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Relator Receives Over $9 Million For Blowing The Whistle On Mortgage Fraud

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  • Posted on: Aug 23 2017

On August 8, 2017, the U.S. Department of Justice (“DOJ”) announced a nearly $75 million settlement with PHH Mortgage Corporation (NYSE: Symbol PHH) and PHH Home Loans (collectively, “PHH”) to resolve allegations that PHH violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (“HUD”) Federal Housing Administration (“FHA”), guaranteed by the United States Department of Veterans Affairs (“VA”), and purchased by the Federal National Mortgage Association (“Fannie Mae”), and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), that did not meet applicable origination, underwriting, and quality control requirements. PHH agreed to pay $65 million to resolve the FHA allegations, and $9.45 million to resolve the VA and FHFA allegations.

The settlement was reached following negotiations that began in March of this year.

“PHH submitted defective loans for government insurance, and homeowners and taxpayers paid the price. This significant resolution helps rectify the misconduct by returning more than $74 million in wrongfully claimed funds to the government,” said Acting U.S. Attorney for the District of Minnesota Gregory Brooker.

Allegations and Admitted Facts

Between January 1, 2006, and December 31, 2011, PHH certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements and did not comply with FHA’s self-reporting requirements. In the press release, the DOJ provided examples of loan defects that PHH admitted resulted in loans being ineligible for FHA mortgage insurance.  These included:

  • Failing to document the borrowers’ creditworthiness, including paystubs, verification of employment, proper credit reports, and verification of the borrowers’ earnest money deposit and funds to close.
  • Failing to document the borrower’s claimed net equity in a prior residence or obtain documentation showing that the borrower had paid off significant debts. Including these debts in the borrower’s liabilities resulted in the borrower exceeding HUD’s debt-to-income ratio requirements for FHA-insured loans.
  • Insuring a loan for FHA mortgage insurance even though the borrower did not meet HUD’s minimum statutory investment for the loan.

In 2007, PHH audited a targeted sample of government loans for closing or pre-insuring requirements and found that its “percent accurate” did not exceed 50 percent during 2007. Since at least 2006, HUD has required self-reporting of material violations of FHA requirements. However, between January 1, 2006, and December 31, 2011, PHH Home Loans did not self-report any loans to HUD; rather, PHH Home Loans did not self-report any loans to HUD until 2013, after the Government commenced its investigation resulting in the settlement.

As a result of PHH’s conduct and omissions, PHH admitted, HUD insured loans endorsed by PHH that were not eligible for FHA mortgage insurance, and that HUD would not otherwise have insured. PHH admitted that HUD subsequently incurred substantial losses when it paid insurance claims on those loans.

In addition, from at least 2005 to 2012, PHH submitted for guarantee by the VA mortgage loans that did not meet the VA’s requirements. PHH is a VA approved lender that originates and underwrites mortgage loans and obtains VA loan guarantees (wherein the VA guarantees a portion of home loans).

Also from at least 2009 to 2013, PHH sold mortgage loans to Fannie Mae and Freddie Mac, two entities that Congress created to provide stability and liquidity in the secondary housing market.  During this period, PHH originated and sold loans to Freddie Mac and Fannie Mae that did not meet their requirements.

“We have agreed to resolve these matters, which cover certain legacy origination and underwriting activities, without admitting liability, in order to avoid the distraction and expense of potential litigation,” said PHH in a press release (here). “While we cooperated fully in these investigations since receiving subpoenas in 2013, we concluded that settling these matters is in the best interest of PHH and its constituents. Adhering to high legal, regulatory and ethical standards is at the core of how we conduct business, and we remain committed to serving our customers and all of our stakeholders consistent with that principle.”

Whistleblower Lawsuit

Some of the allegations resolved by the settlements were included in a whistleblower lawsuit filed under the False Claims Act against PHH Home and PHH Mortgage by a former employee of PHH, Mary Bozzelli (“Bozzelli”). Bozzelli worked as an underwriter and supervisor for PHH for nearly three decades.  Two years after she left PHH, Bozzelli filed the qui tam action to redress misconduct she had observed during her tenure. See United States ex rel. Mary Bozzelli v. PHH Mortg. Corp. and PHH Corp., 13-cv-3084 (E.D.N.Y. May 28, 2013).

“It is great to see PHH finally held accountable for its actions,” said Bozzelli. “Mortgage fraud is hardly victimless. Not only did PHH defraud taxpayers, but instead of helping deserving borrowers obtain home loans through the government loan programs, I witnessed firsthand the ways in which PHH abused the programs to line its own pockets.”

As a result of the settlement, Bozzelli will receive over $9 million as a whistleblower award. Under the False Claims Act, a whistleblower can sue on behalf of the government and share in any recovery.

The settlement agreements can be found here and here.


The settlements with PHH are notable because False Claims Act investigations of mortgage lenders typically focus on the lender’s participation in government-insured lending programs, such as those offered by the FHA and VA. The settlements not only involve those lending programs, but also involve lender certifications to Fannie Mae and Freddie Mac, a rare instance of the False Claims Act being used as an enforcement tool.

The settlements are also notable because even though PHH denied wrongdoing, the company nevertheless admitted that it failed to satisfy certain program requirements, such as failing to document the borrowers’ creditworthiness, including verifying income, assets, and funds during underwriting. Typically, no such admissions are made in settlements.

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