Quicken Loans’ Small Victory Might Not Be That Small

Earlier this month, a U.S. District judge ruled that the Department of Justice (DOJ) can pursue its case against Detroit-based Quicken Loans but narrowed the number of loans that can be included in the case.

In the March 9 decision, Judge Mark Goldsmith of the U.S. District Court for the Eastern District of Michigan said the statute of limitations narrowed the time frame of the loans to April 23, 2009, and after.

The DOJ, in United States v. Quicken Loans, claims that Quicken failed to properly underwrite mortgages backed by the Federal Housing Administration (FHA) from Sept. 1, 2007, to Dec. 31, 2011.

According to the Detroit News, the judge also threw out claims that Quicken Loans had manipulated data during the loan process.

Quicken Loans issued a statement indicating the company is “pleased” that the DOJ is overreaching and that the lender is eager and “more than prepared” to prove its case to a jury. The company has maintained that it is the largest FHA mortgage lender and that it has the lowest default rate among FHA lenders originating more than nominal volumes.

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“Quicken Loans is and has been the FHA’s gold standard when it comes to underwriting quality and loan performance for FHA loans nationwide. Not only have we had the lowest default rates of any FHA lender in the country, but we have done so while, at the same time, leading the nation in FHA closed volume and market share,” Bill Emerson, vice chairman of Quicken Loans, says in the statement.

Legal experts say this recent ruling could be far-reaching.

“Quicken has been vocal on how they view this matter and have stood behind their public comments with their actions taken in the case,” says Craig Nazzaro, a consumer finance regulatory attorney with Baker, Donelson, Bearman, Caldwell & Berkowitz PC in Atlanta. “I think the successes they achieved within this order will strengthen Quicken’s resolve to defend this action through trial.”

That resolve is what onlookers are watching. Although other lenders have agreed to settlements with the DOJ, Quicken Loans, which says it has originated $80 billion in FHA business, has been fighting the government’s lawsuit.

“That’s what has intrigued me, that most of the other banks entered settlements,” says Amiyatosh Purnanandam, a professor of finance at the Stephen M. Ross School of Business at the University of Michigan. “There is the possibility that they do have a strong case. We will wait and watch.”

There is, indeed, a wait, as the case is expected to go to trial in 2019.

The ruling is another small victory for Quicken Loans, but there is still work to do. “In these lawsuits, the issue is, let’s say if you find some loans that were not under the guidelines of the FHA – was it just a mistake, or was it a widespread practice?” Purnanandam says. “If you get a handful of loans with silly mistakes, that’s one thing; one can say it’s not a big deal.”

The government is saying that Quicken’s “mistakes” are a big deal and is using the False Claims Act in its case. The False Claim Act is a law designed to protect the U.S. government from fraud from contractors and allows the government to assess treble damages.

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This penalty potential is another reason legal experts are watching the case. “The government has taken an aggressive approach and collected substantial amounts of money,” says Ari Karen, a partner at the Washington, D.C.-area law firm Offit Kurman. “This case is important because it tests the limits of the aggressive and broad interpretation the government has taken with the False Claims Act.”

Quicken has noted more than once, since the DOJ filed the lawsuit in 2015, that the agency chose a few loans with minor mistakes – out of thousands of loans – for this case.

Separately, also in March, the DOJ submitted an amicus curiae brief in PHH Corp. v. Consumer Financial Protection Bureau (CFPB). The DOJ filed the brief for the petitioner, PHH, and indicated the DOJ agreed with a panel decision that the CFPB’s current single-director leadership structure is unconstitutional.

Although the PHH case is different and unrelated to the Quicken Loans case, experts say the recurring theme is government overreach in enforcement of banking-related rules.

“The success both Quicken and PHH have exhibited thus far may embolden lenders, servicers and other targets to push back on what many in the industry have viewed as overly aggressive enforcement,” Nazzaro says. “Since the rise in activity in investigations and enforcement actions that followed the financial crisis, many in the industry have taken the stance of ‘corporation at all costs,’ and the goal was to reach a settlement quickly.”

He predicts a tipping point. “We see the industry taking a more aggressive stance and looking to take advantage of the regulatory landscape that is currently beginning to shift.”

Nora Caley is a Denver-based freelancer.


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