Prospect Mortgage LLC on Monday agreed to pay the U.S. more than $4 million to resolve allegations that it approved mortgage loans for federal insurance that failed to meet Federal Housing Administration (FHA) standards. The settlement is the latest deal resulting from a federal crackdown on banks and mortgage companies that allegedly contributed to the financial crisis of 2008-2009.
Federal prosecutors said the July 3 deal settles a False Claims Act lawsuit the U.S. government brought against Prospect Mortgage.
According to the announcement, the California-based lender participated as a direct endorsement lender (DEL) in the Federal Housing Authority’s insurance program. As a DEL, Prospect 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 DEL program requires lenders to maintain a quality-control program to prevent and correct problems in their underwriting practices and to self-report any deficient loans identified by their quality-control staff.
The U.S. government sued Prospect Mortgage for its alleged failure to comply with FHA origination, underwriting, and quality-control requirements. These violations led to the federal government insuring risky and otherwise unqualified loans that it would not have insured otherwise.
Between December 2007 and December 2009, Prospect had a 12.29 percent default rate – well in excess of the national average. Federal investigators determined that more than three-quarters of these defaults were attributable to two particular Prospect branches located in Florida and North Carolina.
“To participate in the FHA program, Prospect had to comply with HUD underwriting and quality control requirements and certify that these requirements had been satisfied with respect to each FHA loan it originated,” said John A. Horn, U.S. Attorney for the Northern District of Georgia. “Prospect failed to adhere to these requirements at two Southeastern branches and when many of these loans later defaulted, the United States suffered substantial losses.”
Prospect agreed to pay the U.S. $4.157 million to resolve the False Claims Act allegations.