Acting Manhattan U.S. Attorney Settles Civil Mortgage Fraud Lawsuit Against Residential Home Funding Corp.

UPDATE

The press release issued in this case on September 28, 2017, incorrectly identified Residential Home Mortgage Corp. as the settling defendant instead of Residential Home Funding Corp.  The defendant in this case is Residential Home Funding Corp. Residential Home Mortgage Corp. has no connection to this case and has not been accused of any wrongdoing.

Joon H. Kim, the Acting United States Attorney for the Southern District of New York, Dane Narode, Associate General Counsel for Program Enforcement for the U.S. Department of Housing and Urban Development (“HUD”), and Christina Scaringi, the Special Agent in Charge of HUD’s Office of the Inspector General (“HUD-OIG”), Northeast Region, announced today that the United States has settled a civil mortgage fraud lawsuit against RESIDENTIAL HOME FUNDING CORP. (“RESIDENTIAL HOME FUNDING”) stemming from RESIDENTIAL HOME FUNDING’s participation in the Federal Housing Administration’s (“FHA”) Direct Endorsement Lender Program (“DEL Program”).  In the settlement, approved Monday by U.S. District Judge Jed S. Rakoff, RESIDENTIAL HOME FUNDING agreed to pay $1.67 million and admitted, acknowledged, and accepted responsibility for, among other things, failing to maintain a compliant quality control program and approving loans for FHA insurance that failed to meet the requirements established by HUD.  The settlement amount was based on RESIDENTIAL HOME FUNDING’s financial ability to pay after a review of the company’s financial records.  As part of the settlement, RESIDENTIAL HOME FUNDING also agreed to retain an independent compliance consultant to ensure its compliance with the HUD/FHA rules applicable to the DEL Program.

Acting Manhattan U.S. Attorney Kim said:  “We are committed to holding lenders accountable when they recklessly approve loans for FHA insurance and then fail to live up to their promises to HUD.  With this settlement, Residential Home Funding accepts responsibility for its conduct and will pay $1.67 million.”

HUD Associate General Counsel for Program Enforcement Dane Narode said:  “This case demonstrates HUD’s resolve in protecting the integrity of its mortgage insurance programs for the benefit of all Americans, especially first-time homebuyers.  We’re pleased that Residential Home Funding has accepted responsibility for its actions and has agreed to improve its training and quality control program.”  

HUD-OIG Special Agent in Charge Christina Scaringi said:  “This settlement with Residential Home Funding is the latest example of our continued commitment to hold mortgage industry professionals accountable for their actions.  HUD OIG’s Joint Civil Fraud Division and Office of Investigations will continue to work together with our partners at the U.S. Attorney’s Office to root out lenders who choose to use deceptive practices that ultimately cause FHA to suffer losses on mortgages that should never have been approved.”

The Government’s Complaint in this action alleged as follows:      

During the period 2006 through 2012 (“Covered Period”), RESIDENTIAL HOME FUNDING participated in the DEL Program.  As a DEL lender, RESIDENTIAL HOME FUNDING had the authority to originate, underwrite, and approve mortgages for FHA insurance.  If a DEL lender like RESIDENTIAL HOME FUNDING approved a loan for FHA insurance and the loan later defaulted, the holder of the loan could submit an insurance claim to HUD and HUD had to pay the costs associated with the default.  Throughout the Covered Period, HUD therefore required DEL lenders to follow HUD’s program rules, including its underwriting requirements and its requirement that lenders maintain a compliant quality control program.  A compliant quality control program must include procedures to ensure that the lender reviews loans for compliance with HUD requirements, promptly discloses to HUD all loans containing evidence of fraud or other serious underwriting problems, and conducts a full review of all loans that go into default within the first six payments (“early payment defaults”).  RESIDENTIAL HOME FUNDING failed to comply with all three of these basic requirements, and it also routinely approved loans for FHA insurance that did not meet HUD’s underwriting requirements.  Notwithstanding these failures, RESIDENTIAL HOME FUNDING continued to fraudulently certify to HUD, each year, that it “conforms to all HUD-FHA regulations necessary to maintain its HUD-FHA approval.”

            As part of the settlement, RESIDENTIAL HOME FUNDING has admitted, acknowledged, and accepted responsibility for the following misconduct during the Covered Period:

• RESIDENTIAL HOME FUNDING failed to conform to the HUD and FHA rules requiring DEL lenders to maintain a compliant quality control program by, among other things:

• • not taking action to address loans with underwriting deficiencies that were identified through RESIDENTIAL HOME FUNDING’s own quality assurance review process;

• • not reviewing early payment default loans; and

• • not reporting to HUD loans that were identified in RESIDENTIAL HOME FUNDING’s quality control reviews as having indicia of fraud or other serious deficiencies.

• Contrary to representations in RESIDENTIAL HOME FUNDING’s annual certifications, RESIDENTIAL HOME FUNDING did not conform to all applicable HUD and FHA regulations.

• RESIDENTIAL HOME FUNDING endorsed for FHA mortgage insurance loans that did not meet all underwriting requirements contained in HUD’s handbooks and mortgagee letters.

• RESIDENTIAL HOME FUNDING submitted to HUD and FHA loan-level certifications stating that loans were eligible for FHA mortgage insurance when in fact they were not.

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Mr. Kim thanked HUD-OIG for its assistance in this case.

This case is being handled by the Office’s Civil Frauds Unit.  Assistant U.S. Attorneys Jessica Jean Hu and Elizabeth M. Tulis are in charge of the case.