A reverse mortgage lender’s motion to dismiss a case stemming from a complaint filed by the U.S. Department of Justice (DOJ) has been denied by the presiding judge, making way for a previously-determined trial date to continue on as planned. This is according to court documents obtained by RMD, and statements by the lender’s legal representation made to other reporting outlets.

The dispute arises from a complaint filed by DOJ against reverse mortgage lender Nutter Home Loans (formerly known as James B. Nutter & Co.), a complaint which was filed by DOJ against the lender last fall. As the DOJ alleges in the original complaint filed last year, Nutter allegedly forged certifications and used unqualified underwriters to approve Federal Housing Administration (FHA)-backed Home Equity Conversion Mortgage (HECM) loans originated between 2008 and 2010 in an effort to bolster its production of reverse mortgage loans.

Representatives for Nutter continued to deny the allegations as devoid of sufficient evidence to prove the government’s claims, while the government contended that it has made a sufficient case for the process to continue to trial. In this latest development, a judge has sided with the government saying it has sufficiently corroborated its reasoning for filing the complaint.

Aim for dismissal denied

In the original motion to dismiss the case, representation for Nutter Home Loans explained that the original complaint filed by DOJ was devoid of the necessary facts and information to allow the case to move forward.

“Allowing the case to move forward would allow the Government to seek an improper windfall and recover damages on insurance payments for loans that the Company properly originated for borrowers who were eligible and qualified for the HECM program,” said Edward T. Kang, a partner in the D.C. office of Alston & Bird LLP, who is defending the company in this action. “The Company believes that these efforts by the Government to engage in ‘Monday morning quarterbacking’ will be rejected.”

However, that is not the way that presiding Judge Roseann A. Ketchmark saw things, according to the documentation explaining her rejection of the dismissal motion.

“After review, the Court finds that [DOJ] sufficiently alleges the ‘who, what, where, when, and how’ of [Nutter]’s alleged misconduct,” the document reads.

Under the False Claims Act (FCA), liability must be placed on any entity which “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,” according to the law cited by Judge Ketchmark. This makes up Count I of the complaint, while Count II deals with the imposition of liability on anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim,” the law says as again cited by the judge.

“As to Count I, the pleadings allege with specificity how [Nutter] ‘knowingly present[ed], or cause[d] to be presented, a false or fraudulent claim for payment or approval,’” she writes. “As to Count II, the pleadings allege with specificity that [Nutter] ‘knowingly ma[de], use[d], or cause[d] to be made or used, a false record or statement material to a false or fraudulent claim.’ [DOJ]’s allegations as to falsity, materiality, causation, and [intent of knowledge or wrongdoing], are sufficient to survive dismissal.”

The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) gives the federal government the authority to recover civil penalties for any violation of laws applicable to the case, Judge Ketchmark says. DOJ successfully pointed out where it believes violations of FIRREA occurred, as well as pointing out potential breaches of contract and fiduciary duty, which can also be brought before the Court in an impending trial.

The dismissal motion also presents some detail about Nutter Home Loans’ history in the reverse mortgage space, specifying that the company became a direct endorsement HECM lender beginning in August, 1995, and annually certified its compliance with agency regulations and practices to get “Computerized Homes Underwriting Management Identification,” allowing an underwriter to approve loans for FHA mortgage insurance on behalf of Nutter. It did this for employees and/or contractors it sought to establish as qualified underwriters, a core component of DOJ’s dispute.

Response of parties

In a statement to RMD, Kang explained that the result of the dismissal motion is not what the company wanted to hear, however it nonetheless looks forward to bringing out all material facts in court and that the court only acknowledged the allegations as truthful because of process requirements.

“While disappointed with the outcome of the Order, the Company notes that the Court assumed all allegations made in the complaint as true, as is required at this stage of the proceedings,” Kang told RMD. “The company looks forward to its opportunity to present facts that will demonstrate that the allegations in the complaint are inaccurate and that the government cannot meet its burden of proof.”

A representative for the U.S. Attorney’s Office for the District of Columbia previously advised RMD that ongoing policy is not to comment on pending litigation, though the representative did confirm previously that a trial date has been set. No additional notices or statements by the attorneys representing the government in this case have been filed as of press time.

Previously, Judge Ketchmark proposed a lengthy scheduling process which began with discovery commencing in April 2021, and ending with a jury trial which as of now is slated to begin on August 21, 2023.

History

The allegations, if true, would do damage to the financial viability of the HECM program inside the Mutual Mortgage Insurance (MMI) Fund, and this action signals that the federal government takes seriously any threat to the integrity of the HECM program, according to HUD Inspector General Rae Oliver Davis.

“Lenders who willfully disregard FHA requirements for HECM loans expose the program to significant financial losses that threaten the future availability of this important program to seniors,” said Davis in September. “This complaint is evidence that we will tirelessly investigate allegations of abuses of the HECM program by FHA lenders.”

In December 2020, roughly one month prior to the inauguration of President Joe Biden, then-HUD Secretary Dr. Ben Carson and then-HUD Chief Financial Officer (CFO) Irv Dennis in consultation with the HUD OIG released a report that made mention of the government’s case against Nutter Home Loans and another case against a different HECM lender as evidence of its commitment to enforcement.