Allied Home Mortgage and CEO Face Statutory Trebling of Damages and Penalties for Fraudulent Conduct
Preet Bharara, the United States Attorney for the Southern District of New York, Kenneth Magidson, the United States Attorney for the Southern District of Texas, Julián Castro, Secretary of the United States Department of Housing and Urban Development (“HUD”), and David A. Montoya, Inspector General of HUD (“HUD-OIG”), announced today that a unanimous jury has found the entities formerly known as ALLIED HOME MORTGAGE CAPITAL CORPORATION (“ALLIED CAPITAL”) and ALLIED HOME MORTGAGE CORPORATION (“ALLIED CORPORATION”) (collectively, “ALLIED”), as well as ALLIED’s president and chief executive officer JIM C. HODGE (“HODGE”), liable for violating the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) in connection with over a decade of fraudulent misconduct related to ALLIED’s participation in the Federal Housing Administration (“FHA”) mortgage insurance program. The jury awarded the United States a total of $92,982,775 in damages, including $7,370,132 against HODGE. Pursuant to the FCA, damages in this case are subject to mandatory trebling. In addition, the FCA provides for a penalty of $5,500 to $11,000 for each violation. Separately, FIRREA provides for a penalty for each statutory violation. The Court will determine the amount of the penalties at a later date. The verdict was returned yesterday following a five-week trial in Houston before United States District Judge George C. Hanks, Jr., of the United States District Court for the Southern District of Texas.
Manhattan U.S. Attorney Preet Bharara said: “For years, Jim Hodge and Allied lied to HUD in order to fraudulently reap profits from the FHA mortgage insurance program. After a month-long public trial where all their misconduct was exposed, a jury has held Mr. Hodge and Allied responsible for their lies and has made them pay for losses the United States suffered on loans that would never have been insured by HUD absent their lies. This case represents yet another recovery by the United States – this time after a trial – for fraud perpetrated against HUD by participants in the Direct Endorsement Lender program.”
Houston U.S. Attorney Kenneth Magidson said: “The excellent coordination between personnel from our two U.S. Attorney’s Offices and with HUD investigators has resulted in a tremendous win for the government. Working together, we ensured a successful outcome following a lengthy trial and investigation against Allied and its CEO. We will continue to apply our resources whenever and wherever we can to ensure those that perpetuate such egregious fraud against the United States are held accountable for their actions.”
HUD Inspector General David A. Montoya said: “The heart of our mission is to weed out actors such as these that are intent on defrauding federal housing programs. This should serve as a notice to all those determined to engage in illegal schemes such as these that they are not beyond the reach of the federal law enforcement community.”
According to the evidence presented at trial:
FHA mortgage insurance makes home ownership possible for millions of American families by protecting lenders against mortgage defaults. FHA mortgage insurance also makes mortgage loans valuable in the resale market. To protect the continued availability of FHA mortgage insurance funds, HUD must accurately assess the risk of default on the loans it insures. To accomplish this task, HUD relies on assurances by lenders that they, and the loans they submit for insurance, comply with program requirements.
As a HUD-approved loan correspondent, ALLIED CAPITAL originated FHA-insured mortgage loans. ALLIED CAPITAL was required to seek HUD approval for each branch office from which it originated FHA loans. Instead of complying with this requirement, however, ALLIED CAPITAL, with HODGE’s knowledge and approval, operated over one hundred “shadow” branch offices that originated FHA loans without HUD authorization. As part of its scheme to deceive HUD, ALLIED CAPITAL submitted loans originated by those branches to HUD using the ID numbers of approved branches. ALLIED CAPITAL’s undisclosed shadow branches were not subject to HUD oversight and their default rates were disguised by the default rates of branches whose IDs they were using. This fraudulent misconduct resulted in $7,370,132 in losses to HUD when certain of those loans defaulted.
ALLIED CORPORATION, as a participant in HUD’s Direct Endorsement Lender program, underwrote FHA-insured mortgage loans. For each FHA-insured mortgage loan, ALLIED CORPORATION was required to certify to HUD that the loan was underwritten according to HUD’s guidelines. Those guidelines ensure that FHA-insured loans are made only to borrowers who can repay them, thereby seeking to avoid losses to HUD’s FHA insurance fund and foreclosures on borrowers’ homes. ALLIED CORPORATION, however, recklessly underwrote and certified at least 1,192 loans for FHA insurance that were ineligible for insurance under HUD’s guidelines. This fraudulent misconduct resulted in losses to HUD of $85,612,643 when those loans defaulted.
To compound matters, ALLIED and HODGE operated a dysfunctional quality control program and lied to HUD about it. HUD requires lenders participating in its programs to timely perform quality control audits of their FHA loans to identify and correct systemic problems, including underwriting problems. ALLIED, however, employed only a handful of quality control employees to review loans from as many as 600 branch offices. Many of those employees were unqualified to audit FHA-insured loans. In addition, HODGE personally directed his employees to falsify quality control reports to give the impression that required reviews had been performed, when in fact they had not. When HUD auditors later asked for those quality control reports, ALLIED provided the falsified reports. ALLIED and HODGE also falsely certified to HUD on an annual basis that ALLIED was in compliance with HUD’s quality control requirements.
The United States filed a complaint-in-intervention in this lawsuit in November 2011. At that time, the action was pending as a qui tam whistleblower lawsuit in the United States District Court for the Southern District of New York. In September 2012, the action was transferred to the United States District Court for the Southern District of Texas.
Mr. Bharara and Mr. Magidson thanked HUD’s Office of General Counsel and HUD-OIG for their extraordinary assistance with this case.
