Fannie And Freddie Loans Could Be Next FCA Targets
Law360Andrew W. Schilling
By now, lenders that make loans insured by the federal government are well acquainted with the False Claims Act. Following the financial crisis, the U.S. Department of Justice has aggressively used the FCA to collect billions of dollars in settlements from mortgage lenders whose loans are backed by the Federal Housing Administration (FHA), a component of the U.S. Department of Housing and Urban Development (HUD). While most of the DOJ’s cases to date have focused on loan origination, more recently both the DOJ's and the relator’s bar have pursued an increasing number of cases on the servicing side as well, including in the area of reverse mortgages. The government has also used the FCA to pursue mortgage lenders whose loans were insured by the Veterans Administration, albeit not on the same scale as its pursuit of FHA lenders.
While the DOJ’s pursuit of government lenders and servicers has been aggressive, at least so far most of the government’s enforcement attention in this area to date has focused on loans insured by the federal government. But what if the government applied its same aggressive approach to conventional loans sold to Fannie Mae and Freddie Mac, which for some lenders and servicers constitute a much greater percentage of their business?
The risk of the DOJ applying the False Claims Act to Fannie and Freddie loans may seem remote. After all, this Civil War-era law — enacted to protect the Union Army from war profiteers — is designed to protect against fraud perpetrated upon the U.S. government, and Fannie and Freddie are not part of the government. End of story.
But the risk is not nearly as remote as it may seem. In fact, the Justice Department has already pursued several FCA cases involving government-sponsored enterprise (GSE) loans, and recovered more than $1 billion. And the number of cases involving GSE loans is sure to increase if the government prevails in a case that is pending before a federal appeals court. That case, United States ex rel. Adams v. Aurora Loan Services, will be fully submitted for decision by Feb. 12, and its outcome could have significant ramifications for mortgage lenders.
Originally published in Law360; reprinted with permission.