A 2011 case that was filed in Manhattan’s U.S. District Court led to a five-week trial in Houston and a unanimous jury decision against one of the largest FHA home loan originators.
Allied Home Mortgage Capital Corporation and Jim C. Hodge, its president and chief executive officer, were charged and convicted of violations of both the federal False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 Act (FIRREA).
As a result of the convictions, the federal government will receive nearly $93 million from Allied Home Mortgage Capital and an additional $7.3 million from Hodge. Under the FIRREA, additional penalties will be assessed at a later time for each fraudulent violation ranging from a low of $5,500 to $11,000.
The additional penalties could be substantial. Over nearly a decade, Allied Capital originated FHA-insured home loans. Of these loans, at least 1,192 were actually ineligible for FHA insurance under HUD guidelines. When the loans defaulted, HUD incurred losses of $85,612,643.
According to an investigative article by ProPublica, Allied had the highest serious delinquency rate among the top 20 FHA loan originators from June 2008 to May 2010. During these years, nine states issued sanctions against Allied for its use of unlicensed brokers and practices of misleading borrowers.
“For years, Jim Hodge and Allied lied to HUD in order to fraudulently reap profits from the FHA mortgage insurance program”, said Manhattan U.S. Attorney Preet Bharara. “After a monthlong public trial where all their misconduct was exposed, a jury has held Mr. Hodge and Allied responsible for their lives and has made them pay for losses the United States suffered on loans that would never have been insured by HUD absent their lies.”
FHA guidelines ensure that its loans can only be made to consumers who can afford to repay them. To protect the ongoing availability of FHA mortgage insurance funds, HUD is responsible for accurately assessing the risk of default on loans it insures. HUD relies on assurances from lenders that they and the loans they submit fully comply with program requirements.
Allied operated as many as 600 branch offices, but only a few locations had quality control employees to review loans. Allied Capital — with Hodge’s knowledge and approval — originated loans at more than 100 “shadow” branch offices that did not have the required authorization. The scheme included submitting loans from those branches to HUD using ID numbers of authorized sites.
When HUD auditors asked for quality control reports, Allied provided falsified information and Hodge directed employees to falsify quality control reports. Each year, both the firm and Hodge falsely certified to HUD that the business was in compliance with required quality control standards.
For Kenneth Magidson, Houston U.S. Attorney, the case represents an example of how fraudulent acts are aggressively pursued even when multiple U.S. Justice Offices are involved.
“Working together, we ensured a successful outcome following a lengthy trial and investigation against Allied and its CEO,” Magidson said. “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.”
While the federal government and HUD can and should prosecute unlawful activities, the consumers who were snookered into these fraudulent loans deserve to be made whole.
For many consumers, a home represents the single largest investment of a lifetime. Its loss leads to several financial harms that affected consumers will suffer. Foreclosures dramatically depress credit scores and, as credit scores drop, the likelihood of new credit costing more is a near certainty. Some affected consumers will wind up paying a cumulative cost for receiving one predatory loan.
The Allied convictions also are a reminder of how the Justice Department can use its authority to take action when mortgage lending rules and laws are violated. The future of this vital federal office should be a focal point of the upcoming confirmation hearings. Senate Judiciary committee members must acknowledge that the journey towards fair housing has yet to reach its destination.
Charlene Crowell is communications deputy director with the Center for Responsible Lending. She can be reached at firstname.lastname@example.org.