DOJ Catch Of The Week - First Tennessee Bank
By the C|C Whistleblower Lawyer Team
This week’s Department of Justice “Catch of the Week” goes to First Tennessee Bank. On Monday, the Memphis-based bank agreed to pay $212.5 million to resolve allegations it violated the False Claims Act by originating and underwriting mortgage loans insured by the Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements. According to HUD Inspector General David A. Montoya, the government’s investigation “found that First Tennessee caused FHA to pay claims on loans that the bank never should have approved and insured in the first place.” See DOJ Press Release.
Between January 2006 and October 2008, First Tennessee, through its subsidiary First Horizon Home Loans Corporation, participated in the FHA insurance program as a Direct Endorsement Lender (DEL). As a DEL, First Tennessee had the authority to originate, underwrite and endorse mortgages for FHA insurance. If a DEL such as First Tennessee approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD for the losses resulting from the defaulted loan. Since neither the FHA nor HUD reviews a loan before it is endorsed for FHA insurance, DELs such as First Tennessee are required to follow program rules designed to minimize the issuance of deficient loans.
According to the government, First Tennessee failed to comply with FHA origination, underwriting and quality control requirements. As part of the settlement, First Tennessee admitted from January 2006 through October 2008 it repeatedly certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements. The bank further admitted that beginning no later than early 2008, it became aware that a substantial percentage of its FHA loans were not eligible for FHA mortgage insurance due to its own quality control findings. Despite internally acknowledging that hundreds of its FHA mortgages had material deficiencies, and despite its obligation to self-report findings of material violations of FHA requirements, First Tennessee failed to report even a single deficient mortgage to FHA. First Tennessee’s conduct caused FHA to insure hundreds of loans not eligible for insurance and, as a result, FHA suffered substantial losses when it later paid insurance claims on those loans.
In announcing the settlement, Principal Deputy Assistant Attorney General Benjamin C. Mizer of the DOJ Civil Division said “First Tennessee’s reckless underwriting has resulted in significant losses of federal funds and was precisely the type of conduct that caused the financial crisis and housing market downturn. We will continue to hold accountable lenders who put profits before both their legal obligations and their customers, and restore wrongfully claimed funds to FHA and the treasury.” In August 2008, First Tennessee sold First Horizon to MetLife Bank, a wholly-owned subsidiary of MetLife Inc., which thereafter originated FHA-insured mortgages under the MetLife name. In February 2015, MetLife agreed to pay $123.5 million to resolve its False Claims Act liability arising from its FHA originations after it acquired First Horizon from First Tennessee. See DOJ Press Release.
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