U.S. Files Suit Against Guild Mortgage Alleging False Claims
The United States has filed a complaint in the U.S. District Court for the District of Columbia against Guild Mortgage Company, alleging that the company knowingly submitted or caused the submission of false claims to the federal government by improperly originating and underwriting mortgages insured by the Federal Housing Administration (FHA), the U.S. Department of Justice announced last week. Guild is a mortgage lender headquartered in San Diego, California.
Guild participated in the FHA insurance program as a direct endorsement (DE) lender. As a DE lender, Guild had the authority to originate, underwrite and certify mortgages for FHA insurance. If a DE lender such as Guild approves a mortgage loan for FHA insurance and the loan later defaults, the U.S. Department of Housing and Urban Development (HUD), FHA’s parent agency, is responsible for the losses resulting from the defaulted loan. Under the DE lender program, neither the FHA nor HUD reviews the underwriting of a loan before it is endorsed for FHA insurance. HUD therefore relies on DE lenders to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance and DE lenders must certify that every loan endorsed for FHA insurance is underwritten according to the applicable FHA standards.
The government’s complaint alleges that Guild knowingly submitted, or caused the submission of, claims for hundreds of improperly underwritten FHA-insured loans. The complaint further alleges that Guild grew its FHA lending business by ignoring FHA rules and falsely certifying compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages. For example, Guild allegedly allowed underwriters to waive compliance with FHA requirements when underwriting a loan. Additionally, Guild used unqualified junior-underwriters who did not have a DE certification to waive mandatory conditions on higher risk loans where HUD required underwriting only by highly trained DE underwriters.
The government’s complaint further alleges that Guild’s senior management focused on growth and profits and ignored quality. Guild conducted at least 125 branch audits in which almost 40 percent resulted in either a qualified rating or unsatisfactory rating. A qualified rating was defined as having a “significant number of findings, and/or findings noted that have more serious impact or risk to Guild,” or “Knowledge of procedures and controls; however, they appear to be inefficient.” An unsatisfactory rating was defined as one where “serious concerns were noted: lack of knowledge, procedures, and/or controls in branch.” The complaint alleges that, through Guild’s quality control reviews, significant defects were found in over 20 percent of the FHA loans reviewed and over half the loans had either significant or moderate defects. Significant defects included fraud, misrepresentation and other serious findings while moderate defects included not following guidelines. However, Guild did not calculate or distribute any error rate during the relevant time period, thus management was not presented with these findings. Additionally, Guild did not even distribute any of the quality control findings to management. As a result, Guild management often did not review or remediate findings from quality control audits. In the quarters where Guild management actually did review quality control findings, it did so almost a year after the loans closed and failed to timely remediate any identified problems. When Guild finally began addressing the quality of its FHA underwriting, Guild’s head of quality control pointed out the ineffectiveness of its past efforts at addressing loan quality: “I’m not optimistic about training reminders and individual follow-ups being all that effective.”
The government’s complaint alleges that as a result of Guild’s knowingly deficient mortgage underwriting practices, HUD has already paid tens of millions of dollars of insurance claims on loans improperly underwritten by Guild, and that there are many additional loans improperly underwritten by Guild that are currently in default and could result in further insurance claims on HUD. For example, the government’s complaint identifies a mortgage loan that was improperly underwritten in violation of HUD requirements, causing the borrower to default and HUD to pay the loss on the loan. Specifically, Guild failed to verify the borrower’s prior rental payments, overstated the borrower’s income, failed to develop a credit history for the borrower who had no credit score, exceeded FHA’s qualifying debt to income ratio without determining whether certain compensating factors were present, and failed to identify the source of a large deposit made to the borrower’s account. The underwriter at Guild improperly waived multiple conditions and allowed an unauthorized junior underwriter to do the same for other conditions. In sworn testimony, the Guild underwriter admitted the loan failed to comply with FHA underwriting requirements.
The lawsuit was brought under the qui tam, or whistleblower, provisions of the False Claims Act by a former employee of Guild. Under the act, a private party may bring suit on behalf of the United States and share in any recovery. The government may intervene in the case, as it has done here. The False Claims Act allows the government to recover treble damages and penalties from those who violate it.
The Chanler Group, in association with the Hirst Law Group, represents whistleblowers who take action under the False Claims Act to report fraud committed against the federal and state governments. We have years of experience representing whistleblower clients who expose every kind of fraud against the government, including health care fraud, contract fraud, and tax fraud. Read more about our expertise in False Claims Act cases and how you can take action.