DOJ sues Deutsche Bank, subsidiary, under False Claims Act for mortgage fraud

by Ben Vernia | May 3rd, 2011

On May 3, the Department of Justice announced that it was filing suit in the Southern District of New York for fraud in connection with mortgages generated and sold subject to FHA insurance. According to DOJ’s press release:

The United States has filed a civil mortgage fraud lawsuit against Deutsche Bank AG and its wholly owned subsidiary, MortgageIT Inc. The government’s complaint seeks damages and civil penalties under the False Claims Act for repeated false certifications made to the U.S. Department of Housing and Urban Development (HUD) in connection with the residential mortgage origination and sponsorship practices of MortgageIT. To date, the Federal Housing Administration (FHA) has paid insurance claims on more than 3,100 mortgages, totaling $386 million, for mortgages endorsed by MortgageIT.

Today’s announcement was made by Preet Bharara, U.S. Attorney for the Southern District of New York; Tony West, Assistant Attorney General for the Justice Department’s Civil Division; Helen Kanovsky, General Counsel of HUD; and Michael P. Stephens, Acting Inspector General of HUD.

According to the government’s complaint filed today in Manhattan federal court: Between 1999 and 2009, MortgageIT was an approved direct endorsement lender, and endorsed more than 39,000 mortgages for FHA insurance, totaling more than $5 billion in underlying principal obligations. These mortgages were highly marketable for resale to investors because they were insured by the full faith and credit of the United States. MortgageIT and Deutsche Bank, which acquired MortgageIT in January 2007, made substantial profits through the resale of these endorsed FHA-insured mortgages.

According to the complaint, MortgageIT repeatedly made false certifications to HUD to obtain approval of mortgages that MortgageIT underwriters wrongfully endorsed for FHA insurance. These mortgages were not eligible for FHA insurance under HUD rules. Notwithstanding the mortgages’ ineligibility, underwriters at MortgageIT endorsed the mortgages by falsely certifying that they had conducted the due diligence required by HUD rules when, in fact, they had not. By endorsing ineligible mortgages and falsely certifying compliance with HUD rules, MortgageIT wrongfully obtained approval of these ineligible mortgages for FHA insurance, thereby putting millions of FHA dollars at risk.

In addition, according to the complaint, MortgageIT and Deutsche Bank never implemented the quality control procedures required of direct endorsement lenders, but falsely certified to HUD that MortgageIT had the required procedures in place. On various occasions when HUD discovered evidence that MortgageIT was violating the quality control requirement, MortgageIT falsely stated the failures had been corrected.

The government’s complaint seeks treble damages and penalties under the False Claims Act for the insurance claims already paid by HUD for mortgages wrongfully endorsed by MortgageIT through the false statements of Deutsche Bank and MortgageIT. In addition, the United States seeks compensatory and punitive damages under the common law theories of breach of fiduciary duty, gross negligence, negligence and indemnification for the insurance claims that HUD expects to pay in the future for mortgages wrongfully endorsed by MortgageIT as a result of Deutsche Bank’s and MortgageIT’s false statements.

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