On May 22, 2008, the Department of Justice ("DOJ") announced a settlement of $4.6 million with National City Mortgage Inc. ("NCM") to settle allegations under the False Claims Act. As the federal government aggressively pursues investigations of mortgage loan practices, authorities are likely to carefully consider the use of the False Claims Act to redress conduct involving federally insured mortgage loans. The allegations in this case involved claims that NCM submitted loans for insurance coverage more than 60 days after closing which had been falsely certified as being current and were therefore in violation of HUD regulations.
The False Claims Act ("FCA") was originally enacted in 1863 to deter widespread fraud by suppliers of the Union Army, who were submitting inflated claims and providing defective goods to the government. Over time it has been expanded to award treble damages and mandatory penalties in a variety of cases involving fraud against the government, and includes a lowered intent standard, making it highly useful to the government in actions to recover for fraud. Under amendments in 1986, private individuals or "qui tam relators" who sue on behalf of the government can share as much as 30 percent of the government's recovery, making qui tam enforcement highly attractive to an expanding population of whistleblowers and bounty hunters. In addition to the federal statute, twenty-two states now have state false claims laws with qui tam enforcement. These include some states with high mortgage default rates, such as California, Florida, and Nevada.
FCA liability has been found to attach to fraud allegations involving federally insured mortgages, business loans, and credit agreements where false claims were submitted to government entities, including HUD, the VA, FHA, and SBA. In such cases, liability has been based on direct submissions of false claims to the government and on false certifications that "cause" false claims to be submitted to the government. False certification allegations are of particular concern in these cases because they may be based on certifications of compliance with a variety of criteria underlying loan agreements, and the certifying entity does not have to submit a claim to the government.
However, false certification liability has been specifically limited in the area of federal loan insurance to instances when mortgagors default on their mortgages; it is only then that a "claim" against the government ripens. In the instance of NCM, the lender had allegedly falsely certified that 58 loans for which it was applying HUD insurance coverage were not more than 30 days past due. Had these loans defaulted, HUD insurance would have protected the lender against loss.
With the surging rate of foreclosures, federal insurers will be scrutinizing claims more closely than ever. Moreover, lured by rewards related to bring qui tam actions, many parties will be paying closer attention to potential fraud against the government, including in the form of false certifications regarding mortgages. To the extent states are using state funds to assist those who are defaulting on their mortgages, there is also the potential for state qui tam actions against those responsible.
Mortgage industry participants that deal with federally insured loans need to be aware of the scope and implications of the False Claims Act, which can have significant financial and reputation impacts on these businesses.
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