Insured Loan Programs
Through various programs, the United States government insures loans provided for specific purposes such as small business expenses, mortgages, and education costs. In the past, disputes involving loans backed by the government have been resolved through negotiations between big banks and the government, usually involving the government’s repurchase demands for non-complying loans. Today, that paradigm has given way to prosecution under the False Claims Act.
The False Claims Act prohibits false claims made to obtain federally guaranteed loans. As such, false claims made to federal loan programs, such as the Small Business Association (“SBA”) or the Federal Housing Authority (“FHA”) may violate the False Claims Act. The False Claims Act has been enforced against recipients, intermediaries, and participating lenders of federal loans for falsifying loan documents, inflating reported program costs, or otherwise disregarding the applicable regulations and loan requirements under federal programs.
The Department of Justice (“DOJ”) targets banks and other financial institutions of all sizes as well as officers and directors of those institutions. Institutions that lack effective FCA compliance programs, such as auditing policies and procedures, reporting up a chain of command, and conducting periodic reviews, may be especially vulnerable. Since qui tam actions are filed under seal, financial institutions face considerable exposure if they commit fraud involving insured loan programs.
In recent years, the federal government has increased its support for insured loan programs, largely in response to unstable economic conditions. Increased funding and new programs addressed a wide range of interests including energy efficiency, small businesses and start-ups, disaster relief, education, housing, and veterans issues. Fraudulent actions and false statements made in connection with such loan programs implicate the core purpose of the False Claims Act to protect the integrity of government funds by encouraging individuals with knowledge of fraudulent activity to come forward and seek recovery of government funds lost to fraud under the whistleblower, or qui tam, provisions of the False Claims Act.
Aside from banks, for-profit colleges are among the most notorious FCA violators. In 2010, an undercover investigation by the Government Accountability Office (“GAO”) concluded that among fifteen for-profit colleges around the country, four of them encouraged applicants to falsifying loan documents in order to qualify for federal student aid. Many of these for-profit colleges have also illegally paid bonuses or commissions to admission counselors and recruiters based on the number of students admitted, a practice which is prohibited under the Higher Education Act.
In 2012, Deutsche Bank agreed to pay the federal government more than $200 million to settle allegations of FCA allegations that cost taxpayers approximately $368 million. In that case, the DOJ alleged that Deutsche Bank’s wholly-owned subsidiary, MortgageIT, falsely certified certain mortgage loans as qualifying for Department of Housing and Urban Development's (“HUD”) Federal Housing Administration (“FHA”) insurance. The government contended that FHA paid over $368 million on insurance claims for more than 3,200 mortgages endorsed by MortgageIT. During the investigation, Deutsche Bank and MortgageIT admitted, acknowledged, and accepted responsibility that they failed to conform to applicable HUD and FHA regulations, that they submitted false certifications to HUD claiming that certain loans were eligible to receive FHA mortgage insurance, and that HUD consequently incurred significant losses when some of the MortgageIT loans defaulted.
In 2009, the University of Phoenix agreed to pay $67.5 million to settle claims that it violated the FCA by accepting federal financial student aid while simultaneously paying admission counselors based on the number of students recruited. The two whistleblowers, former employers of the university, received an award of $19 million.