During the time period covered by the settlement, M&T Bank participated as a “direct endorsement lender” in the HUD insurance program. Under the program, M&T had the authority to originate, underwrite, and endorse mortgages for insurance. If M&T approved a mortgage loan for insurance and the loan later defaulted, the holder of the loan could submit an insurance claim to HUD for the losses resulting from the defaulted loan.
Under the program, HUD did not review M&T’s loans for compliance before it is endorsed them for insurance. M&T, as a government fiduciary, was therefore required to (1) follow program regulations intended to ensure the company is properly underwriting and certifying mortgages for insurance; (2) maintaining a quality control program that can prevent and correct deficiencies in underwriting practices, and (3) self-report any deficient loans identified by the bank’s quality control compliance program.
In her complaint, Kelschenbach alleged that M&T failed to adhere to HUD’s self-reporting requirements. While M&T identified numerous insured loans with “major errors” between 2006 and 2011, the bank did not report a single loan to HUD until 2008, and thereafter self-reported only seven loans to HUD. Kelschenbach provided the government with examples of M&T practices that blatantly skirted HUD regulations: a manager who oversaw production of retail and wholesale loans made comments like, “Let’s play roulette and fix it if they catch us,” and “Close it now and fix it later,” even though there were no procedures in place for later follow up and, in fact, the loans closed without fixing outstanding issues.
She further alleged that M&T managers openly mocked the bank’s risk department to underwriters and encouraged underwriters to ignore the department. When managers did not agree with rules or guidelines put forth by M&T’s risk department, or when they wanted underwriters to ignore one of those directives, they would state that the directives were not important and were “stupid.” Similarly, when managers did not agree with the guidelines put forward by a government agency, they would say the guideline was “stupid” or “did not make sense.” Kelschenbach alleged that these statements are mild examples of managers pressuring underwriters and insisting that they approve loans that did not meet HUD statutory guidelines.
As a result of M&T’s conduct, HUD insured hundreds of loans that were not eligible for mortgage insurance. As government attorneys pointed out in their settlement agreement with M&T, had HUD known of the deficiencies in the bank’s underwriting practice, the agency would not have otherwise insured M&T loans. HUD subsequently incurred substantial losses when it paid insurance claims on those loans.
The settlement resolves Kelschenbach’s allegations that M&T failed to comply with origination, underwriting, and quality control requirements. As part of the settlement, M&T Bank admitted to the following: “Between Jan. 1, 2006, and Dec. 31, 2011, M&T certified insurance mortgage loans that did not meet HUD underwriting requirements and did not adhere to quality control requirements. Between 2006 and 2011, M&T also failed to review an adequate sample of loans, as required by HUD.”
In the wake of the sub-prime mortgage crisis, False Claims Act cases alleging fraudulent mortgage practices have bubbled-up through courts across the country. While the fraud a whistleblower sees may not be as explicit as what Kelschenbach experienced at M&T, consulting an experienced whistleblower attorney or an attorney who specializes in the False Claims Act will help evaluate and guide a potential whistleblower’s claim. Whistleblowers who bring qui tam False Claims Act cases against companies that commit fraud against the government stand to not only disrupt immoral practices, but recover large financial rewards.