Finance of America Mortgage to Pay $14.5 Million to Resolve False Claims Act Liability Involving FHA Mortgage Lending

ALBANY, NEW YORK – Finance of America Mortgage LLC has agreed to pay the United States $14,500,000 to resolve allegations that Gateway Funding Diversified Mortgage Services, L.P. (Gateway), which it acquired in 2015, violated the False Claims Act by knowingly originating and underwriting deficient mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA), announced United States Attorney Grant C. Jaquith.

“Gateway misrepresented that its federally-insured loans met HUD’s quality standards, harming borrowers who were left underwater on their homes and taxpayers who backed the mortgages,” said United States Attorney Jaquith.  “We are committed to holding mortgage lenders accountable when they abuse government programs for their own gain.”

During the time period covered by the settlement, Gateway participated as a direct endorsement lender (DEL) in the FHA insurance program.  A DEL has the authority to originate, underwrite and endorse mortgages for FHA insurance.  If a DEL approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD, FHA’s parent agency, for the losses resulting from the defaulted loan.  Under the DEL program, the FHA does not review a loan for compliance with FHA requirements before it is endorsed for FHA insurance.  DELs are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance, to maintain a quality control program that can prevent and correct deficiencies in their underwriting practices, and to self-report any deficient loans identified by their quality control program.

The settlement announced today resolves allegations that Gateway failed to comply with certain FHA origination, underwriting and quality control requirements.  As part of the settlement, Gateway admitted that the company failed to audit all early-payment default loans (EPD) as required by HUD and, on those occasions when it did audit these loans, it “ignored calls from its compliance department regarding the company’s poor EPD rate for FHA loans.”  Gateway also admitted that, in late 2011, some of its senior executives learned that the company’s one-year compare ratio (a figure HUD uses to compare lenders, with a higher ratio indicating that a lender has an unusually high default percentage compared to its peers) was increasing due, in part, to Gateway’s origination activities out of its Horsham, Pennsylvania headquarters and certain branch offices.  Many of those same executives were then told in early 2014 that the same underwriters and offices identified in 2011 continued to “show a pattern of poor performance” on EPD loans.  Gateway also admitted that it failed to adhere to HUD’s self-reporting requirements for loans containing material deficiencies.  Notably, Gateway acknowledged that its conduct and omissions resulted in HUD insuring many loans approved by Gateway that were not eligible for FHA mortgage insurance under the DEL program.

“This investigation, along with others similar to it, represents our steadfast commitment toward protecting the integrity of federal housing programs,” said Michael Powell, Special Agent in Charge, Joint Civil Fraud Division, HUD’s Office of Inspector General (HUD-OIG).  “It further reaffirms our intent to pursue those who exploit HUD programs for corporate gain.”

This investigation was triggered by a whistleblower lawsuit filed under the qui tam provisions of the False Claims Act, which allow private persons, known as “relators,” to file civil actions on behalf of the government and share in any recovery.  The relator in this case, a former Gateway employee, will receive $2,392,500 of the settlement proceeds.  The case is docketed with the U.S. District Court for the Northern District of New York under number 1:16-cv-750.

The investigation and settlement were the result of a coordinated effort among the U.S. Attorney’s Office for the Northern District of New York, the Department of Justice’s Civil Division, HUD-OIG, and HUD.  The United States was represented by Assistant U.S. Attorney Adam J. Katz and Department of Justice Trial Attorneys Christopher Reimer and Harin Song.