The lending industry recently began to see the light at the end of the tunnel when Department of Housing and Urban Development Secretary Ben Carson told Congress in October that HUD is working with the Department of Justice to address the “ridiculous” rise of DOJ enforcement in Federal Housing Administration lending.
Carson told members of Congress, and later the Mortgage Bankers Association, that the Trump administration is considering ending the use of the False Claims Act to extract settlements from FHA lenders.
In recent years, the DOJ under President Barack Obama accused a number of lenders of violating the False Claims Act by knowingly originating and underwriting mortgages that did not meet FHA standards.
As it turns out, the government isn’t quite ready to be done with using the False Claims Act in the lending business.
On Friday, the DOJ announced that IBERIABANK Corporation, IBERIABANK and IBERIABANK Mortgage, agreed to pay a fine of $11,692,149 to resolve allegations that the companies violated the False Claims Act by falsely certifying that loans originated by the companies were eligible for FHA mortgage insurance.
IBEARIABANK joins a lengthy list of lenders that have been fined under False Claims Act, including: Wells Fargo, which agreed to a $1.2 billion settlement; Franklin American, which settled with the government for $70 million; Walter Investment, which settled for $29.6 million; First Tennessee, the regional bank for First Horizon National, which settled for $212.5 million; M&T Bank, which settled for $64 million; Freedom Mortgage, which agreed to pay $113 million; Regions Bank, which settled for $52.4 million; BB&T, which settled for $83 million; United Shore Financial Services, which settled for $48 million; and PHH Corp., which settled for $75 million.
As with many of the other lenders, IBERIABANK 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, IBERIABANK violated FHA lending rules during the period of Jan. 1, 2005 through Dec. 31, 2014 by certifying mortgages for FHA insurance that did not meet HUD underwriting and origination requirements.
The DOJ said that as part of the settlement, IBERIABANK admitted that HUD paid FHA insurance claims on some of these ineligible mortgages, some of which included mortgages where IBERIABANK’s loan files contained “inadequate documentation of the borrower’s income, unresolved appraisal discrepancies concerning declining home values in the relevant neighborhood, and inadequate verification related to the borrower’s down payment.”
During that same time period, IBERIABANK also made incentive payments to underwriters and others who performed underwriting activities.
According to the DOJ, a HUD review of IBERIABANK in 2010 alerted the bank that it was not in compliance with HUD’s underwriter commission prohibition. After that, IBERIABANK told HUD that it was no longer paying underwriter commissions.
But, IBERIABANK did not tell HUD that it was providing underwriters with incentive payments and that it continued to do so through 2014.
Additionally, DOJ claims that IBERIABANK’s internal processes were not up to snuff.
Between 2005 and 2014, IBERIABANK did not timely self-report material violations of HUD requirements, DOJ said.
Internal IBERIABANK audits and reviews during this time found that the bank’s quality reviews were not being performed in a timely manner and did not comply with other HUD requirements, DOJ added.
As a result of IBERIABANK’s conduct and omissions, HUD insured loans that were approved by the bank but were not eligible for FHA mortgage insurance and that HUD would not otherwise have insured. HUD subsequently incurred losses when it paid insurance claims on those loans, the DOJ said.
“Mortgage lenders must follow FHA program rules designed to avoid putting federal funds at risk and increasing the chances that borrowers may lose their homes,” said Principal Deputy Assistant Attorney General Chad Readler, head of the Justice Department’s Civil Division. “The Department will continue to hold accountable lenders that knowingly violate material program requirements that cause the government to guarantee ineligible loans.”
According to the DOJ, the allegations that led to this settlement came from a whistleblower lawsuit filed under the False Claims Act by former employees of IBERIABANK, Kelley Shackleford and Karen Mills, who were employed with IBERIABANK in Little Rock, Arkansas.
Under the False Claims Act, citizens can sue on behalf of the government and share in any recovery.
In this case, Shackleford and Mills will receive a 20% share of the recovery, approximately $2.3 million.
“It is troubling when financial institutions, who have fiduciary responsibilities and are expected to conduct themselves as honest brokers, wrongfully exploit federally funded programs,” said Jeremy Kirkland, Acting Deputy Inspector General, HUD Office of Inspector General.
“This settlement demonstrates HUD OIG’s commitment to work with our partners, under the False Claims Act, to combat fraud against the Government,” Kirkland added. “Today’s settlement should serve as a cautionary tale that we will continue to aggressively utilize it in pursuit of those that seek to undermine federal housing programs.”
HousingWire attempted to contact IBERIABANK and this article will be updated should the bank respond.