Choosing Compliance Over Profits
Banks and Lenders Choosing Compliance over Profits
After settling with several of the largest financial institutions in the country over alleged abuse of Federal Housing Administration (FHA) lending practices, the Department of Justice targeted one of the nations largest mortgage lenders in April 2015 with a lawsuit alleging systematic attempts to “elevate profits over compliance.” Suing under the False Claims Act, the government alleges that between September 2007 and December 2011, the company “knowingly submitted or caused to be submitted,” claims for hundreds of mortgage loans that had been improperly underwritten on FHA guidelines.
The FHA program doesn’t fund mortgages directly, but offers insurance to encourage lenders to extend loans to borrowers with lower income and/or lower credit scores. FHA-approved lenders are authorized to originate, underwrite and certify mortgages that are backed by FHA insurance. If the borrower subsequently defaults on a FHA-insured mortgage, the holder of the loan can file a claim against that insurance to recover losses on the loan.
Violations of the False Claims Act allow the government to pursue up to treble damages and penalties from companies that are alleged to have deliberately defrauded the administration, so the financial numbers here could be quite large. Having already paid out millions in insurance claims on improperly underwritten loans in the aftermath of the ‘mortgage meltdown,’ the government has sought restitution from banks and mortgage companies that it believes were involved in multiple instances of abuse. For example, adjusting or “fudging” income documentation, or producing inflated appraisals on properties that failed to meet appraisal requirements at the first attempt.
Even though the mortgage company in question is countersuing, claiming that the government is on a “witch-hunt” against financial institutions, and that the allegations are based on “an unrepresentative sample of 55 loans out of the nearly 246,000 closed over the past seven years,” the government is alleging that there is email evidence to confirm that “management exceptions” were granted to knowingly break FHA rules in order to get loans approved. One such alleged “management exception,” references a borrower who requested a refund of the $400 application fee so that she could feed her family. Bank account statements revealed multiple prior overdrafts, but the loan was made anyway. The borrower became delinquent after only five payments, prompting a claim of $94,000 against the FHA policy.
The mortgage company argues that such incidents represent deliberate “cherry-picking” on the part of the government and vows to fight the lawsuit, but the question remains as to why any truly compliant organization would contemplate “management exceptions” at all? Of even greater concern is the allegation that such conduct was not the result of a few rogue managers who bent the rules, but rather a systemic process that was allegedly overseen by senior executives who tracked the percentages on these management exceptions. The government quotes one email claiming that 40% of the management exceptions on their FHA insured loans should never have been approved, and with a large number of loans still in the pipeline at 60 days past due, the true cost of this conduct remains to be calculated.
When a company is alleged to have tracked its’ percentage of non-compliance against established regulations, there is clearly cause for concern. The mortgage company will no doubt be looking to its compliance policies and the enforcement of those policies as part of its defense against substantial financial penalties, but the allegations suggest that there was greater interest in the available volume of business than in compliance.
More and more lending organizations and banks are realizing that without a comprehensive automated compliance management system in place to establish clear protocols and accountability, policies and procedures run the risk of being overridden or ignored in the pursuit of maximum revenue and profitability. With treble damages and penalties at stake under the False Claims Act, what’s your level of confidence in the strength of your compliance policies, processes and procedures?