Consumer Fraud

Federal Jury Awards U.S. $92 Million In Allied Mortgage Fraud Case

whistleblower 3 370x210 Federal Jury Awards U.S. $92 Million In Allied Mortgage Fraud CaseA Texas federal court jury awarded the U.S. government about $92 million in a False Claims Act case brought against Allied Capital and bank principal Jim Hodge by a whistleblower who accused the company and some affiliates of knowingly originating and underwriting more than a thousand home loans that did not meet the Federal Housing Administration’s (FHA) insurance requirements.

The U.S. Department of Justice intervened in the case in 2011, the same year a whistleblower filed it in a New York federal court, naming both Allied Home Mortgage Capital and Allied Home Mortgage Corp. as defendants. The government moved the case the following year to Houston, where a similar case was pending.

According to whistleblower News Review, “The case has special significance as it is one of only [two] False Claims Act cases against a lender related to the mortgage meltdown that went to trial and verdict. The other was the well-chronicled HUSL – Bank of America case. All others were settled in some of the largest settlement amounts in U.S. history.”

Allied participated as a direct endorsement lender (DEL) in the FHA insurance program. As a DEL, Allied had 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 the Department of Housing and Urban Development (HUD), FHA’s parent agency, for the losses resulting from the defaulted loan.

FHA does not review DEL loans for compliance with FHA requirements before endorsing them for FHA insurance, so DELs are required to follow program rules designed to ensure that the loans are properly underwritten and endorsed. The government also requires DELs to shoulder much of the risk of underwriting loans, but Allied allegedly got around this by opening up independently operated “shadow” branches through which it funneled the loans.  When HUD received the loan documents, it appeared as though they had come from legitimate, licensed Allied offices.

The Allied lawsuit is one of several the U.S. government has settled in recent months, years after rampant fraud in the baking industry led to a nationwide mortgage meltdown and deep recession. The amount the whistleblower who filed the suit will be awarded has not been determined, but it could be as high as $23 million, or 25 percent of the total recovery.

Whistleblower News Review
Houston Chronicle