DOJ Catch of the Week -- Allied Home Mortgage

By the C|C Whistleblower Lawyer Team

This week’s Department of Justice “Catch of the Week” goes to Allied Home Mortgage.  On Wednesday, a Houston jury found the entities formerly known as Allied Home Mortgage Capital Corp., Allied Home Mortgage Corp., and their president and chief executive officer Jim C. Hodge liable for violating the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).  After a five-week trial, the jury awarded the United States roughly $93 million in damages, including more than $7 million against Hodge.  The Court will determine the amount of any penalties at a later date.  See DOJ Press Release.

According to the evidence presented at trial, the Federal Housing Administration (FHA) provides mortgage insurance to protect lenders against mortgage defaults and thus make home ownership possible for millions of American families who otherwise might not qualify.  In providing this insurance, the FHA — through the Department of Housing and Urban Development (HUD) — must accurately assess the risk of default on the loans it insures.  It does so by relying on assurances by lenders that they, and the loans they submit for insurance, comply with program requirements.

One of these requirements is obtaining HUD approval for each branch office from which a lender originates FHA loans.  Instead of complying with this requirement, however, Allied Capital operated over one hundred “shadow” branch offices that originated FHA loans without HUD authorization.  These undisclosed shadow branches were not subject to HUD oversight and their default rates were disguised by the default rates of approved branches whose IDs they were using.  This fraudulent misconduct resulted in roughly $7 million in losses to HUD when certain of those loans defaulted.

Another requirement is certifying to HUD that the loans were underwritten according to HUD’s guidelines which are designed to ensure that FHA-insured loans are made only to borrowers who can repay them.  Allied Corp., however, recklessly underwrote and certified at least 1,192 loans for FHA insurance that were ineligible for insurance under HUD’s guidelines.  This fraudulent misconduct resulted in losses to HUD of roughly $86 million when those loans defaulted.

Making matters worse, Allied and Hodge operated what the government described as a “dysfunctional quality control program” and lied to HUD about it.  HUD requires lenders participating in its programs to timely perform quality control audits of their FHA loans to identify and correct systemic problems, including underwriting problems.  Allied, however, employed only a handful of quality control employees to review loans from as many as 600 branch offices.  Many of those employees were unqualified to audit FHA-insured loans.  In addition, Hodge personally directed his employees to falsify quality control reports to give the impression that required reviews had been performed, when in fact they had not.

In announcing the settlement, Manhattan U.S. Attorney Preet Bharara did not mince words in describing the extent of Allied’s fraud against the government:

For years, Jim Hodge and Allied lied to HUD in order to fraudulently reap profits from the FHA mortgage insurance program.  After a month-long public trial where all their misconduct was exposed, a jury has held Mr. Hodge and Allied responsible for their lies and has made them pay for losses the United States suffered on loans that would never have been insured by HUD absent their lies.

HUD Inspector General David A. Montoya pointed to the verdict as a warning to others contemplating engaging in similar misconduct:  “The heart of our mission is to weed out actors such as these that are intent on defrauding federal housing programs.  This should serve as a notice to all those determined to engage in illegal schemes such as these that they are not beyond the reach of the federal law enforcement community.”

The allegations originated in a whistleblower lawsuit filed by former Allied manager Peter Belli under the qui tam provisions of the False Claims Act.  He will receive a yet-to-be determined whistleblower award from the proceeds of the government’s recovery.

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