it into a settlement.

But other lenders, like Franklin American, have chosen to settle rather than fight a protracted and costly battle against the Feds.

“This settlement is another step forward in the government’s efforts to hold lenders accountable for the harm caused by years of improper and inadequate underwriting of mortgages insured by the federal government,” Principal Deputy Assistant Attorney General Benjamin Mizer, head of the Justice Department’s Civil Division, said of the Franklin American settlement. “As this settlement makes clear, we will hold accountable anyone whose conduct results in loss to the government, whether it is a large bank or a smaller mortgage lender.”

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