Branch, Banking Trust Company (known more commonly as BBT) will pay $83 million to settle allegations brought by the Department of Justice, which accused the lender of violating the False Claims Act by falsely certifying that it complied with “critical underwriting and quality control requirements” on mortgages insured by the Federal Housing Administration.
BBT becomes the latest in a long string of lenders targeted by the DOJ for False Claims Act violations. The False Claims is designed to prosecute vendors the government feels fraudulently represented themselves while doing business with the nation.
In recent months, Wells Fargo agreed to a $1.2 billion settlement, while Franklin American settled with the government for $70 million, Walter Investment settled for $29.6 million, First Tennessee, the regional bank for First Horizon National, settled for $212.5 million, MT Bank settled for $64 million, Freedom Mortgage agreed to pay $113 million, and Regions Bank settled for $52.4 million– all for False Claim Act violations.
In BBT’s case, the DOJ said that over an extended period of time, BBT failed to comply with key Department of Housing and Urban Development underwriting and quality control requirements.
As with many of the other lenders, BBT acted as a “direct endorsement lender” in the FHA insurance program from January 2006 to January 2012. As a direct endorsement lender, the lender has the authority to originate, underwrite and endorse mortgages for FHA insurance without prior approval from the FHA.
Under the direct endorsement lender program, the FHA does not review a loan for compliance with FHA requirements before it is endorsed for FHA insurance.
And according to the DOJ, BBT did not underwrite loans to the FHA and HUD standard.
“The FHA program depends on Direct Endorsement Lenders endorsing only eligible loans for FHA mortgage insurance, and complying with HUD’s quality control requirements,” said Principal Deputy Assistant Attorney General Benjamin Mizer, head of the Justice Department’s Civil Division.
“Lenders like BBT that participate in the FHA program must make adherence to the FHA program rules a priority,” Mizer added. “The Department has and will continue to hold accountable those lenders that prioritize profits over program compliance.”
According to DOJ, the settlement with BBT resolves allegations that the lender failed to comply with FHA origination, underwriting, and QC requirements.
As part of the settlement, BBT admitted to the following facts, per the DOJ:
- BBT significantly increased its loan volume between 2006 and 2009 – more than doubling all loan originations, while increasing the number of FHA insured loans six fold. This increase in volume was accompanied by an increase in the number of loans internally rated “Serious-Marketability” – the most significant BBT QC defect rating, and a defect that rendered a loan ineligible for FHA insurance. Between 2007 and 2011, the percentage of loans underwritten by BBT each year that were rated Serious-Marketability by its QC department always exceeded 30%, and exceeded as much as 50% in 2010 and 2011. BBT nevertheless endorsed many of these loans for FHA insurance and, if they defaulted, sought payment from HUD for the insured loans.
- The monthly reviews and reports that BBT’s QC department shared with management alerted BBT to deficiencies in many of its FHA loans. A 2010 BBT internal memorandum stated that “increased volume of FHA requests and changes to regulatory requirements have resulted in origination, processing and underwriting errors. Some employees are not applying current and accurate FHA guidelines.” A proposal to improve BBT’s underwriting of FHA loans with additional training as well as a testing and certification process for underwriters was prepared in 2010, but neither recommendation was implemented until after 2014.
- Additionally, between 2006 and 2014, BBT’s QC process did not satisfy certain FHA requirements. Although loan volume more than doubled from 2006 to 2009, the number of QC employees remained the same. The QC department requested additional employees in 2009, yet new employees were not added until 2013. Because BBT’s QC department did not have adequate staff, it instituted a cap on the number of loans it reviewed. As a result, between 2009 and 2014, the QC department did not always review the number of loans necessary to comply with HUD’s loan review sampling requirements. Additionally, BBT did not perform reviews of its lender branch offices, as required by HUD, before beginning the reviews again in late 2014.
According to the DOJ, BBT’s actions caused the FHA to insure hundreds of loans that were not eligible for insurance and, as a result, the FHA suffered “substantial losses” when it paid insurance claims on those loans.
“Lenders are required to apply FHA’s standards to each mortgage loan we insure and to honestly certify to us that they’ve done so,” said Associate General Counsel Dane Narode for HUD’s Program Enforcement. “Today’s settlement reminds all lenders that sound underwriting is the bedrock of a healthy housing market and the financial futures of homeowners we support.”
In a statement, BBT said that it “fully cooperated” with the investigation and settled without any admission of liability to “avoid the cost and uncertainty of potential litigation.”
BBT said that it previously disclosed the investigation, potential claims and estimated potential net exposure to losses, adding that the settlement will have no negative effect on BBT’s financial condition or results of operations as a result of previous accruals totaling $85 million.
BBT also said that in a “related matter,” the company is pursuing a potential recovery of approximately $70 million.
“BBT remains committed to providing a high-quality mortgage experience along with exceptional service to help our clients achieve economic success and financial security,” the company said in a statement.