The Department of Justice reports that a federal jury found Allied Home Mortgage Capital Corporation, Allied Home Mortgage Corporation, and their President/CEO liable under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) for fraudulent misconduct related to participation in the Federal Housing Administration (FHA) mortgage insurance program.
The verdicts followed a five-week long trial.
The jury awarded the United States a total of $92,982,775 in damages, including $7,370,132 against the President/CEO. Pursuant to the FCA, the damages in this case are subject to trebling. In addition, the court must impose a mandatory penalty of $5,500 to $11,000 for each violation. Separately, FIRREA also provides for a penalty for each statutory violation. U.S. District Judge George C. Hanks Jr., who presided over the trial, will determine the total penalties and damages at a later date.
DOJ argued the following. As a HUD-approved loan correspondent, Allied Capital originated FHA-insured mortgage loans and was required to seek HUD approval for each branch office from which it originated such loans. Allied Capital did not comply, operating more than 100 “shadow” branch offices that originated FHA loans without HUD authorization. Allied Capital’s undisclosed shadow branches were not subject to HUD oversight and their default rates were disguised by the default rates of branches whose IDs they were using.
Allied Corporation, on the other hand, as a Direct Endorsement Lender, underwrote FHA-insured mortgage loans. For each loan, Allied Corporation was required to certify to HUD that the loan was underwritten according to HUD’s guidelines. Allied Corporation, however, recklessly underwrote and certified at least 1,192 loans for FHA insurance under HUD’s guidelines.
To compound matters, the companies and HUD operated a dysfunctional quality control program and misled HUD about it. HUD requires lenders participating in its programs to timely perform quality control audits of their FHA loans to identify and correct systemic problems, including underwriting problems. Allied only employed a handful of quality control employees to review loans from as many as 600 branch offices. Further, many of those employees were unqualified to audit FHA-insured loans. In addition, Hodge personally directed his employees to falsify quality control reports to give the impression that required reviews had been performed, when in fact they had not. When HUD auditors later asked for those quality control reports, Allied provided the falsified reports. Allied and Hodge also falsely certified to HUD on an annual basis that Allied was in compliance with HUD’s quality control requirements.
It is not possible to tell which of these allegations the jury found credible. However, the word on the street is that the defendants intend to appeal on both substantive and procedural grounds.