False Claims Act Risk For Lenders: Will P3 Program Risk Compete With Federally Insured Mortgage Programs?


Financial institutions have settled several False Claims Act (FCA) cases involving allegations that they failed to comply with Federal Housing Administration (FHA) rules regulating federally insured mortgage programs in 2020. The role of Financial institutions in the distribution of more than $ 522 billion in Paycheck Protection Program (PPP) loans and an additional $ 3.7 billion in Main Street Lending Program (MSLP) loans created a new FCA risk for lenders.

Recent Developments in FHA Enforcement

Until recently, FCA enforcement actions were the primary tool used by the United States Department of Justice (DOJ) to punish lenders who failed to comply with the rules and standards governing mortgage loan programs. of the FHA. From 2009 to 2016 alone, the Justice Department recovered more than $ 7 billion in FCA settlements and judgments relating to housing fraud and financial fraud.1 This risk, along with a lack of transparency in program standards, has acted as a deterrent to lenders from issuing FHA-insured loans.2 So in October 2019, in an effort to encourage lenders to re-participate in FHA loan programs, the Department of Justice and the Department of Housing and Urban Development (HUD) issued a Memorandum of Understanding. describing a new common approach to the application of FCA.3 The MoU announced that the FHA loan requirements would be enforced primarily through the HUD administrative procedure process, but warned that the DOJ and HUD would continue to coordinate to determine whether the facts and circumstances certain defaults on FHA insured mortgages warranted application by the FCA. The MOU also mandated new standards for when the HUD can refer an issue to the FCA Enforcement and sets out guidelines on how the HUD and DOJ will cooperate during the investigative, FCA litigation and settlement issues.

Following the issuance of the MOU, DOJ settled a number of important CFA issues that were pending prior to October 2019.4 However, in accordance with the MoU’s new approach to FCA enforcement, the DOJ did not announce the filing of a new FCA lawsuit against a financial institution for the granting of loans insured by the FCA. FHA unqualified only in October 2019. In September 2020, the government initiated civil action against Nutter. Home Loans f / k / a James B. Nutter & Co. for allegedly tampering with certifications and using unqualified underwriters to approve reverse mortgages under the FHA Home Equity Conversion Mortgage Program.5 We expect the DOJ’s more reserved approach to using the FCA to enforce HUD regulations to continue in 2021. However, the change in political direction at DOJ and FHA could bring changes to the protocol. ‘agreement and shape application priorities.

New FCA risk posed by Paycheck Protection Program and Main Street Loan Program

The Coronavirus Aid, Relief and Economic Security Act (CARES Act), which aimed to address the troubling economic impact of the COVID-19 pandemic, was enacted on March 27, 2020 and established the PPP and MSLP programs.6

Under the PPP, small businesses can obtain low-interest loans – which may be eligible for a discount – to cover salary costs, rent, and other overhead costs. The Small Business Administration (SBA) is responsible for administering the program: authorizing lenders to distribute PPP loans and reimbursing lenders for amounts canceled. As of August 8, 2020, when the program closed, 5,460 lenders had participated in the program, issuing 5,212,128 loans, for a total of $ 525,012,124.7 The MSLP which, on the other hand, is administered by the Federal Reserve, aims to make loans accessible to small and medium-sized for-profit businesses and non-profit organizations. The MSLP, which does not provide for loan cancellations, has been much less popular than the PPP and has distributed 400 loans totaling $ 3.7 billion as of October 30, 2020.8

The extent of the FCA risk that accompanies participation in PPP and MSLP is not yet clear. As noted above, prior to the issuance of the MOU between the DOJ and the HUD, the DOJ had long used the FCA as a means of punishing lenders who violate the requirements of the FHA program.9 In the absence of similar memoranda of understanding between the DOJ and the SBA and the DOJ and the Federal Reserve, it is not clear whether the DOJ will aggressively employ the FCA against lenders who violate the rules governing PPP and MSLP. . DOJ’s commitment to take enforcement action against COVID-19 fraudsters has been clear from the onset of the pandemic, when DOJ took steps to collect and share tips with other federal agencies, a appointed a coronavirus fraud coordinator in each judicial district and appointed numerous state-wide and region-wide COVID-19 fraud task forces.ten However, there are other indications that FCA enforcement against financial institutions related to participation in PPP and MSLP may not compete with the level of FCA enforcement prior to MOU in programs. federally insured mortgages.

First, the SBA’s PPP rules allow lenders to rely heavily on statements and certifications from borrowers at the initial application and loan cancellation stages. The SBA has indicated that it will “release from any liability any lender who relies on such borrower documents and a certificate from a borrower.”11 Lenders must, however, confirm that borrowers have submitted the correct documents. It is therefore possible that lenders face a significant FCA risk if they ignore borrower fraud red flags, do not collect the required documents or do not comply with anti-money laundering rules, that the PPP rules specify that all lenders must have in place. Lenders under the MSLP should conduct an assessment of the financial condition of a potential borrower and apply their own underwriting standards. However, the Federal Reserve’s FAQ states that lenders can rely on certifications of eligibility and compliance with the borrower’s program requirements, and are not expected to independently verify certifications or monitor ongoing compliance, but must notify the Federal Reserve Bank of Boston if they become aware that a borrower “has made a material misstatement or has otherwise breached a covenant during the term” of an MSLP loan.12

Looking forward

The DOJ-HUD MoU appears to have slowed the flow of FCA cases in the mortgage industry, but the extent of the new FCA risk that financial institutions face as a result of participating in PPP and MSLP programs is still uncertain. not clear. The agency rules governing these programs do not directly relate to DOJ enforcement policies. In the absence of a memorandum of understanding or other clear DOJ policy statement, we will need to continue to monitor DOJ actions in 2021 to determine to what extent the DOJ will use the FCA as a vehicle to control loans. PPP and MSLP.

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