FHA lending violations lead to $93 million fine and convictions
Charlene Crowell | 12/13/2016, 3:29 p.m.
A 2011 case that was filed in Manhattan's U.S. District Court led to a 5-week trial
in Houston and a unanimous jury decision against one of the largest FHA home loan
Allied Home Mortgage Capital Corporation, also known as Allied Capital, Allied Home Mortgage Corporation and Jim C. Hodge, its president and chief executive officer. The corporations and Hodge were charged and convicted of violations of both the federal False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 Act (FIRREA).
As a result of the convictions, the federal government will receive nearly $93
million from Allied Home Mortgage Capital and an additional $7.3 million from Hodge. Under the FIRREA, additional penalties will be assessed at a later time for each fraudulent violation ranging from a low of $5,500 to $11,000.
The additional penalties could be substantial. Over nearly a decade, Allied Capital
originated FHA-insured home loans. Of these loans, at least 1,192 were actually
ineligible for FHA insurance under HUD guidelines. When the loans defaulted, HUD
incurred losses of $85,612,643.
According to an investigative article by ProPublica, Allied had the highest serious
delinquency rate among the top 20 FHA loan originators from June 2008-May 2010.
During these years, 9 states issued sanctions against Allied for its use of
unlicensed brokers and practices of misleading borrowers.
"For years, Jim Hodge and Allied lied to HUD in order to fraudulently reap profits
from the FHA mortgage insurance program", said Manhattan U.S. Attorney Preet
Bharara. "After a month-long public trial where all their misconduct was exposed, a
jury has held Mr. Hodge and Allied responsible for their lives and has made them pay for losses the United States suffered on loans that would never have been insured by HUD absent their lies."
FHA guidelines ensure that its loans can only be made to consumers who can afford to repay them. To protect the ongoing availability of FHA mortgage insurance funds, HUD is responsible for accurately assessing the risk of default on loans it insures. HUD relies on assurances from lenders that they and the loans they submit fully comply with program requirements.
Allied operated as many as 600 branch offices, but only a few locations had quality
control employees to review loans. Allied Capital - with Hodge's knowledge and
approval - originated loans at more than 100 "shadow" branch offices that did not
have the required authorization. The scheme included submitting loans from those
branches to HUD using ID numbers of authorized sites.
When HUD auditors asked for quality control reports, Allied provided falsified
information and Hodge directed employees to falsify quality control reports. Each
year, both the firm and Hodge falsely certified to HUD that the business was in
compliance with required quality control standards.
For Kenneth Magidson, Houston U.S. Attorney, the case represents an example of how fraudulent acts are aggressively pursued even when multiple U.S. Justice Offices are involved.
"Working together, we ensured a successful outcome following a lengthy trial and
investigation against Allied and its CEO. We will continue to apply our resources
whenever and wherever we can to ensure those that perpetuate such egregious fraud against the United States are held accountable for their actions," said Magidson.
While the federal government and HUD can and should prosecute unlawful activities, the consumers who were snookered into these fraudulent loans deserve to be made whole.
For many consumers, a home represents the single largest investment of a lifetime.
Its loss leads to several financial harms that affected consumers will suffer.
Foreclosures dramatically depress credit scores and, as credit scores drop, the
likelihood of new credit costing more is a near certainty. Some affected consumers
will wind up paying a cumulative cost for receiving one predatory loan.
The Allied convictions also are a reminder of how the Justice Department can use its
authority to take action when mortgage lending rules and laws are violated. The
future of this vital federal office should be a focal point of the upcoming
confirmation hearings. Senate Judiciary committee members must acknowledge that the journey towards fair housing has yet to reach its destination.