And the Fraud Claims Keep Coming...

The United States Department of Justice’s successful attempt to prove fraudulent conduct in connection with alleged shoddy origination practices against Countrywide has spurred copycat lawsuits against lenders. The latest is a claim against Royal Bank of Scotland, who did not even originate the loans in question, but was allegedly aware of the poor origination practices associated with the loans securitized and sold. RBS’s attempt to obtain dismissal of the fraud claims was rejected, thus bolstering the trend of lawsuits successfully alleging fraud based upon allegedly sub-par origination practices. It appears that a lender whose practices fall below an unwritten standard of care are increasingly likely to face fraud claims, and the multi-million dollar penalties associated therewith. This is particularly true when it comes to underwriting.

Lenders should make it a practice to review their compliance management system to ensure it sufficiently audits and examines underwriting practices. Lenders should make sure that underwriters are properly trained and supervised and have adequate resources and time to properly underwrite files. Quality control processes and reporting should be sufficient to identify systemic problems and prompt remedial action must be taken when circumstances suggest that loans are being improperly handled. Furthermore, compensation plans for executives and those overseeing underwriting process should incorporate sound underwriting as part of the compensation structure. Lenders must set up systems at all levels to ensure that the desire for fast underwriting at the lowest cost does materialize into haphazard underwriting, higher delinquency rates and ultimately fraud claims. This is particularly true with the new qualified mortgage laws. Beyond the fact that poor underwriting practices can lead to the loss of a QM safe harbor, such mistakes on a repeat basis could lead to findings that the underwriting practices were shoddy. Without corrective measures, it appears a lender under such circumstances could be susceptible to a claim that its repeated mistakes evidence a fraudulent intention to originate loans without proper safeguards and underwriting processes.