On July 3, 2017, the Department of Justice (DOJ) announced that Prospect Mortgage will pay approximately $4,157,000 to settle allegations the company committed civil mortgage fraud by underwriting mortgages that did not comply with Federal Housing Administration (FHA) standards.
According to the DOJ, the California-based mortgage lender engaged in fraud carried out against the Direct Endorsement Lender Program, which is administered by the Federal Housing Administration and US Department of Housing and Urban Development.
The program allows mortgage lenders the authority to originate, underwrite and endorse mortgages for FHA insurance. If a borrower defaults on their loan, the institution holding the loan can submit a claim to the government to recover its losses. Under the program, the FHA does not review a loan for compliance with FHA requirements before it is endorsed for FHA insurance.
According to the DOJ, two of Prospect’s branches neglected to underwrite loans to the FHA standard.
Prospect acknowledged that its branches in Georgia and North Carolina endorsed for FHA insurance a number of FHA loans that were not originated in compliance with FHA requirements. Furthermore, the branches falsely certified that the noncompliant loans were underwritten in accordance with FHA requirements.
According to the DOJ, its investigation showed that the “majority” of the audited loans from the two branches did not meet HUD underwriting requirements.
The settlement makes Prospect Mortgage the latest lender fined by the government over violations of the False Claims Act, which is designed to prosecute vendors the government believes fraudulently represented themselves while doing business with the nation. The DOJ has made a habit of using the False Claims Act to extract settlements from lenders for supposedly misrepresenting the quality of loans to the Federal Housing Administration.