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Regions Bank Pays $52.4 Million to Settle False Claims Act Violations

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  • Posted on: Sep 26 2016

What is being done about fraud in the FHA’s mortgage insurance program?

In September, the U.S. Department of Justice announced that Regions Bank (“Regions”) agreed to pay $52.4 million to resolve allegations that it violated the False Claims Act. The Alabama-based bank knowingly  originated mortgage loans insured by the Federal Housing Administration (“FHA”) that did not meet the underwriting guidelines of the U.S Department of Housing and Urban Development (“HUD”).

What is an FHA Direct Endorsement Lender?

Since January 2006, Regions has been a direct endorsement lender (“DEL”) in the FHA’s mortgage insurance program which gives these lenders the authority to originate, underwrite and endorse mortgages for FHA insurance. If the borrower subsequently defaults, the holder of the note can submit an insurance claim to HUD to recoup the losses related to the default. Under the program, the FHA relies on the DEL to certify compliance.

As part of the settlement, Regions admitted that from January 1, 2006 to December 31, 2011, it certified loans that did not meet HUD underwriting requirements regarding borrower creditworthiness.  The bank also admitted that it’s quality control department did not review a sufficient number of FHA loans. Even worse, when deficiencies were identified, bank employees often cured the deficiencies, understating the defect rate being reported to senior management.

In addition, Regions did not comply with HUD guidelines regarding the bank’s review of Early Payment Default loans. The guidelines require a review of all  loans that became 60 days past due within the first six months, but Regions reviewed only those loans that became 90 days past due.

Lastly, the bank did not fully adhere to HUD’s self-reporting requirements, which require DELs to report fraud and other serious violations or other material deficiencies. In fact, the bank identified numerous loans containing deficiencies between 2006 and 2011, but did not begin self-reporting until 2011. By failing to comply with the requirements of the FHA program, HUD insured hundreds of loans that were ineligible and incurred substantial losses.

The Takeaway

The FHA mortgage insurance program is designed to encourage home ownership for lower income borrowers or those suffering from financial hardship. Lenders are given incentives to make potentially riskier loans in exchange for government guarantees to reimburse holders of the loans for default-related losses. By failing to adhere to HUD’s underwriting guidelines, and recover losses from the FHA program, Regions essentially made false claims to the government. The question remains as to how far reaching these issues are at the FHA, and whether there is the potential of a crisis similar to the one that culminated in the collapse of the subprime mortgage market in 2008. For this reason,  the False Claims Act rewards whistleblowers who successfully recover funds on behalf of the government.

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