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Financial Services Law Insights and Observations

Texas Federal District Court Allows Government's FCA / FIRREA Mortgage Suit To Proceed

False Claims Act / FIRREA


On September 10, the U.S. District Court for the Southern District of Texas denied a mortgage lender’s motion to dismiss the federal government’s claims that the lender and two of its executives knowingly made false statements in loan applications to HUD regarding the company’s compliance with FHA origination requirements. U.S. v. Americus Mortg. Corp., No. 12-2676, 2013 WL 4829271 (S.D. Tex. Sept. 10, 2013). The government claims the lender’s actions violated the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), and resulted in HUD incurring losses of over $150 million on loans that defaulted. The court held (i) that the government complaint sufficiently alleged that the lender, at the direction of the individual defendants, knowingly made false statements of fact to HUD while engaging in a fraudulent course of business that caused HUD to pay out money that it otherwise would not have paid, thereby sufficiently alleging a violation of the FCA, and (ii) that pleading proof of specific intent to defraud was unnecessary. The court also rejected the lender’s argument that allegations of materiality or scienter were vitiated because HUD was “on notice of, and conducting an investigation into” the conduct alleged to have violated the FCA, and allowed the lender to continue participating in the FHA-insurance program. Finally, the court held, among other things, that the three-year tolling period that applied to the FCA’s six-year statute of limitations resulted in the government’s complaint being timely. With respect to the FIRREA claim, the court rejected the lender’s argument that it was not an entity subject to FIRREA. The court reasoned that the plain language of Section 1006 in the FIRREA statute applies to “whoever” is connected to HUD, which included the lender. It further stated that the complaint established that the lender knowingly submitted false statements to influence HUD, in violation of FIRREA.

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