On February 25, the Department of Justice (DOJ) announced that it had reached a settlement with MetLife Home Loans LLC concerning its investigation into MetLife’s origination and underwriting practices of loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA loans). As part of the settlement, MetLife agreed to pay $123.5 million to resolve claims that it violated the False Claims Act by knowingly originating and underwriting mortgage loans that did not meet FHA underwriting guidelines. The settlement covers FHA loans originated or purchased by MetLife from October 2008 through March 2012, that were submitted to HUD for insurance claims by August 25, 2014.
According to the DOJ’s allegations, MetLife’s quality control department’s post-closing review of loans determined that over 1,000 loans contained significant underwriting errors, but failed to report the majority of those errors to HUD. The DOJ further contended that when Met Life purchased FHA loans from First Tennessee Bank in 2008, it did so knowing that over 50% of the loans contained material errors, but took no action to resolve or mitigate those errors. The DOJ also alleged that from January 2009 through July 2010, MetLife’s quality control department’s monthly review of FHA loans found for each month that in excess of 25% of FHA loans originated contained significant errors. MetLife’s senior management was purportedly aware of the high error rate because it routinely received the quality control findings. Additionally, the DOJ claimed that, for part of the investigation period, senior management had instructed the quality control manager to only to self-report to HUD loans with confirmed borrower fraud or third-party misrepresentations.
The MetLife settlement follows the DOJ’s familiar pattern of asserting allegations that FHA lenders were originating high percentages of loans with material underwriting errors; quality control departments were not functioning properly; and that senior management was aware of the issues and failed to make the necessary self-reports to HUD. This latest settlement involving FHA loans shows the DOJ’s continued commitment to pursue False Claims Act allegations against FHA lenders. As previously predicted by LenderLaw Watch, enforcement actions against FHA lenders will likely continue in 2015 as the DOJ pursues recession and post-recession era allegations that lenders were skirting FHA underwriting requirements. Given the majority of settlements announced by the DOJ have been with lenders that originated large volumes of FHA loans, smaller volume lenders should be vigilant as they may be the next targets of similar DOJ investigations.