A little over five years ago, the government sued Allied Home Mortgage, its various entities, and its president and CEO, Jim Hodge for $834 million, claiming that Allied engaged in repeated fraud against the Federal Housing Administration over a 10-year period.
The government claimed that Allied Home Mortgage, Allied Home Mortgage Capital Corporation, at Hodge’s direction committed repeated violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act by falsely certifying the quality of loans insured by the FHA, as well as violating several FHA lending rules.
Now, after a long legal battle, the government secured a victory against Allied Home Mortgage and Hodge, as this week, a federal jury unanimously found Allied Home Mortgage and Hodge liable for civil mortgage fraud.
The jury found that Allied Home Mortgage and Hodge did indeed commit False Claims Act violations and FIRREA violations and awarded the United States a total of $92,982,775 in damages, including $7,370,132 against Hodge.
While it’s a far cry from the $834 million the government initially sought, the damages are eligible for trebling under the terms of the False Claims Act, meaning it could rise to as high as $279 million.
Additionally, the FCA provides for a penalty of $5,500 to $11,000 for each violation, the government noted in a release. FIRREA also provides for a penalty for each statutory violation. The Court will determine the amount of the penalties at a later date.
According to information provided by the government, Allied Home Mortgage Capital originated FHA-insured mortgage loans.
As an FHA-approved lender, Allied Capital needed approval from the Department of Housing and Urban Development for each branch office where originated FHA loans.
But instead of complying with this rule, Allied Capital, with Hodge’s knowledge and approval, operated over one hundred “shadow” branch offices that originated FHA loans without HUD authorization, the government said.
Allied Capital then tagged the loans from those “shadow” branches with the ID numbers of approved branch locations, allowing those shadow branches to escape HUD oversight.
Allied Capital was also able to hide those branches default rates with the default rates of branches whose IDs they were using.
According to the government, this “fraudulent misconduct” resulted in $7,370,132 in losses to HUD when some of those loans originated at those shadow branches defaulted.
Additionally, Allied Home Mortgage was a participant in HUD’s Direct Endorsement Lender program, meaning it had the right to underwrite loans and transfer them to the FHA without prior approval.
But according to the government, Allied Home Mortgage abused that privilege.
Allied Home Mortgage “recklessly underwrote” and certified at least 1,192 loans for FHA insurance that were ineligible for insurance under HUD’s guidelines, the government said.
The government said that this “fraudulent misconduct” resulted in losses to HUD of $85,612,643 when those loans defaulted.
Beyond that, Allied operated a “dysfunctional quality control program and lied to HUD about it,” the government said.
According to the government, Allied employed only a “handful” of quality control employees to review loans from as many as 600 branch offices, and “many” of those employees were not qualified to conduct FHA compliance reviews.
Additionally, Hodge “personally directed his employees to falsify quality control reports to give the impression that required reviews had been performed, when in fact they had not,” the government said.
Allied also provided falsified QC reports to HUD and falsely certified to HUD on an annual basis that the lender was in compliance with HUD’s quality control requirements.
“For years, Jim Hodge and Allied lied to HUD in order to fraudulently reap profits from the FHA mortgage insurance program,” U.S. Attorney Preet Bharara said.
“After a month-long public trial where all their misconduct was exposed, a jury has held Mr. Hodge and Allied responsible for their lies and has made them pay for losses the United States suffered on loans that would never have been insured by HUD absent their lies,” Bharara continued. “This case represents yet another recovery by the United States – this time after a trial – for fraud perpetrated against HUD by participants in the Direct Endorsement Lender program.”