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Mortgage lender to pay $13.2M for violating FHA lending standards

Between Jan. 1, 2006 and Dec. 31, 2011, the Justice Department says, a Miami-based mortgage originator called the Universal American Mortgage Company LLC (UAMC) knowingly originated mortgages under the Federal Housing Administration mortgage insurance program that did not qualify with that program's lending requirements. These defective loans violated the False Claims Act because the FHA mortgage insurance program is left on the hook when its insured mortgages go into foreclosure.

UAMC is what's called a "direct endorsement lender" or "DEL" for the FHA insurance program, which is managed by the Department of Housing and Urban Development. DELs are given the authority to originate, underwrite and endorse FSA-insured mortgages with no direct FHA oversight.

Therefore, there are strict program requirements in place to ensure that DELs properly underwrite and certify their mortgages as FHA-compliant. DELs must also maintain quality control programs to prevent and correct noncompliance with lending rules.

This is done for two reasons. First, the FHA's underwriting standards are meant to prevent borrowers from borrowing more than they can truly afford, which limits the risk of default. Second, when FHA-insured mortgages do go into default, the mortgage holder can submit a claim to have their losses covered by the FHA.

According to the Justice Department, UAMC not only knowingly submitted non-compliant loans for FHA insurance but it also put in place improper incentives for underwriters who knowingly failed to provide quality control reviews. These violations of the FHA standards increased the risk of the affected mortgages and also put the government in the position of insuring that extra risk.

"Not only does this harm the borrowers leaving them over their heads in debt and underwater on their mortgages, it harms taxpayers because the mortgages are backed by government insurance," commented a U.S. Attorney involved in the case.

The Justice Department has settled the case against UAMC for $13.2 million. The lawsuit was initially brought under the False Claims Act by a whistleblower who is a former employee of an entity related to UAMC. When private citizens bring whistleblower actions under the False Claims Act, they are entitled to a substantial percentage of any damages recovered for the government. In this case, the whistleblower will receive $1,980,000.

The False Claims Act is meant to provide a mechanism for private citizens to help fight fraud, waste and abuse against government programs and in government contracts. People in many industries stand to receive significant compensation for blowing the whistle. If you have witnessed government contract fraud and are considering blowing the whistle, protect your rights and your award by discussing the situation with a False Claims Act attorney.

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