On September 28, the U.S. government filed a lawsuit alleging that a purported charitable “counseling fund,” five mortgage lenders, and their principals defrauded the United States and various banks insured by the Federal Deposit Insurance Corporation in actions that resulted in millions of dollars of mortgage losses as well as the payment of over $5.6 million in false claims by the federal government.

The government alleges that the mortgage lenders participated in a federal program sponsored by HUD that allowed the lenders to make mortgage loans that are insured by the Federal Housing Administration in the event of default.  The defendant mortgage lenders then allegedly sold those loans to federally-insured banks.  The government further alleges that the mortgage lenders’ loans went into “early payment default” at more than twice the average default rate of other lenders, and that the lenders conspired with the charitable “counseling fund” to conceal their high default rates from HUD to avoid removal from HUD’s program.

The government claims that the mortgage lenders funneled their money through the charitable “counseling fund” to make defaulting borrowers’ monthly payments to the banks in order to conceal the defaults from HUD and the banks.  When the loans had aged beyond the bank’s contractual right to force repurchase, or past the period that HUD monitored for early payment defaults, the lenders would stop making payments, leaving the borrowers without any further support.

The complaint seeks treble damages and penalties under the False Claims Act, 31 U.S.C. § 3729 et seq.; fines under the Financial Institutions Recovery, Reform and Enforcement Act, 12 U.S.C. § 1833a; and damages and indemnification under the common law theories of gross negligence, breach of fiduciary duty, and unjust enrichment.  The lawsuit is pending in the United States District Court for the Eastern District of New York.