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Freedom Mortgage to pay $113 million for FHA violations

Unusually high levels of defective mortgages

Freedom Mortgage Corporation now has more in common with Wells Fargo, Franklin American Mortgage, Walter Investment, and First Tennessee Bank than simply being mortgage lenders, as Freedom Mortgage is set to become the latest mortgage company to settle with the Department of Justice over alleged violations of the False Claims Act.

The Department of Justice announced Friday that Freedom Mortgage will pay $113 million for originating loans that did not meet Federal Housing Administration underwriting standards.

Freedom Mortgage joins a growing list of companies that settled with the government over FHA lending violations, including Wells Fargo, which recently agreed to a $1.2 billion settlement; Franklin American, which settled with the government for $70 million; Walter Investment, which settled for $29.6 million; and First Tennessee, the regional bank for First Horizon National, which settled for $212.5 million.

The False Claims act is the primary law the government uses to prosecute vendors it feels fraudulently represented themselves while doing business with the nation.

As with several of the other companies, Freedom Mortgage acted as a “direct endorsement lender” in the FHA insurance program, which grants the lender the authority to originate, underwrite and endorse mortgages.

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, Freedom Mortgage “failed to comply” with certain FHA origination, underwriting and quality control requirements.

As part of the settlement, Freedom Mortgage admitted that between Jan. 1, 2006 and Dec. 31, 2011, it certified mortgage loans for FHA insurance that did not meet Department of Housing and Urban Development underwriting requirements and were therefore not eligible for FHA mortgage insurance.

Additionally, the DOJ said that between 2006 and 2008, Freedom Mortgage did not meet the FHA’s quality control requirements by not sharing its early payment default QC reviews with production and underwriting management, and not requiring responses to its Early payment default QC findings from its production or underwriting staff.

Early payment default is a loan that becomes 60 days past due within the first six months of the loan.

The DOJ said that due to “staffing limitations” between 2008 and 2010, Freedom Mortgage did not always perform timely QC reviews or perform audits of all EPD loans, as is required by HUD.

The EPD QC reviews that Freedom Mortgage was able to perform revealed high defect rates, as much as 30% between 2008 and 2010, the DOJ said.

But, between 2006 and 2011, Freedom Mortgage did not report a single improperly originated loan to HUD, despite its obligation to do so, the DOJ said.

Additionally, in 2012, Freedom Mortgage identified hundreds of loans that “possibly should have been self-reported to HUD,” but reported only one.  

Therefore, the DOJ said that HUD insured hundreds of loans that were not eligible for FHA mortgage insurance, and subsequently incurred substantial losses when it paid insurance claims on the ineligible loans approved by Freedom Mortgage.

“Freedom Mortgage did not properly comply with FHA rules for the mortgages it was generating and did not adequately monitor early payment defaults,” said U.S. Attorney Paul Fishman for the District of New Jersey. 

“It also failed to report to HUD the defaults it did discover, as required by its participation in the program,” Fishman said. “Today’s settlement recognizes those failures and imposes an appropriate sanction.”

A representative from Freedom Mortgage said that the company made a “business decision” to put this issue behind it.

“Like many other high volume FHA-approved lenders, Freedom Mortgage Corporation was reviewed by the Department of Justice and HUD for loan origination activities that occurred as long as nine years ago,” the company said in a statement.

“Without any admission of liability and in order to avoid the extended distractions and expenses associated with protracted litigation, Freedom Mortgage made a business decision to resolve this matter,” the company continued.

“The settlement in no way affects Freedom’s ability to originate FHA insured loans,” the company said. “The company continues to focus on our most important mission – that of providing homeownership opportunities to our current and future customers.”

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