Franklin First Financial is set to join a list of mortgage lenders that settled with the Department of Justice for violating Federal Housing Administration lending standards, but unlike Wells Fargo, Walter Investment, First Tennessee, and a host of others, Franklin First isn’t settling allegations that the lender violated the False Claims Act by “knowingly originating and underwriting” mortgages that did not meet FHA standards.
Rather, the government accused Franklin First of paying borrowers mortgages to keep them from defaulting, thereby concealing the lender’s default rates.
In recent months, Wells Fargo agreed to a $1.2 billion settlement, Walter Investment settled for $29.6 million, First Tennessee, the regional bank for First Horizon National, settled for $212.5 million, M&T Bank settled for $64 million, Freedom Mortgage agreed to pay $113 million, Regions Bank settled for $52.4 million, and BB&T settled for $83 million – all over alleged violations of the False Claims Act.
All of those lenders acted as a “direct endorsement lender” in the FHA insurance program. As a direct endorsement lender, the lender has the authority to originate, underwrite and endorse mortgages for FHA insurance without prior approval from the FHA.
Franklin First also took part in the “direct endorsement lender” program. One of the stipulations of the “direct endorsement lender” program is that the FHA tracks the default rates of mortgages originated by participating lenders.
If the FHA determines that a lender’s mortgages defaulted within the first two years at a rate 100% or higher than other lenders within the same geographic region, the FHA can audit, immediately suspend, or seek to permanently remove the lender from the Direct Endorsement Program.
In the case of Franklin First, the government accused the lender and several of its executives of making “surreptitious” mortgage payments for borrowers on at least 111 FHA-insured loans that otherwise would have become delinquent or gone into default within two years of origination.
According to the government’s complaint, Franklin First’s chief executive officer, Frederick Assini, the company’s chief operating officer, Christopher Bertman, and Andrew Dauro, a manager of the company, all took part in the scheme.
The government claimed that as a result of the scheme, Franklin First “deprived HUD of critical loan performance information needed to determine whether Franklin First should remain eligible for participation in the Direct Endorsement Program.”
According to the government, Franklin First and its executives also “concealed” the source of the payments to the delinquent borrowers’ mortgages.
“In addition, the defendants concealed from HUD the fact that Franklin First was making the loan payments by funneling the payments through a purported charitable organization, the Rainy Day Foundation,” the government said.
Per the terms of the settlement agreement, Franklin First, Assini, Bertman, and Dauro admitted to “making the improper payments and that the payments altered the company’s delinquency and default rates.”
As a result of the settlement, Franklin First, Assini, Bertman, and Dauro agreed to pay $1.25 million to resolve the government’s claims.
“This resolution demonstrates our Office’s vigorous pursuit of those who would abuse federal mortgage programs, whether they be companies or individuals,” said United States Attorney Robert Capers. “The significant penalty and defendants’ admissions to wrongdoing help to restore the integrity of the FHA mortgage insurance program.”