If you are in the mortgage business, chances are you're now used to banks and companies you know being accused of mortgage-related fraud.
But you may not appreciate what even an honest, well-run company can face in mortgage fraud litigation when the federal government is the plaintiff. When the government sues for fraud, its primary weapon is a powerful Civil War-era statute called the False Claims Act. And it's not just for defense contractors or Medicare providers anymore. Right now, signs are that this weapon is going to be turned on the mortgage industry.
Among other things, the FCA allows the government to recover three times the amount it paid to anyone who submitted a false claim for government funds, or made a false statement in support of a false claim, plus up to $11,000 for every false claim or statement. Private whistle-blowers (called "relators") can also bring so-called qui tam FCA suits on the government's behalf, and take a statutory share of the government's recovery if they win — essentially, a bounty. Plus, you pay their attorneys' fees as well as your own.
The statute was enacted to combat war profiteering, and as one might expect, this past decade of war has seen a lot of FCA litigation against defense contractors. The health care and pharmaceutical industries have been a very significant recent target as well, accounting for $2.5 billion in recoveries last year — over 80% of total civil fraud recoveries. Since the statute's major overhaul in 1986, the government has recovered almost $29 billion.
The mortgage industry may be next. The government won multimillion-dollar settlements or trial judgments against RBC Mortgage Co. and National City Mortgage Inc. in 2008, Beazer Homes USA in 2009 and Anchor Mortgage Corp. in 2010. Other cases are pending, but the current number of reported cases doesn't tell the whole story. That's because qui tam suits are filed under seal and not immediately served on the defendant, sometimes remaining off the public docket for years while the Justice Department investigates the private relator's claims and decides whether to "intervene" and take over the lawsuit.
Other recent signals include a January 2011 statement to Congress by the Justice Department, touting a number of pro-plaintiff revisions to the FCA that were enacted during the recession, and identifying "mortgage fraud" as a "top priority" in the agency's effort to "recapture billions of taxpayer dollars lost to fraud." Interagency task forces have formed, too, with ominous names like "Operation Malicious Mortgage" and the "Financial Fraud Enforcement Task Force."
Go online, and you'll also quickly find plaintiffs' law firms encouraging sophisticated industry professionals — some no doubt displaced by the economic downturn — to try to earn substantial bounties as whistle-blowers against their current or former employers.
In oversimple terms, FCA claims require a falsehood that leads or could lead the government to pay money. So, in the financial sector, recipients of Troubled Asset Relief Program funds for a time looked like obvious FCA targets, though that trend so far hasn't materialized.
The more likely FCA defendants now seem to be those connected with the sale of Federal Housing Administration-insured mortgages that have defaulted, particularly if there is some indication that the borrower's ability to pay or the value of the property was overstated to qualify for federal insurance, or if false certifications were made about business referral fees or gifts of down-payment funds. Similar allegations could surface when loans were sold to or securitized by Freddie Mac and Fannie Mae, entities that may not have received any direct federal funding, but are going to cost hundreds of billions of public bailout money just the same.
The industry exposure is potentially enormous, especially when you consider that each bad mortgage and every "false" document associated with it could carry an $11,000 penalty, over and above whatever actual damages it caused. These penalties can add up quickly.
What to do? Be alert to government subpoenas, "civil investigative demands," or other information requests, even if they are informal. These are signs that the Justice Department or another agency may be investigating a sealed FCA case. Pay attention to employees who are critical of the company's business practices, too; they may be relators. But get some legal advice before you take any action. The FCA and similar state laws strictly prohibit any retaliation.
If you see signs like these, get legal help to evaluate the situation and marshal your defenses. Maybe the concerns are confined to low-level employees who arguably acted to benefit themselves personally, and not the company. Perhaps the whistle-blower simply does not understand what the company did or did not do. With appraisers, developers, the borrowers themselves and all sorts of other players potentially responsible for aspects of each transaction, maybe the fault lies elsewhere. Or maybe there's no clear connection between a given false statement and any damage the government suffered upon default. Whatever the case, the next order of business is to try to persuade the government to keep its almost limitless litigation resources on the sideline. The Justice Department's nonintervention sometimes ends the case, and almost always reduces the exposure — FCA cases where the relator proceeds alone account for only a small fraction of total FCA recoveries. For that reason alone, your defense should come together long before you are served with a complaint and need to make your case to a judge or jury.
