Prospect Mortgage, LLC Agrees To Pay $4.157 Million To Resolve False Claims Act Allegations Arising From The FHA Mortgage Lending Practices Of Two Of Its Branches

SAN FRANCISCO – Prospect Mortgage Company, LLC (“Prospect”) has agreed to pay the United States $4.157 million to resolve allegations that that the company committed civil mortgage fraud in connection with its participation in the Direct Endorsement Lender Program announced U.S. Attorney for the Northern District of California Brian J. Stretch, and U.S. Attorney for the Northern District of Georgia John A. Horn.   

The Direct Endorsement Lender Program, is administered by the Federal Housing Administration (“FHA”) and the U.S. Department of Housing and Urban Development (“HUD”).    Prospect participated in the FHA insurance program as a Direct Endorsement Lender (“DE Lender”).  As a DE Lender, Prospect had the authority to originate, underwrite, and endorse mortgages for FHA insurance.  In this settlement, Prospect has agreed to pay the United States $4.157 million to resolve an investigation conducted by the U.S. Attorneys’ Offices (USAO) for the Northern District of California and the Northern District of Georgia into whether Prospect violated the False Claims Act by falsely certifying compliance with critical underwriting and quality control (“QC”) requirements when originating loans insured by the FHA and HUD.

“Prospect’s knowing failure to comply with material HUD loan origination requirements not only resulted in major losses to the public fisc, but also served to undermine the FHA program,” said U.S. Attorney Stretch.  “Today’s settlement demonstrates the Department of Justice’s resolve and commitment to hold lenders, large and small, accountable for this type of fraudulent conduct.” 

“To participate in the FHA program, Prospect had to comply with HUD underwriting and quality control requirements and certify that these requirements had been satisfied with respect to each FHA loan it originated,” said U.S. Attorney Horn.  “Prospect failed to adhere to these requirements at two Southeastern branches and when many of these loans later defaulted, the United States suffered substantial losses.”  

“Ensuring the fiscal integrity of FHA programs is at the core of our mission,” said Acting HUD Inspector General Helen M. Albert.  “We will continue to work with our law enforcement partners to identify and root out those that seek to compromise such programs that are directly intended to assist the American public,” he concluded.

Under the DE Program, if a DE Lender approves a mortgage loan for FHA insurance, and the loan later defaults, the holder of the loan may submit an insurance claim to the Government to recover its losses on the loan.  The Government does not review a loan before endorsement for FHA insurance; instead, FHA and HUD rely upon DE Lenders like Prospect to follow program rules.  The rules require, among other things, that a lender: (1) adhere to HUD underwriting guidelines; (2) maintain a QC program that can identify and correct deficiencies in their underwriting practices; and (3) self-report to HUD materially deficient loans identified by their QC program.  As revealed by an Atlanta HUD-Office of Inspector General (“OIG”) audit, two Prospect branches – one in Florida and another in North Carolina – originated many of these loans without adhering to the requisite HUD requirements.  As a result, the United States suffered substantial losses when the loans defaulted and ripened into claims by Prospect for insurance payments from the United States.

Between December 2007 and December 2009, Prospect had a 12.29 percent default rate – well in excess of the national average – within HUD’s Atlanta Home Ownership Center (“HOC”).  HUD determined that approximately 76% of these defaults were attributable to two particular Prospect branches located in Florida and North Carolina.  The Government’s investigation revealed that the majority of the audited loans from these branches were not compliant with HUD underwriting requirements relating to Prospect’s assessment of borrower: (1) assets; (2) income; and (3) credit, which are essential considerations in determining whether a loan will be repaid, as opposed to going into default or serious delinquency.  

As part of the settlement, Prospect has acknowledged, among other things, the following conduct that occurred in the two Prospect branches at issue:

• Prospect endorsed for FHA insurance loans that had not been originated in accordance with HUD requirements concerning a DE Lender’s assessment of assets, income, and credit.
• Prospect falsely certified that the non-compliant loans that it originated had been underwritten in accordance with HUD underwriting requirements.  
• As evidenced by its 12.29% default rate within the Atlanta HOC, and the fact that 76% percent of such defaults were attributable to one branch office in Florida and another in North Carolina, Prospect failed to adhere to HUD quality control guidelines. 

The investigation of this case was a coordinated effort between the USAO for the  Northern District of California, the USAO for the Northern District of  Georgia, and HUD, including HUD’s Office of Inspector General.

This resolution with Prospect is the latest in a string of civil fraud cases pursued by the United States in recent years alleging fraudulent lending practices by residential mortgage lenders.

Assistant U.S. Attorney Douglas K. Chang handled this matter for the U.S. Attorney’s Office for the Northern District of California, with the assistance of Tina Louie.