Primary Residential Mortgage Inc. and SecurityNational Mortgage Company announced separate agreements with the United States Department of Justice on behalf of the Department of Housing and Urban Development to pay $5 million and $4.25 million, respectively, to resolve allegations that they violated the False Claims Act.

According to the DOJ, both lenders allegedly violated the False Claims Act by “knowingly originating and underwriting mortgage loans insured by HUD’s Federal Housing Administration that did not meet applicable requirements.”

The two lenders quickly replaced BB&T as the latest in a long string of lenders targeted by the DOJ for False Claims Act violations. The False Claims is designed to prosecute vendors the government feels fraudulently represented themselves while doing business with the nation.

Less than a week ago, Branch, Banking & Trust Company (known more commonly as BB&T) announced it would pay $83 million to settle allegations brought by the DOJ, which accused the lender of violating the False Claims Act by falsely certifying that it complied with “critical underwriting and quality control requirements” on mortgages insured by the FHA.  

The DOJ cited that since at least January 2006, SecurityNational and PRMI have participated as Direct Endorsement Lenders (DELs) in the FHA insurance program. 

As DELs, the DOJ said both lenders had the authority to originate, underwrite and endorse mortgages for FHA insurance. Also, the FHA does not review a loan before it is endorsed for FHA insurance for compliance with FHA’s credit and eligibility standards, relying, instead, on the efforts of the DEL to verify compliance. 

However, both PRMI and SecurityNational admitted they certified loans for FHA mortgage insurance that did not meet HUD underwriting requirements regarding borrower creditworthiness and eligibility, the DOJ stated.

Here is what both lenders admitted to:

PRMI admitted it endorsed loans that were not eligible for FHA mortgage insurance, including loans where:

• PRMI failed to document the assets used to qualify the borrower for FHA mortgage insurance and omitted liabilities owed by the borrower from the underwriting analysis;
• PRMI failed to document income used to qualify the borrower for FHA mortgage insurance;
• PRMI failed to verify the borrower’s earnest money deposit; and
• The borrower was delinquent on a second, pre-existing FHA mortgage.

SecurityNational admitted it endorsed loans that were not eligible for FHA mortgage insurance, including loans where:

• The borrower was delinquent on federal debt and had an unpaid court-ordered judgment;
• The borrower was four months delinquent on the underlying mortgage SecurityNational refinanced into an FHA loan;
• The mortgage loan amount exceeded HUD’s loan to value requirements;
• SecurityNational failed to document income used to qualify the borrower for FHA mortgage insurance; and
• SecurityNational failed to analyze the borrower’s delinquent credit history.

These violations resulted in HUD insuring loans endorsed by each lender that were not eligible for FHA mortgage insurance under the DEL program and that HUD would not otherwise have insured. 

As a result, the DOF stated that HUD subsequently incurred substantial losses when it paid insurance claims on those loans.

“The FHA program provides important economic support for homeownership and community development,” said Principal Deputy Assistant Attorney General Benjamin Mizer, head of the Justice Department’s Civil Division.  “The department has and will continue to ensure that program participants adhere to applicable requirements and will pursue those that knowingly misuse the program for their own gain and to the detriment of homeowners and the public.”

The claims asserted against SecurityNational and PRMI are allegations only and there has been no determination of liability.

“We are pleased to reach a resolution of this matter and believe it permits us to move forward with our business confidently”, said David Zitting, CEO and president of PRMI.

“We recognize the important role our government plays in strengthening real estate finance, protecting consumers and making home ownership opportunities available to Americans,” he continued.

“Like many other high volume FHA-approved lenders, SecurityNational was reviewed by the Department of Justice and HUD for loan origination activities that occurred as long as nine years ago,” said Jeffrey Stephens, general counsel with SecurityNational.

“Without any admission of liability and in order to avoid the extended distractions and expenses associated with protracted litigation, SecurityNational made a business decision to resolve this matter,” said Stephens. “The settlement in no way affects SecurityNational’s ability to originate FHA insured loans. The company continues to focus on its most important mission–that of providing homeownership opportunities to its current and future customers.”