The U.S. Department of Justice (DOJ) has filed a complaint against Quicken Loans Inc. alleging that the non-bank mortgage lender improperly originated and underwrote mortgages insured by the Federal Housing Administration (FHA).
The DOJ's action was expected, as Quicken Loans earlier this week filed a pre-emptive lawsuit challenging the complaint.
Specifically, the DOJ alleges that Quicken Loans instituted and encouraged an underwriting process that led to employees disregarding FHA rules and falsely certifying compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages.
For example, the company allegedly had a ‘value appeal’ process in place whereby company managers would ask appraisers to sometimes inflate the value of homes when the value came in too low in order for the borrower to qualify for an FHA-backed loan.
Quicken also allegedly granted ‘management exceptions’ whereby managers would allow underwriters to break an FHA rule in order to approve a loan.
As explained in a DOJ press release, Quicken was a direct endorsement lender for the FHA and thus had the authority to originate, underwrite and certify mortgages for FHA insurance. As such, it was all the more incumbent on the company to ensure that its FHA-backed loans were being underwritten according to FHA guidelines.
The DOJ's complaint says the number of loans affected by Quicken's faulty underwriting is in the hundreds and that the loans in question were originated from September 2007 through December 2011.
The complaint further alleges that company management knew about the aforementioned underwriting practices but turned a blind eye on them. For example, Quicken's divisional vice president for underwriting, the second most senior executive in the company's operations department, wrote in an email discussing the value appeal process that ‘I don't think the media and any other mortgage company [Fannie Mae, FHA, Freddie Mac] would like the fact we have a team who is responsible to push back on appraisers questioning their appraised values,’ the DOJ says in its release.
In another email, the same executive wrote to a group of other company executives stating that 40% of the management exceptions on FHA's early payment defaults should not have been granted, adding: ‘we make some really dumb decisions when it comes to client service exceptions. Example, purchase loan we pulled new credit and the client stopped paying on almost everything and the scores fell by 100 points, we [still] closed it,’ the DOJ says in its release.
In yet another email discussing an FHA loan, the operations director, a senior level executive, explained that the loan was approved based on ‘bastard income,’ which he described as ‘trying to put some kind of income together that is plausible to the investor even though we know its creation comes from something evil and horrible.’
The DOJ's release goes on to provide other examples of how Quicken allegedly made mistakes when underwriting FHA loans, which in turn resulted in many of those borrowers defaulting, resulting in insurance claims in the millions of dollars.
Quicken is also accused of failing to have proper quality control processes in place in order to ensure such exceptions, and the resulting loan defects, did not occur.
In its pre-emptive suit filed Monday against the U.S. DOJ and the U.S. Department of Housing and Urban Development, Quicken Loans says it has been under investigation by the DOJ for nearly three years. The company further adds that the loan defects in question were uncovered as a result of a sampling of 55 of about 246,000 loans.
The defects included miscalculating a borrower's income by $17 and lending a borrower $26 too much, Quicken says in its suit filed in U.S. District Court for the Eastern District of Michigan.
In its filing, Quicken says it is being targeted as part of a ‘political agenda under which the DOJ is 'investigating' and pressuring large, high-profile lenders into paying nine- and 10-figure sums and publicly 'admitting' wrongdoing.’
‘After three years of struggling to understand the DOJ's position and methodology that would warrant the country's largest and highest quality FHA lender to make untrue admissions and pay an inexplicable penalty or face public legal action, it is time to ask the court to intervene,’ says Bill Emerson, CEO of Quicken Loans, in a statement earlier this week. ‘No threat, including high-profile senseless lawsuits from powerful federal officials, will deter our company and its leadership from doing the right thing. We will stand in defense of our impeccable reputation established by thousands of hard-working ethical team members over our 30-year history.’
In a statement issued Thursday, Quicken Loans points out that it is the FHA's largest lender and that, ‘by its own objective public reporting, FHA ranks Quicken Loans the highest quality (lowest default rate) lender of any large FHA originator in the U.S.’
‘Today's DOJ filing is simply the continuation of the abusive actions and a make-good on the DOJ's threats since their witch-hunt began three years ago,’ Quicken says in its statement, adding that the complaint ‘is riddled with inaccurate and twisted conclusions from fragments of a handful of emails cherry-picked from 85,000 documents that the DOJ subpoenaed.’
‘Worse than that, the DOJ appears to be basing their entire case on a handful of out-of-context email conversations skimmed from the communication between Quicken Loans employees,’ the company says. ‘These conversations relate to a miniscule number of loans out of the nearly 250,000 FHA mortgages the company has closed over the past seven years.’
The company goes on to say that the lawsuit only hurts the ‘millions of middle class American families who rely on FHA financing to reach their goal of affordable home ownership.’
‘For now, Quicken Loans plans to continue offering FHA mortgages to our clients, but like nearly every lender in the country, we will be evaluating the prudence of our continued participation in the FHA program,’ the company says, adding that it is looking forward to settling the matter in court.