Not only is the government suing Allied Home Mortgage for FHA fraud, its lawsuit calls into question how company founder and CEO Jim Hodge handled complaints by insiders about its net branch arrangements.
According to a lawsuit filed by the U.S. attorney for the Southern District of New York, the nonbank lender for years originated loans out of hundreds of “shadow” branches without bothering to get those locations approved by HUD, which oversees FHA.
In its civil complaint, prosecutors charge that Allied submitted loans from those shadow branches to FHA using the unique identity number of a branch that was actually approved.
In other words, Houston-based Allied—once considered the largest net branch operator in the U.S.—asked for FHA insurance based on what the government calls “false certifications.”
U.S. attorney Preet Bharara said that several senior Allied executives voiced concerns about the firm's net branch practices but “it was continued under the direction of Hodge.”
At one time Allied had 600 branches—with little in the way of quality control, the government claims. (Allied had a small QC staff in St. Croix in the U.S. Virgin Islands, but the government claims these offshore employees had no mortgage experience.)
The U.S., suing on HUD's behalf, noted that for 10 years Allied required its (net) branch managers to assume “financial responsibility” for its offices, running the operation like a franchise. The government notes that Allied collected revenue from the branches while they were profitable but then closed them “without notice when they were not, leaving branch managers liable for the branch's financial obligations.”
All of this probably would not have come to light if the delinquency rate on Allied's production were low. But according to the Department of Justice, nearly 32% of the 112,324 loans the firm facilitated between 2001 and 2010 went delinquent, resulting in roughly $834 million of insurance claims paid by FHA.
The DOJ sued Allied, Hodge and another executive, Jeanne Stell, accusing them of fraudulent lending practices tied to hundreds of millions of dollars in government-backed loans.
Early last week, in a brief interview with National Mortgage News right after the lawsuit was filed, Hodge said he had not yet seen the notice of charges and was given no forewarning of the lawsuit. "I'm totally unaware of it," he said.
He added that the firm—an active lender—plans to comment once it sees the notice of civil allegations. At press time Hodge had not returned a follow-up phone call.
Among other things, the lawsuit accuses Allied of engaging in a pattern of “reckless" lending practices by disregarding FHA underwriting requirements and repeatedly misleading the agency about compliance.
The civil fraud suit seeks triple damages under the False Claims Act against the lender, Hodge and Stell.
In 2006 and in 2007, the firm's default rate reached 55%, the government says.
"Allied's decade of concealed misconduct has resulted in tens of thousands of defaulted loans, thousands of American homeowners facing eviction and hundreds of millions of dollars in losses to the United States," prosecutors charge.
