DOJ's False Claims Act focus shifts to reverse mortgage servicers
The Trump administration's Justice Department was expected to be less aggressive in its pursuit of False Claims Act cases against the mortgage industry. Instead, its focus has shifted to Federal Housing Administration-insured reverse mortgages.
The Justice Department obtained more than $1.6 billion in False Claims Act settlements and judgments during the 2016 fiscal year that ended on Sept. 30, primarily from cases of FHA lenders accused of origination defects in forward mortgages. Since 2009, the total has been over $7 billion.
It's a cash cow the federal government appears reluctant to give up, said Phillip Schulman, a partner at the Washington law firm Mayer Brown.
"There was a thought that there might be a kinder, gentler Department of Justice with a Republican administration, but the False Claims Act has been a cash register for the government for the last five years," Schulman said.
"Not only hasn't it gone away but the DOJ is now looking to the next set of companies for potential liability," he added.
That may be why the DOJ has stepped up action against servicers of Home Equity Conversion Mortgages, the FHA's reverse mortgage program.
"HUD has very detailed servicing requirements on Home Equity Conversion Mortgages," said Krista Cooley, another partner at Mayer Brown. "And some of the servicing requirements that apply specifically to HECM loans have translated into False Claims Act risk for some servicers. So it is really important for servicers to get things right."
For example, when a reverse mortgage borrower dies or vacates the property for more than a year, the Department of Housing and Urban Development requires the servicer to obtain an appraisal within 30 days of the reverse mortgage becoming due and payable. The appraisal allows HUD and the lender to agree on the home's value and decide whether to proceed with foreclosure, engage in a workout, or deal with estate rights issues. Servicers that miss the 30-day appraisal deadline are not entitled to interest that accrues after the loan becomes due.
"We have seen DOJ and HUD assert a failure by servicers to curtail debenture interest," Cooley said. "If the servicer fails to curtail debenture interest, that could lead to an allegation of a false claim for the overstated amount of interest on the claim form."
Mayer Brown represents several mortgage companies targeted by the Justice Department this year, Schulman said. Lenders and servicers can face treble damages for False Claims Act violations, which is why many prefer to settle. "There is a lot a risk if you go forward and litigate," he said.
Some servicers have already settled with Justice, including $48 million paid by United Shore Financial Services last December. Financial Freedom, the reverse mortgage unit of CIT, agreed in May to pay $89 million to settle allegations involving unearned interest payments it received from FHA.
"CIT is pleased to have resolved the HUD mortgage servicing claims related to Financial Freedom," said Gina Proia, a spokeswoman for CIT. "As previously disclosed, CIT continues to evaluate strategic options for the Financial Freedom business."
Proia confirmed that Financial Freedom is not accepting new servicing and is allowing its existing reverse mortgage servicing portfolio to run off.
Meanwhile, Reverse Mortgage Solutions, a subsidiary of Walter Investment Management Corp., agreed two years ago to a $29.6 million settlement with the Justice Department and HUD for submitting false claims for debenture interest on HECM loans.
False Claims Act cases can be brought in a number of ways, including by referral from the HUD Office of the Inspector General. Plus the Justice Department can initiate a case without a referral.
Whistleblowers can bring qui tam lawsuits, and if the Justice Department intervenes, the whistleblower can receive a percentage of any funds recovered. In the Financial Freedom settlement, $1.6 million went to a whistleblower, Sandra Jolley.
The Justice Department does not track the number of False Claims Act cases it brings or settles, spokeswoman Nicole Navas Oxman said.
One mortgage company that is taking its chances in court is Quicken Loans, which has gone so far as to file a pre-emptive lawsuit against the DOJ over allegations of False Claims Act violations. That case is still being litigated; Schulman and Mayer Brown represent Quicken on other matters, although not the False Claims Act case.
If Quicken is successful then it will encourage other mortgage companies to take their chances in court, Schulman said.
The Justice Department's scrutiny comes as the reverse mortgage sector is experiencing some growth because more financial planners and advisers are looking at reverse mortgages as a "retirement funding solution as opposed to a loan of last resort," said Jeffrey Taylor, president of Wendover Consulting, which specializes in reverse mortgage servicing issues.
"I do see signs of an uptick in applications filings and rising home values help that," he said.
But it's a smaller number of firms affected since there are a limited number of players in the reverse mortgage field.
"Unlike the forward mortgage business where you have lots of servicers, the reverse mortgage space is smaller and more complicated," Taylor said. "So there are only a handful of reverse mortgage servicers and subservicers."
Still, the National Reverse Mortgage Lenders Association is not concerned about a shortage of servicing capacity.
Only 60,000 to 65,000 reverse mortgages are originated a year, which the major reverse mortgage servicers can easily manage, according to Peter Bell, the association's president and CEO.
"We believe there is sufficient capacity for the volume of production," Bell said.
He said there is renewed interest in reverse mortgage originations because of a drop-off in regular mortgages.
Some mortgage lenders are "looking at reverses as a way to substitute for the refi business that is disappearing," Bell said.
HECM originations totaled $4.55 billion in the second quarter of fiscal year 2017, up from $3.9 billion a year earlier, according to statistics released on June 23.
On June 8, the Mortgage Bankers Association sent a letter to Attorney General Jeff Sessions and HUD Secretary Ben Carson calling for a moratorium on new False Claims Act cases until the FHA has completed additional work on its defect taxonomy.
While the taxonomy has been rolled out for the FHA's Loan Review System, it does not outline any remedies for each tier of defect, the letter said.
The MBA's discussions with Carson have shown "that he was aware of our concern about immaterial mistakes in loan files, and that to us was a signal at least that there is an opportunity to work with him in implementing something that would give greater clarity," said David Stevens, the MBA's president and CEO.
Right now, the FHA commissioner post remains vacant and that would be the person "to help do the heavy lifting for the secretary and try to work on getting the taxonomy process implemented," Stevens added.
It's still less than six months into the Trump administration and people would have to wait and see for a year from now whether it is active as the Obama administration was. "But it is fair to say the DOJ has not decided to take a pass on False Claims Act investigations," Schulman said.
Both HUD and the Justice Department have plenty of vacant positions that need to be filled, Stevens said. Until that happens, "I'm not sure what we will see … but I'm not certain that there's been any significant relief yet felt on false claims."