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United States Files Lawsuit Alleging That Guild Mortgage
Improperly Originated and Underwrote FHA-Insured Mortgage Loans
The
United States has filed a complaint in the U.S. District Court for the District
of Columbia against Guild Mortgage Company (Guild) under the False Claims Act
for improperly originating and underwriting mortgages insured by the Federal
Housing Administration (FHA), the Justice Department announced today.
Guild is a mortgage lender headquartered in San Diego, California.
“This
case is another example of the Justice Department’s continued efforts to
ensure that lenders that participate in the FHA mortgage insurance program act
in good faith and conduct appropriate due diligence when committing the United
States to insure home loans,” said Principal Deputy Assistant Attorney General
Benjamin C. Mizer, head of the Justice Department’s Civil Division. “To protect
the housing market and the FHA fund, we will continue to hold responsible
lenders that knowingly violate the rules.”
Guild
participated in the FHA insurance program as a direct endorsement (DE)
lender. As a DE lender, Guild had the authority to originate, underwrite
and certify mortgages for FHA insurance. If a DE lender such as Guild
approves a mortgage loan for FHA insurance and the loan later defaults, the
U.S. Department of Housing and Urban Development (HUD), FHA’s parent agency, is
responsible for the losses resulting from the defaulted loan. Under the
DE lender program, neither the FHA nor HUD reviews the underwriting of a loan
before it is endorsed for FHA insurance. HUD therefore relies on DE
lenders to follow program rules designed to ensure that they are properly
underwriting and certifying mortgages for FHA insurance and DE lenders must
certify that every loan endorsed for FHA insurance is underwritten according to
the applicable FHA standards.
The
government’s complaint alleges that, from January 2006 through December 2011,
Guild knowingly submitted, or caused the submission of, claims for hundreds of improperly
underwritten FHA-insured loans. The complaint further alleges that
Guild grew its FHA lending business by ignoring FHA rules and falsely
certifying compliance with underwriting requirements in order to reap the
profits from FHA-insured mortgages. For example, Guild allegedly allowed
underwriters to waive compliance with FHA requirements when underwriting a
loan. Additionally, Guild used unqualified junior-underwriters who did not have a DE certification to
waive mandatory conditions on higher risk loans where HUD required underwriting
only by highly trained DE underwriters. (so much for the days of
processors signing off conditions)
The
government’s complaint further alleges that Guild’s senior management focused
on growth and profits and ignored quality. From 2006 to 2012, Guild
conducted at least 125 branch audits in which almost 40 percent resulted in
either a qualified rating or unsatisfactory rating. A qualified rating
was defined as having a “significant number of findings, and/or findings noted
that have more serious impact or risk to Guild,” or “Knowledge of procedures
and controls; however, they appear to be inefficient.” An unsatisfactory
rating was defined as one where “serious concerns were noted: lack of
knowledge, procedures, and/or controls in branch.” The complaint alleges
that, through Guild’s quality control reviews, significant defects were found
in over 20 percent of the FHA loans reviewed between 2006 and 2011 and over
half the loans had either significant or moderate defects. Significant
defects included fraud, misrepresentation and other serious findings while
moderate defects included not following guidelines. However, Guild did
not calculate or distribute any error rate during the relevant time period,
thus management was not presented with these findings. Additionally, for
many of the quarters from 2006 through 2009, Guild did not even distribute any
of the quality control findings to management. As a result, Guild
management often did not review or remediate findings from quality control
audits during these years. In the quarters where Guild management
actually did review quality control findings, it did so almost a year after the
loans closed and failed to timely address any identified problems.
In
2013, Guild finally began addressing the quality of its FHA underwriting,
Guild’s head of quality control pointed out the ineffectiveness of its past
efforts at addressing loan quality: “I’m not optimistic about training reminders and
individual follow-ups being all that effective.”
The
government’s complaint alleges that as a result of Guild’s knowingly deficient
mortgage underwriting practices, HUD has already paid tens of millions of
dollars of insurance claims on loans improperly underwritten by Guild, and that
there are many additional loans improperly underwritten by Guild that are
currently in default and could result in further insurance claims on HUD.
For example, the government’s complaint identifies a mortgage loan that was
improperly underwritten in violation of HUD requirements, causing the borrower
to default and HUD to pay the loss on the loan. Specifically, Guild failed to verify the
borrower’s prior rental payments, overstated the borrower’s income,
failed to develop a credit history for the borrower who had no credit score, exceeded FHA’s qualifying debt
to income ratio without determining whether certain compensating factors were
present, and failed to identify the source of a large deposit made to the
borrower’s account. The underwriter at Guild improperly waived
multiple conditions and allowed an unauthorized junior underwriter to do the
same for other conditions. In sworn testimony, the Guild underwriter
admitted the loan failed to comply with FHA underwriting requirements.
“The
Federal Housing Administration’s insurance program is meant to encourage
lenders to expand opportunity for homeownership by providing financing to prospective
buyers who otherwise might not be able to enter the housing market,” said U.S.
Attorney Channing D. Phillips for the District of Columbia. “To ensure
that prospective homebuyers realize the dream of long term homeownership, the
program has strict rules and is not a license for lenders to carelessly subject
federal dollars to risk. This lawsuit is designed to help the FHA – and
American taxpayers -- recoup tens of millions of dollars in losses attributable
to a lender accused of improperly underwriting FHA-insured mortgages and
committing the government’s guarantee to mortgages that failed to comply with
program rules.”
“The
decision to intervene in this matter should serve as a reminder of the priority
given to pursuing lenders that violate HUD program rules in order to hold them
accountable and the value of private citizen participation, including
whistleblowers, in pursuing lenders that violate the rules,” said HUD Inspector
General David A. Montoya.
“FHA
relies on the honesty and integrity of those lenders participating in our
program,” said HUD’s General Counsel Helen R. Kanovsky. “The action we
take today should send a clear message that we will not tolerate the abuse of
our programs or of the families who should benefit from them.”
Falsifying documents, white outs, blind eye, ignoring guidelines oh my oh my.
The
lawsuit was brought under the qui tam, or whistle blower, provisions
of the False Claims Act by a former employee of Guild. Under the act, a
private party may bring suit on behalf of the United States and share in any
recovery. The government may intervene in the case, as it has done
here. The False Claims Act allows the government to recover treble
damages and penalties from those who violate it. This not a disgruntled employee to be this huge. Offices were disrupted by gentlemen in black suits, thousands of empty legal boxes and access to emails and computer files.
The
investigation of this matter was a coordinated effort among HUD, its Office of
Inspector General, and the U.S. Attorney’s Office for the District of Columbia
and the Civil Division’s Commercial Litigation Branch.
The action
is captioned United States ex rel. Dougherty v. Guild Mortgage
Company (D.D.C.). The claims asserted in the complaint are
allegations only and there has been no determination of liability.
Losses to Guild could be in 100-600 millions'.
Guild Mortgage does purchase, resale, and refinance mortgage loans.
After decades of successful innovation and growth, Guild Mortgage Company is a mortgage banking company with more than 250 branches and satellites across the United States.
Guild may lose ability to sell loans to our government which is 99% of their business. What does this mean to the consumer? Apply somewhere else if your loan is in process.
Martin Gleich frowns in his grave. A ship without a captain.
Mary Ann MCGarry who is at the helm?
Anyone who got a Guild FHA loan will line up for class action lawsuit next...
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