Eleventh Circuit Revives VA Mortgage Fraud Whistleblower Case
Last week, a three-judge panel on the Eleventh Circuit breathed new life into a fifteen-year-old mortgage fraud lawsuit brought by two whistleblowers under the False Claims Act. The opinion, United States ex rel. Bibby v. Mortgage Investors Corporation adds another voice to the chorus of circuit courts applying the Supreme Court’s landmark 2016 ruling on the FCA’s “materiality” standard, Universal Health Services, Inc. v. United States ex rel. Escobar. This time around, the court sided with the whistleblowers, reversing a lower court’s decision to kill the case on summary judgment instead of letting it go to a jury.
The lawsuit was filed in 2006 by two mortgage brokers who accused their employer, the now defunct Mortgage Investors Corporation (MIC), of adding illegal fees to VA-backed Interest Rate Reduction Refinance Loans (IRRRL). Through the IRRRL program, the VA helps keep veterans housed, allowing them to refinance existing VA-backed mortgages at more favorable terms. In exchange for guaranteeing an IRRRL in the event of borrower default, the VA requires lenders to follow a set of rules designed to protect veterans, including rules limiting the fees lenders can charge borrowers during the origination process. While originating loans for MIC, the whistleblowers allegedly learned that the company regularly charged veterans illegal fees, “bundling” them with legal ones to hide the practice from the VA.
The Eleventh Circuit’s Opinion
The whistleblowers litigated the case through summary judgment, where a district court ruled that the suit couldn’t proceed because the evidence didn’t show that charging illegal fees was material to the VA’s decision to honor a loan guaranty. The district court emphasized that the whistleblowers hadn’t shown that the VA stopped guaranteeing MIC-originated loans when they learned about MIC’s fraud. In reversing the decision, the Eleventh Circuit made clear that “the materiality test is holistic, with no single element—including the government’s knowledge and its enforcement action—being dispositive.” After “looking at the VA’s behavior holistically,” the Court found ample evidence suggesting that charging illegal fees did, in fact, matter to the VA, which took consistent efforts to stop the practice. Looking simply to whether the VA honored a given guaranty—which the VA was statutorily required to do—didn’t comport with the Supreme Court’s mandate in Escobar. The court also emphasized that “the central aim of the IRRRL program was to help veterans stay in their homes, and fee regulations contributed to that goal,” offering strong evidence of the regulation’s materiality.
Although defense attorneys have often painted Escobar as a death knell for whistleblower actions, the Bibby decision is yet another reason to take that perspective with a grain of salt. When the government has been defrauded, courts are capable of looking beyond whether the government kept paying the fraudster to assess whether the fraudulent activity mattered to the government.