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US Files Lawsuit Alleging Guild Mortgage Improperly Originated and Underwrote FHA-Insured Mortgage Loans

The government’s crackdown on fraud committed against its agencies has impacted all areas of the economy including the housing market.  Earlier this month, the US Justice Department filed a complaint against Guild Mortgage Company (Guild) – a mortgage lender based in San Diego – under the False Claims Act for improperly originating and underwriting mortgages insured by the Federal Housing Administration (FHA).  “This case is another example of the Justice Department’s continued efforts to ensure that lenders that participate in the FHA mortgage insurance program act in good faith and conduct appropriate due diligence when committing the United States to insure home loans,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.

Guild participated in the FHA insurance program as a direct endorsement (DE) lender and as such had the authority to originate, underwrite and certify mortgages for FHA insurance.  Moreover, if a DE lender goes into default at any point on his/her loan, the U.S. Department of Housing and Urban Development (HUD), FHA’s parent agency suffers the losses caused by the defaulted loan.  Since neither the FHA nor HUD reviews the underwriting of loans, both agencies rely on DE lenders to follow all applicable FHA standards in their endorsement of loans.  The government alleges that from January 2006 through December 2011, Guild knowingly submitted claims for hundreds of improperly underwritten FHA-insured loans.  The government also alleges that Guild grew its business by ignoring FHA rules and that it falsely certified compliance with underwriting requirements all for the purpose of reaping profits from FHA-insured mortgages.  Finally, Guild is alleged to have used unqualified, uncertified junior-underwriters to wave mandatory conditions on higher risk loans where HUD required that underwriting only be done by trained DE underwriters.

The government’s complaint further alleges that Guild’s senior management focused on growth and profits and ignored quality.  For example, the complaint alleges that between 2006 2011 Guild’s quality control reviews found that 20% of its loans had significant defects while over half had either significant or moderate defects.  (Significant defects included fraud, misrepresentation and moderate defects meant not following stated guidelines.)  However, Guild did not calculate, distribute or submit to management these findings.  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.

Lastly, the government’s complaint alleges that as a result of Guild’s improper underwriting practices, HUD has paid tens of millions of dollars of insurance claims on loans that were improperly underwritten by Guild.  Some of the loans currently in default could result in further insurance claims on HUD.  “This lawsuit is designed to help the FHA – and American taxpayers — recoup tens of millions of dollars in losses attributable to a lender accused of improperly underwriting FHA-insured mortgages and committing the government’s guarantee to mortgages that failed to comply with program rules,” said U.S. Attorney Channing D. Phillips for the District of Columbia.  “FHA relies on the honesty and integrity of those lenders participating in our program,” said HUD’s General Counsel Helen R. Kanovsky.  “The action we take…should send a clear message that we will not tolerate the abuse of our programs or of the families who should benefit from them.”  The lawsuit was brought under the qui tam provisions of the False Claims Act by a former Guild employee.  Under the Act, a private party can bring suit on behalf of the US and share in any recovery.