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Prospect Mortgage fined $4.16 million for crisis-era FHA lending violations

DOJ sanctions lender for two branches’ activities from 2007-2009

While most of the country spent the early part of this week consumed by fireworks and consuming copious amounts of hot dogs and hamburgers, one mortgage lender found itself joining a list that includes Wells Fargo, Walter Investment, Freedom Mortgage, and many more.

On Monday, the Department of Justice announced that Prospect Mortgage will pay more than $4 million to settle allegations the company committed civil mortgage fraud by underwriting mortgages that did not comply with Federal Housing Administration standards.

That makes Prospect the latest lender fined by the government over violations of the False Claims Act, which is designed to prosecute vendors the government feels fraudulently represented themselves while doing business with the nation.

In recent years, the False Claims Act became the DOJ’s weapon of choice against the mortgage industry. Under President Barack Obama, the DOJ used the law to extract settlements from lenders for supposedly misrepresenting the quality of loans insured by the FHA.

According to the DOJ, Prospect’s conduct was limited to two branches and took place from 2007-2009.

As with many of the other lenders, during the time period referenced, Prospect 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.

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, two of Prospect’s branches did not underwrite loans to the FHA standard.

Specifically, a DOJ investigation found that two Prospect branches, one in Florida and one in North Carolina, originated a number of FHA loans without adhering to the FHA’s requirements.

As a result, the United States “suffered substantial losses when the loans defaulted and ripened into claims by Prospect for insurance payments from the United States,” the DOJ said.

According to the DOJ, between December 2007 and December 2009, Prospect had a 12.29% default rate, which was “well in excess of the national average,” within the area overseen by the Department of Housing and Urban Development’s Atlanta Home Ownership Center.

The Atlanta Homeownership Center serves the states of Alabama, Florida, Georgia, Kentucky, Illinois, Indiana, Mississippi, North Carolina, South Carolina, and Tennessee.

A DOJ investigation revealed that approximately 76% of those defaults came from two Prospect branches located in Florida and North Carolina.

According to the DOJ, its investigation showed that the “majority” of the audited loans from these branches were not compliant with HUD underwriting requirements.

The issues at hand were Prospect’s assessment of borrower’s assets; income; and credit, which are “essential considerations in determining whether a loan will be repaid, as opposed to going into default or serious delinquency,” the DOJ said.

As part of the settlement, the DOJ said that Prospect acknowledged that it endorsed loans for FHA insurance that were not originated in compliance with HUD requirements. Prospect also admitted that it falsely certified that the non-compliant loans were underwritten in accordance with HUD underwriting requirements.

According to the DOJ, Prospect also admitted that it failed to adhere to HUD quality control guidelines relating to the two branches in question.

“Prospect’s knowing failure to comply with material HUD loan origination requirements not only resulted in major losses to the public fisc, but also served to undermine the FHA program,” U.S. Attorney for the Northern District of California Brian Stretch said. “Today’s settlement demonstrates the Department of Justice’s resolve and commitment to hold lenders, large and small, accountable for this type of fraudulent conduct.”

HousingWire attempted to contact Prospect and HomeBridge Financial Services, which bought the operating assets of Prospect back in February, for comment on the fine.

In a statement, Joel Katz, the president of HomeBridge noted that Prospect’s alleged conduct took place well before HomeBridge acquired Prospect’s operating assets.

“As stated in the Department of Justice’s press release, the alleged incidents occurred close to a decade before HomeBridge acquired the operating assets of Prospect Mortgage,” Katz said in a statement. “As a part of the acquisition of the operating assets, HomeBridge did not take on any legacy liability issues from Prospect Mortgage, and is not impacted financially, or otherwise, by the fines incurred.”

[Update: This article is updated with a statement from HomeBridge. Additionally, this article previously stated that HomeBridge bought Prospect. HomeBridge acquired the operating assets of Prospect, not the entire company. The article is now corrected.]

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