False Claims Act in Mortgage Scams
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Protecting Yourself from False Claims Act Mortgage Scams
Mortgage scams have become increasingly common over the past few years as struggling homeowners look for ways to avoid foreclosure. Unfortunately, scammers often take advantage of vulnerable people by promising false mortgage relief solutions. One type of scam involves violations of the False Claims Act related to Federal Housing Administration (FHA) insured mortgages.
What is the False Claims Act?
The False Claims Act (FCA) is a federal law that imposes liability on persons and companies who defraud governmental programs. The law includes a “qui tam” provision that allows people who are not affiliated with the government, known as “relators,” to file actions on behalf of the government. When a violation of the FCA is proven, the defendant is required to pay three times the actual damages sustained by the government, plus mandatory penalties for each false claim.
The FCA was originally enacted during the Civil War to combat fraud by defense contractors. Today, the law is frequently used to prosecute Medicare and Medicaid fraud, but it also applies to other federally funded programs like FHA home loans.
How the FCA Applies to FHA Loans
The U.S. Department of Housing and Urban Development (HUD) oversees the FHA mortgage insurance program, which is designed to help low-to-moderate income borrowers and first-time homebuyers obtain home financing. Lenders who participate in the FHA program must follow HUD’s origination, underwriting, and documentation guidelines. When a lender submits a mortgage insurance claim to HUD, they are certifying that they have adhered to all program requirements.
If HUD later determines that the lender violated FHA guidelines in connection with an insured mortgage loan, they may impose civil penalties or other administrative sanctions. They can also refer FCA cases to the Department of Justice (DOJ). The DOJ has used the FCA to prosecute FHA lenders for a variety of violations, including:
- Origination violations – Failure to properly verify the borrower’s income, employment, source of funds for the down payment, etc.
- Documentation violations – Allowing borrowers or other parties to handle verification documents.
- Underwriting violations – Failure to identify and resolve red flags and inconsistencies in the loan file.
- False certifications – Falsely certifying to HUD that FHA requirements were met.
In addition to suing lenders, the government also uses the FCA to go after auditors and due diligence firms that fail to detect these types of violations. The faulty underwriting practices often involve:
- Insufficient documentation of borrower income and assets
- Failure to identify questionable information in the loan file
- Inadequate auditing and quality control procedures
So in cases involving FHA loans, an FCA violation occurs when a lender or auditor falsely certifies compliance with program rules despite knowing about underlying deficiencies with the mortgage loan application and approval process.
The FCA has become a valuable tool for prosecuting mortgage fraud, particularly with respect to government programs like FHA. However, scammers are now leveraging some borrowers’ confusion over these government lawsuits to further their own mortgage relief schemes.
Some key signs of an FHA mortgage scam include:
- Asking for upfront fees before services are rendered
- Guaranteeing to obtain mortgage relief or prevent foreclosure
- Advising borrowers not to contact lenders, lawyers, or credit counselors
- Pressuring borrowers to sign over the deed to their home
One common tactic is for scammers to use the news of FCA settlements with particular lenders as “proof” that they can renegotiate loans insured by those lenders. They pretend to be affiliated with the government agencies involved in the lawsuits as a way to gain borrowers’ trust.
In reality, regulators and consumer advocates warn that households struggling with their FHA mortgage should be very cautious about paying third parties offering foreclosure rescue assistance or loan modifications. HUD-approved housing counselors provide these services for free, so consumers should not need to pay anyone an upfront fee.
Unfortunately, by the time borrowers realize they have been scammed, the “rescuers” have often disappeared with their money or even the ownership rights to their home. Homeowners who suspect an FCA mortgage scam should contact the Federal Trade Commission or their state consumer protection office. Consulting with a lawyer can also help determine if any legal recourse is available, but the focus should be on connecting with legitimate sources of federal housing assistance.
How to Report Suspected FCA Violations
The FCA contains qui tam provisions designed to encourage whistleblowers to come forward with allegations of fraud against the government. A whistleblower, known as a “relator,” can file a lawsuit on behalf of the government and receive 15 to 30 percent of any settlement or judgment amount. The DOJ has recovered over $62 billion under the FCA since 1986, with whistleblowers involved in most cases.
People who discover misconduct related to FHA loans have several options for reporting it:
- File a qui tam lawsuit under the FCA and pursue the claims as a relator
- Report the violations to HUD’s Office of Inspector General
- Notify state mortgage regulators if violations of state laws are also suspected
- Contact HUD-approved housing counselors for general guidance
Whistleblowers do need to be aware of some risks involved with qui tam cases, including potential retaliation by employers. Working with an experienced whistleblower attorney can help protect their rights. But regardless of whether someone is interested in becoming a relator or not, coming forward about FHA violations is crucial for holding mortgage lenders accountable and recovering funds for taxpayers.
Protect Yourself from Scams
- Get guidance from trusted sources – Connect with HUD-approved housing counselors or lawyers to understand all of your options. Government agencies provide these services for free.
- Avoid paying upfront fees – Never pay a company to help get mortgage relief before they deliver results. This is illegal.
- Don’t turn over your home’s deed – Scammers may trick you into signing over the ownership rights to your property. This allows them to evict you or sell your home.
- Report scammers – If you realize you’ve been the victim of a mortgage scam, file complaints with consumer protection agencies right away so they can investigate.