Preet Bharara, the U.S. Attorney for the Southern District of New York, Helen Kanovsky, General Counsel of the U.S. Department of Housing & Urban Development (HUD), and David A. Montoya, the Inspector General of HUD, have announced that the U.S. has filed, and simultaneously settled, a civil fraud lawsuit against CitiMortgage Inc., a subsidiary of Citibank. The complaint seeks damages and civil penalties under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) for over six years of misconduct in connection with CitiMortgage's participation in the Federal Housing Administration (FHA) Direct Endorsement Lender Program. In the settlement, CitiMortgage “admits, acknowledges, and accepts responsibility” for certain conduct alleged in the Complaint including, “[failing] to comply fully with all HUD-FHA requirements with respect to certain loans,” and “[submitting] to HUD-FHA certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not.”
CitiMortgage also admitted that, as a result of its conduct, HUD incurred losses when certain loans that should never have been endorsed defaulted and agreed to pay $158.3 million to the U.S. in damages under the False Claims Act. The settlement was approved by U.S. District Judge Victor Marrero.
“For far too long, lenders treated HUD’s insurance of their mortgages like they were playing with house money," said Bharara. "In fact, they were playing with other people’s money and other people’s homes. CitiMortgage is the latest in a series of cases this office has filed against lenders who flouted HUD requirements for making government-backed loans. We are pleased that, with today’s settlement, CitiMortgage has accepted responsibility for its conduct and agreed to pay damages in an amount that will significantly compensate HUD in this case for losses to the FHA insurance fund.”
According to the complaint, since 1981, CitiMortgage has been a participant in the Direct Endorsement Lender (DEL) program, a federal program administered by the Federal Housing Administration (FHA). As a Direct Endorsement Lender, CitiMortgage has the authority to originate, underwrite, and endorse mortgages for FHA insurance. If a Direct Endorsement Lender approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD for the costs associated with the defaulted loan, which HUD must then pay. Under the DEL program, neither the FHA nor HUD reviews a loan before it is endorsed for FHA insurance. Direct Endorsement Lenders are therefore required to follow program rules designed to ensure that they are properly underwriting and endorsing mortgages for FHA insurance and maintaining a quality control (QC) program that can prevent and correct any deficiencies in their underwriting. These requirements include maintaining a QC program that is independent of the lender’s business operations; conducting a full review of all loans that go into default within the first six payments, known as “early payment defaults;” and disclosing to HUD, within 60 days of initial discovery, all loans containing evidence of fraud or other serious underwriting problems. CitiMortgage failed to comply with these basic requirements.
The complaint alleges that CitiMortgage’s business units routinely interfered with, and exerted pressure on, QC personnel in an effort to improperly reduce the quantity and severity of defects reported by the QC unit. Among other things, the business units were instructed to apply “brute force” to pressure QC personnel to reduce or downgrade their findings of defects, and to challenge all adverse findings by the quality control unit in an effort to drive down the defect rates. These practices caused a systemic breakdown of CitiMortgage’s QC program.
CitiMortgage also failed to disclose to HUD loans containing fraud or other serious violations of HUD requirements and did not report a single fraudulent loan that it underwrote until July 2011, shortly after having received a subpoena from the U.S. Attorney’s Office. CitiMortgage did not review approximately 1,000 cases of potential fraud referred by its QC unit. Its failure to maintain a compliant QC program allowed widespread underwriting deficiencies to continue unabated.
As the complaint further alleges, CitiMortgage is also required to execute certifications for every mortgage loan that it endorses for FHA insurance. Since 2004, CitiMortgage has endorsed nearly 30,000 mortgages for FHA insurance. Although CitiMortgage certified that each of these loans was eligible for FHA insurance, it repeatedly submitted certifications that were knowingly or recklessly false. CitiMortgage failed to perform basic due diligence, failed to verify information in the loan file that bore directly on the borrower’s ability to make payments on the mortgage, and repeatedly endorsed mortgage loans that contained serious defects and departures from HUD’s underwriting standards and thus were not eligible for FHA insurance. As a result, since 2004, more than 30% of loans originated or underwritten by CitiMortgage have gone into default. CitiMortgage's default rate soared to more than 47 percent for loans originated in 2006 and 2007, resulting in foreclosures, evictions, and ultimately depressed real estate values, all to the detriment of the national housing market and the national economy. These defaulted loans have resulted in HUD having to pay millions of dollars in insurance claims.
By filing its complaint, the government joined a private whistleblower lawsuit that had been filed against CitiMortgage under the False Claims Act in August 2011. As part of the settlement, CitiMortgage admitted, acknowledged, and accepted responsibility for the following conduct:
►CitiMortgage failed to comply fully with all HUD-FHA requirements with respect to certain loans.
►CitiMortgage failed to conduct a full review of certain loans that it endorsed for FHA mortgage insurance pursuant to the DEL Program that experienced early payment defaults (became 60 days past due within the first six payments).
►CitiMortgage endorsed for FHA mortgage insurance pursuant to the DEL Program certain loans that did not meet underwriting requirements contained in HUD’s handbooks and mortgagee letters, and therefore were not eligible for FHA mortgage insurance under the DEL Program.
►As a result, CitiMortgage submitted to HUD-FHA certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not; FHA insured certain loans endorsed by CitiMortgage that were not eligible for FHA mortgage insurance and that FHA would not otherwise have insured; and HUD consequently incurred losses when those CitiMortgage-endorsed loans defaulted.
Pursuant to the settlement, CitiMortgage will pay the United States $158.3 million within 30 days of the settlement. The $158.3 million that CitiMortgage is paying to the U.S. to settle this lawsuit is in addition to the payments Citigroup has committed to make in connection with the $25 billion mortgage loan servicing settlement announced by the U.S. Department of Justice (DOJ). Under the servicing settlement, the Government retained its full authority to pursue civil fraud lawsuits, such as this one, for damages and penalties when a bank fails to satisfy underwriting standards on government-insured loans.