The Department of Justice (DOJ) announced recently that M&T Bank Corp., a bank headquartered in New York, has agreed to settle a False Claims Act (FCA) lawsuit for $64 million. Allegations in the suit involve M&T Bank’s lending practices and claim the bank was knowingly originating and underwriting loans that did not meet certain requirements to be insured by the Federal Housing Administration (FHA).
Some banks have the option to participate as a direct endorsement lender (DEL), and in the capacity are able to underwrite, originate, and endorse mortgages for FHA insurance. If a person defaults on one of these mortgages, the bank, as holder of the loan, may submit an insurance claim to the Department of Housing and Urban Development (HUD), which is the parent agency for the FHA. However, the problem is these loans are not reviewed by the FHA under this program before they are endorsed for FHA insurance.
Therefore, there are strict requirements the loans must meet before a direct endorsement lender can certify the mortgages for FHA insurance. Moreover, such a lender must maintain a quality control program and report any deficient loans identified by that program. Principle Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division, had this to say, “Mortgage lenders that fail to follow FHA program rules put taxpayer funds at risk and increase the chances of borrowers losing their homes.”
In this case, the allegations were M&T Bank failed to comply with the requirements set forth by the FHA. In addition, it was alleged that M&T Bank created a quality control system that detected significantly lower major error rates. Moreover, even though M&T Bank did detect numerous loans with major errors, the bank failed to report these loans to HUD. Therefore, HUD insured hundreds of loans that were not qualified for the FHA insurance. As all of our readers should know, the FCA contains a qui tam provision, which allows private citizens to sue on behalf of the government when they have knowledge of an entity committing fraud against the government.
As we have stated previously, the qui tam provision provides incentives for ordinary citizens to become whistleblowers by reporting the fraud. These incentives include 15 to 30 percent of the monies recovered and protection against retaliation. This case was originally filed under the qui tam provision of the FCA by a former employee of M&T Bank. Though the share to be awarded to the whistleblower has not yet been determined, it’s believed the employee will receive anywhere from $9.5 million to $19 million as an award for her participation in the case.
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