Over the last several years, lenders like Wells Fargo, Franklin American Mortgage, Walter Investment, First Tennessee Bank, Freedom Mortgage and M&T Bank chose to settle with the Department of Justice after being accused of originating and underwriting mortgage loans that did not meet Federal Housing Administration standards.
Now, Guild Mortgage is next on the DOJ’s hit list, after the government sued the San Diego-based lender, accusing it of violating the False Claims Act, which is the primary law the government uses to prosecute lenders it feels fraudulently represent themselves while doing business with the nation.
In each of those previous cases, the government used the False Claims Act as its primary weapon against the lenders, alleging that each lender violated the Act by ensuring that the mortgages they originated and subsequently verified for FHA mortgage insurance met FHA standards, when in actuality, some number of loans from each lender did not meet the FHA standards.
And now Guild Mortgage is facing similar allegations, and saying it plans to fight.
According to the DOJ, Guild Mortgage allegedly violated the False Claims Act by “knowingly” originating and underwriting mortgage loans that did not meeting FHA and Department of Housing and Urban Development guidelines.
As with several of the other lenders, Guild Mortgage acted as a “direct endorsement lender” in the FHA insurance program, which grants the lender the authority to originate, underwrite and endorse mortgages for FHA insurance without prior review or approval from the FHA.
According to the DOJ, Guild Mortgage did not comply with certain FHA origination, underwriting and quality control requirements.
The government’s complaint alleges that, from January 2006 through December 2011, Guild “knowingly submitted, or caused the submission of,” claims for hundreds of “improperly” underwritten FHA-insured loans.
The government’s complaint also alleges that Guild grew its FHA lending business by “ignoring” FHA rules and falsely certifying compliance with underwriting requirements to “reap the profits” from FHA-insured mortgages.
“For example, Guild allegedly allowed underwriters to waive compliance with FHA requirements when underwriting a loan,” the DOJ said in its statement. “Additionally, Guild used unqualified junior-underwriters who did not have a DE certification to waive mandatory conditions on higher risk loans where HUD required underwriting only by highly trained DE underwriters.”
Additionally, the DOJ further alleges that Guild’s senior management “focused on growth and profits and ignored quality.”
According to the DOJ, the complaint alleges that Guild found significant defects in over 20% of the FHA loans reviewed between 2006 and 2011, and more than half the loans had either significant or moderate defects.
The significant defects included fraud, misrepresentation and other serious findings while moderate defects included not following guidelines. However, Guild did not calculate or distribute any error rate during the relevant time period, thus management was not presented with these findings, the DOJ alleges.
The government’s complaint alleges that as a result of Guild’s “knowingly deficient” mortgage underwriting practices, HUD has already paid tens of millions of dollars of insurance claims on loans improperly underwritten by Guild.
The government also claims that there are “many additional loans” that were “improperly underwritten” by Guild that are currently in default and could result in further insurance claims on HUD.
The government claims that in one case, Guild failed to verify a borrower’s prior rental payments, overstated the borrower’s income, failed to develop a credit history for the borrower who had no credit score, exceeded FHA’s qualifying debt-to-income ratio without determining whether certain compensating factors were present, and failed to identify the source of a large deposit made to the borrower’s account.
The government states that the loan’s underwriter at Guild improperly waived multiple conditions and allowed an unauthorized junior underwriter to do the same for other conditions. In sworn testimony, the Guild underwriter admitted the loan failed to comply with FHA underwriting requirements, the DOJ said.
“The Federal Housing Administration’s insurance program is meant to encourage lenders to expand opportunity for homeownership by providing financing to prospective buyers who otherwise might not be able to enter the housing market,” said U.S. Attorney Channing Phillips for the District of Columbia.
“To ensure that prospective homebuyers realize the dream of long-term homeownership, the program has strict rules and is not a license for lenders to carelessly subject federal dollars to risk,” Phillips continued. “This lawsuit is designed to help the FHA – and American taxpayers -- recoup tens of millions of dollars in losses attributable to a lender accused of improperly underwriting FHA-insured mortgages and committing the government’s guarantee to mortgages that failed to comply with program rules.”
In a statement provided to HousingWire, Guild Mortgage’s president and CEO, Mary Ann McGarry, said that the government’s actions are “unwarranted and without merit,” and said the company intends to fight back.
“We are extremely disappointed that the Department of Justice has elected to pursue this action,” McGarry said.
“Guild has a proud record of making FHA loans since 1961 and we welcome the opportunity to set the record straight and correct the numerous misstatements in the government's complaint," McGarry continued.
"The government's action is unwarranted and without merit. The implication that any default on an FHA loan by a borrower represents wrongdoing by the lender is not justified,” McGarry said.
“For more than five decades Guild has responsibly underwritten fixed rate and fully documented loans in accordance with FHA requirements,” McGarry said. “This enforcement environment that lenders face today threatens to limit opportunities for home ownership and hurts the housing market. It is contrary to the mission of HUD and the FHA program to help the underserved — a Guild tradition since its founding in 1960.”
McGarry said that the current enforcement environment, which has seen the government go after a number of lenders for False Claims Act violations, is setting a dangerous precedent.
“It is unfortunate that lenders such as Guild have been placed in this untenable position where any minor error could result in substantial financial penalties,” McGarry said.
“To help families with low and moderate incomes, we need to expand home-buying opportunities, not shrink them,” McGarry continued.
“Sadly, if this punitive environment continues, the cost of lending will continue to increase for FHA borrowers and only the wealthy will be able to buy homes,” McGarry concluded. “Although we disagree with the allegations and intend to defend ourselves vigorously, we will continue to serve the FHA and first-time homebuyers, which we have served for more than 50 years.”