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Jury Returns $92 Million Verdict Against Allied for FCA Violations

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  • Posted on: Dec 29 2016

Can I receive a financial award for blowing the whistle on my company?

A Texas federal jury has found the entities formerly known as Allied Home Mortgage Capital Corporation (“Allied Capital”) and Allied Home Mortgage Corporation (“Allied Corporation” and together with Allied Capital, “Allied”) and CEO Jim Hodge liable for violating the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) in connection with more than a decade of fraudulent misconduct related to Allied’s participation in the Federal Housing Administration (“FHA”) mortgage insurance program.

The jury determined that Allied and Hodge violated the FCA by falsely representing that FHA mortgage loans were originated from HUD-approved Allied Capital branches and the loans complied with the program’s requirements.

FHA mortgage insurance is designed to make home ownership possible and more widely available by protecting lenders against mortgage defaults. To participate in the program, HUD requires lenders to have licensed offices. However, Allied Capital, with Hodge’s knowledge and approval, operated more than one hundred so-called shadow branches (or net branches) that were opened by independent parties at their own expense with no risk to the lender. Allied Capital then originated mortgage loans using the ID number of approved branches in an effort to circumvent the HUD licensing requirements.

In addition, the loans were written by Allied Corporation with little or false underlying documentation in violation of HUD underwriting requirements. For each FHA-insured mortgage loan, Allied Corporation was required to certify to HUD that the loan was underwritten according to HUD’s guidelines. Those guidelines ensure that FHA-insured loans are made only to borrowers who can repay them, thereby seeking to avoid losses to HUD’s FHA insurance fund and foreclosures on borrowers’ homes. Allied Corporation, however, recklessly underwrote and certified at least 1,192 loans for FHA insurance under HUD’s guidelines.  This fraudulent misconduct resulted in losses to HUD of $85,612,643 when those loans defaulted.

Allied Capital was one of the largest FHA lenders before the 2008 financial crisis and, as the housing market collapsed, had one of the highest default rates in the country.

The scam was exposed when a whistleblower, an Allied Capital employee who managed several branches, filed a qui tam action. In November 2011, the government intervened by filing a complaint-in-intervention.

In sum, the jury found that Allied Capital violated the FCA by representing the loans were written with due diligence in accordance with HUD’s underwriting guidelines and were eligible for FHA insurance. The United States was awarded a total of $92, 982,775 in damages: $85,612.643  against Allied Capital and Allied Corporation and $7,370,132 against Hodge. There may be additional fines assessed under the FCA and FIRREA for the violations. In particular, the FCA provides for treble damages, meaning the government could recover as much as $280 million.

“For years, Jim Hodge and Allied lied to HUD in order to fraudulently reap profits from the FHA mortgage insurance program,” said Manhattan U.S. Attorney Preet Bharara.  “This case represents yet another recovery by the United States – this time after a trial – for fraud perpetrated against HUD by participants in the Direct Endorsement Lender program.”

The Takeaway

Mortgage fraud helped trigger the financial crisis. As we know, the crisis had a devastating impact on the financial system. Thanks to the help of whistleblowers, such as in this case, the government has been able to recover monies that were fraudulently taken from programs that have cost taxpayers tens of millions of dollars.  Indeed, the amounts recovered here are substantial.  There have been only two FCA actions against a lender related to the mortgage crisis that have gone to trial and verdict: this case and the HUSL – Bank of America case. The other cases have been settled; several of them recovered some of the largest amounts in U.S. history. As HUD Inspector General David A. Montoya said about the jury verdict and award: “This [case] 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.”

If you have knowledge of a violation of the False Claims Act, an experienced attorney can help you explore your legal options for compensation.

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