The Last FHA False Claims Act Settlement of 2014

HUD

On December 31, 2014, the U.S. Department of Housing and Urban Development entered into a settlement agreement with New York-based Golden First Mortgage Corporation and its president and owner, David Movtady, concerning allegations that Golden First and Movtady violated the False Claims Act by approving FHA mortgage loans that failed to comply with FHA insurance guidelines and program requirements.  The settlement was announced by the Manhattan U.S. Attorney’s Office, which has been at the forefront of settlements with banks concerning FHA underwriting practices.

The government’s complaint against Golden First, first filed on April 4, 2013 and amended in August 2013, alleged that between 2002 and 2010 Golden First engaged in intentionally fraudulent practices as a direct endorsement lender in the underwriting of FHA mortgages.  Specifically, the complaint alleged that Movtady filed false annual certifications representing that Golden First complied with all FHA program requirements.  According to the complaint and settlement agreement, Golden First purportedly failed to implement a quality control program during the investigation period, and when it did have a quality control program, failed to take any corrective actions in response to its quality control findings.  Additionally, Golden First purportedly failed to conduct any review or quality control of loans that went into early payment default, and also failed to self-report to HUD any findings concerning fraud or serious underwriting violations.  The complaint also alleged that both Movtady and Golden First repeatedly lied to obtain HUD approval for FHA mortgages by falsely certifying that they had exercised due diligence in underwriting; by certifying compliance with FHA guidelines; and by submitting false and fabricated loan documentation.

The complaint alleged that as a result of these false and fraudulent underwriting practices, more than 60% of loans originated by Golden First since 2002 ended in default.  By 2008, nearly one out of every three FHA mortgages originated by Golden First defaulted within the first six months after closing.  The complaint sought claims for violations of the False Claims Act, the Financial Institutions Reform, Recovery, and Enforcement Act, and the common law.

Pursuant to the settlement agreement, Golden First will pay $36 million to settle claims concerning loans it originated between 2002 and 2010, when it ceased operations.  In addition, Movtady agreed to pay $300,000 to settle claims against him and is forever barred from again transacting with the federal government.

This settlement represents the last in a number of settlements in 2014 concerning FHA underwriting practices, and the second such settlement in the past three weeks.  On December 23, 2014, the U.S. Attorney’s Office for the Eastern District of Michigan announced a $4.2 million settlement with John Adams Mortgage Company concerning material underwriting deficiencies in the origination of FHA mortgages.  According to the press release, HUD’s Office of Inspector General concluded that 29 of 31 loans originated by John Adams between 2008 and 2012 went into default and each contained underwriting deficiencies in violation of FHA guidelines.  Those 29 loans resulted in $2.445 million in damages to the government.  As part of the settlement, John Adams also agreed to indemnify the FHA for the two loans that had not resulted in claims, but which also contained underwriting deficiencies.

As recently highlighted on LenderLaw Watch, HUD and the DOJ have actively been pursuing False Claims Act allegations against FHA lenders for violations of FHA guidelines for loans originated between 2002 and 2012.  These latest settlements are part of a continued trend of enforcement actions against FHA lenders that is likely to continue in 2015.

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