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Financial Services Law Insights and Observations

Southern District of New York Endorses Use of FIRREA in Mortgage Fraud Cases

Mortgage Origination Civil Fraud Actions DOJ False Claims Act / FIRREA


On August 16, the U.S. District Court for the Southern District of New York issued a written opinion in support of its May 8, 2013 dismissal of claims for damages and civil penalties under the False Claims Act (FCA) brought by the federal government against a mortgage lender alleged to have sold defective loans to Freddie Mac and Fannie Mae while representing that the loans complied with the enterprises’ requirements. U.S. v. Countrywide Fin. Corp., No. 12-1422, 2013 WL 4437232 (S.D.N.Y. Aug. 16, 2013). Although it dismissed the FCA claims, the court did not dismiss the government’s claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) that the lender’s conduct “affected” a federally insured financial institution – the lender itself. In its opinion, the court rejected the lender’s arguments that FIRREA’s legislative history and policy considerations contradict the government’s position, and instead applied a plain meaning analysis and held that the lender allegedly has paid billions of dollars to settle repurchase claims by Fannie Mae and Freddie Mac as a result of the alleged fraud, which “affected” the lender itself and as such is sufficient to sustain the FIRREA counts. The court also rejected the lender’s argument that the government failed to adequately allege the FIRREA predicate offenses of mail fraud and wire fraud because the alleged misrepresentations were “mere breaches of contract that cannot separately support an action for fraud,” holding that the argument is premised on the “fundamental error” that “mail fraud and wire fraud are subject to the same arcane limitations as common law fraud.” Notably, the court dismissed the government’s FCA claims “with prejudice” because the government failed to plead fraud with particularity with respect to loans sold after the enactment of the Fraud Enforcement and Recovery Act of 2009, which extended the FCA to cover indirect recipients of federal funds.