Regions Bank settles False Claims Act suit for $52.4 million

by Ben Vernia | September 13th, 2016

On September 13, the Department of Justice announced that Regions Bank had agreed to settle civil allegations that, as a Direct Endorsement Lender in the Federal Housing Administration’s insurance program, it knowingly originated and underwrote mortgages that failed to meet FHA requirements. According to DOJ’s press release:

Regions Bank (Regions) has agreed to pay $52.4 million to the United States to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements, the Department of Justice announced today.  Regions is headquartered in Birmingham, Alabama.

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Since at least January 2006, Regions has participated as a direct endorsement lender (DEL) in the FHA insurance program.  A DEL has 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 HUD, FHA’s parent agency, for the losses resulting from the defaulted loan.  Under the DEL program, the FHA does not review a loan before it is endorsed for FHA insurance but instead relies on the efforts of the DEL to verify compliance.  DELs are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance.

As part of the settlement announced today, Regions admitted that between Jan. 1, 2006, and Dec. 31, 2011, it certified for FHA insurance certain mortgage loans that did not meet certain HUD underwriting requirements regarding borrower creditworthiness.  In addition, between Jan. 1, 2006 and Dec. 31, 2011, Regions did not maintain a quality control (QC) program that fully complied with the requirements established by HUD.  Regions’ QC Department did not consistently review an adequate sample of FHA-insured loans.  Moreover, to the extent that Regions’ QC Department identified deficiencies during the course of its loan review, Regions engaged in a pattern of “curing” QC findings by obtaining documentation that was not available to the underwriter at the time the loan was approved.  As a result, the defect rate reported to senior management was understated.  Regions also failed to review Early Payment Default (EPD) loans in accordance with HUD guidelines.  Regions was required to review all loans that became 60 days past due within the first six months.  Nevertheless, at certain times prior to 2011, as part of its EPD review, Regions reviewed only those loans that became 90 days past due.

Additionally, Regions did not fully adhere to HUD’s self-reporting requirements.  During the period between Jan. 1, 2006, and Dec. 31, 2011, the HUD Handbook required lenders to report “findings of fraud” or “other serious violations” or “serious material deficiencies” to HUD.  Although Regions’ monthly QC reviews identified numerous FHA-insured loans for that period that contained material deficiencies, Regions did not begin self-reporting these materially deficient loans to HUD until 2011.

As a result of Regions’ conduct and omissions, HUD insured hundreds of loans approved by Regions that were not eligible for FHA mortgage insurance under the DEL program and that HUD would not otherwise have insured.  HUD subsequently incurred substantial losses when it paid insurance claims on those loans.

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