Default by Nursing Home Chain on HUD-Guaranteed Mortgage Highlights Potential for Fraud in Section 232 Program

Last week, the New York Times reported on the collapse of Rosewood Care Centers, a chain of nursing homes with facilities in Illinois and Missouri. According to the report, the chain had faced years of operational and financial difficulties, including fines by state regulators, personal injury claims by residents, and lawsuits by investors and vendors.

When it went under, Rosewood defaulted on $146 million in mortgage loans, and those loans were guaranteed by the federal government through a program run by the Department of Housing and Urban Development. When a borrower defaults on such a federally-insured mortgage, taxpayers are on the hook. As reported by the Times, in this case the federal government had to pay Rosewood’s lender $146 million.

HUD Section 232 Residential Care Facilities Program

HUD’s Office of Healthcare Programs Section 232 Mortgage Insurance for Residential Care Facilities program is designed to lower borrowing costs for the purchase, construction and renovation of nursing homes and other elder care facilities by providing federal insurance for mortgage loans through the Federal Housing Administration. Such a guarantee makes those loans less risky for banks. To secure a Section 232 loan guarantee, borrowers must meet specified underwriting criteria, and lenders who issue the loans must follow specified underwriting procedures.

As reported in the New York Times, more than 2,300 facilities have a total of $20 billion in mortgage loans guaranteed under Section 232; most borrowers are private for-profit enterprises. While defaults on the loans are rare, when they do occur, the government’s costs are substantial: “The department has incurred an average loss of 80 percent on defaulted mortgages in recent years,” according to the Times reporting.

While the government is now seeking to recover some of its $146 million Rosewood loss, including through the sale of Rosewood assets, such fire-sale recovery efforts cannot make the government whole in most cases. While the default rate may have been historically low, changes in the long-term care market could increase financial stress on borrowers, making defaults more likely. Avoiding fraud in the underwriting of Section 232 loans is a critical step to reducing government exposure to bad loans.

Blowing the Whistle on Fraud in Nursing Home Mortgage Insurance

Misrepresentations and fraud by a borrower or issuer of a Section 232 mortgage, or an issuer’s failure to adhere to underwriting procedures, can give rise to liability under the False Claims Act. Such fraud can lead to substantial financial loss to the government if a loan defaults and the government is called upon to satisfy its guaranty obligation.

Section 232 loan fraud is similar to mortgage loan fraud in the individual housing market. Such FHA fraud has led to substantial False Claims Act recoveries. And, the FCA has been successfully used in the past to recover for fraud involving HUD’s nursing home loan guarantees.

• In 2012, lender Capmark Finance LLC agreed to pay $3.9 million to settle FCA allegations that it had misrepresented material facts regarding two nursing home loan applications, and that Capmark’s false statements had induced HUD to insure the loans, which later defaulted.
• Also in 2012, the government secured a $5.325 million settlement from three individuals – the owners of a nursing home, and the president of a mortgage company – who allegedly made false statements in applications for a HUD-insured nursing home mortgage.

It can be difficult for the government to detect fraud in the underwriting process without information provided by insiders. Such insiders may know the differences between a borrower’s financial statements and the truth, or be able to provide critical evidence about the inadequacy of underwriting performed by the lender.

Whistleblowers with knowledge of fraud in Section 232 loans or deliberate mismanagement of Section 232 loan underwriting may be eligible to file a qui tam action under the False Claims Act. Such actions are filed under seal to permit the government to investigate the claims without alerting the defendant. The False Claims Act helps ensure that information from whistleblowers gets heard by authorities with resources to investigate their allegations. If money is recovered for the government in a qui tam case, the whistleblower is ordinarily entitled to a share of that recovery – between 15 and 30% of the government’s recovery from the defendant.

For more information on the False Claims Act, mortgage fraud, what it means to be a whistleblower, and more, please see our resources below or contact the whistleblower attorney team at Constantine Cannon for a confidential consultation.

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