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Financial Services Law Insights and Observations

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  • FDIC releases process for MDI designation requests

    On May 19, the FDIC released a process for insured institutions or applicants for deposit insurance to submit requests for recognition as a minority depository institution (MDI). As previously covered by InfoBytes, last June the FDIC approved and released an updated Statement of Policy Regarding Minority Depository Institutions to enhance the agency’s efforts to preserve and promote MDIs. 

    The updated statement of policy details the framework by which the FDIC implements objectives set forth in Section 308 of FIRREA and describes agency initiatives for fulfilling its MDI statutory goals. According to the FDIC, “supervised institutions or applicants for deposit insurance that seek to be recognized as an MDI may submit a written request, signed by a duly authorized officer or representative of the institution or applicant, at any time to the appropriate regional office.” Supervised institutions are also able to submit requests in connection with a merger application or a change in control notice. Requests should contain sufficient information in support of the designation, and the FDIC will send a letter acknowledging recognition of the institution as an MDI if an institution has met the eligibility requirements.

    Bank Regulatory Federal Issues FDIC Minority Depository Institution Supervision False Claims Act / FIRREA

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  • DOJ announces $31,000 FCA settlement for duplicative PPP loans

    Federal Issues

    On February 11, the DOJ announced a $31,000 settlement with an IT services company to resolve allegations that it violated the False Claims Act (FCA) by obtaining more than one Paycheck Protection Program (PPP) loan in 2020. According to the settlement agreement, in April 2020 the company received two SBA-guaranteed PPP loans through two different banks. The company agreed to repay the duplicative PPP loan in full to its lender, relieving the SBA of liability. The settlement press release also noted that the settlement with the company resolved a lawsuit filed under the whistleblower provision of the FCA, which permits private parties to file suit on behalf of the U.S. for false claims and share in a portion of the government’s recovery.

    Federal Issues Covid-19 CARES Act SBA DOJ Enforcement False Claims Act / FIRREA

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  • District Court partially grants summary judgment to defendants in FCA case

    Courts

    On February 1, the U.S. District Court for the Eastern District of California denied a relator’s (plaintiff’s) motion for summary judgment on an allegation of promissory fraud in violation of the False Claims Act (FCA) in a case against a rocket manufacturer and its subsidy (defendants). The court similarly denied the defendants’ cross-motion for summary judgment on the promissory fraud violation, but granted the defendants’ motion for summary judgment with respect to allegations of false certification in violation of the FCA. According to the opinion, the plaintiff, who was briefly employed by defendants as the senior director for Cyber Security, Compliance, and Controls, alleged that the defendants fraudulently induced the government to contract with the defendants in 18 contracts, while knowingly out of compliance with Defense Federal Acquisition Regulation 48 C.F.R. § 252.204– 7012 and NASA Federal Acquisition Regulation 48 C.F.R. § 1852.204-76, which impose cybersecurity and confidentiality requirements applicable to persons who receive government contracts. The court noted that plaintiff’s claims were based in part on allegations that defendants failed to disclose data breaches when required to do so. Conversely, defendants argued that they had disclosed their non-compliance with the identified regulations to the DoD and to NASA on multiple occasions and had been working with the government to obtain a waiver. In light of this, the court denied summary judgment on the promissory fraud violation, holding that “[a] genuine dispute of material fact exists as to the sufficiency of the disclosures[.]” The court also decreased the number of contracts the court will assess from 18 to 7, holding that the court will only rule on allegations that pertain to events before the case was filed in 2015. Similarly, the court granted defendants’ motion for summary judgment with respect to allegations of false certification on the grounds that “relator’s claim for false certification is based solely on an invoice payment under a NASA contract that was entered into after relator brought this action and is therefore not a proper basis for his false certification claim.”

    Courts Data Breach False Claims Act / FIRREA Privacy/Cyber Risk & Data Security Relator

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  • DOJ announces $7.9 million FCA settlement with student loan contractor

    Federal Issues

    On January 14, the DOJ announced a $7.9 million settlement with a contractor that serviced student loans for lenders under the Federal Family Education Loan Program to resolve allegations that it violated the False Claims Act by submitting or causing the submission of false claims to the Department of Education. According to the settlement agreement, from 2006 to 2016, the contractor allegedly knowingly failed to make required financial adjustments to borrower accounts and improperly treated some borrowers as eligible for military deferments, which resulted in incorrect reporting to the Department of Education and losses to the United States. The settlement press release noted that the contractor paid $1.4 million to the Department of Education under a remediation plan to partially resolve the allegations and received a credit for that payment under the settlement agreement.

    Federal Issues DOJ Student Lending False Claims Act / FIRREA Enforcement Department of Education

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  • Court dismisses FCA action against national bank

    Courts

    On October 29, the U.S. District Court for the Eastern District of Missouri dismissed a False Claims Act (FCA) suit against a national bank, concluding the relator failed to prove the inapplicability of the public disclosure bar. According to the opinion, the relator filed an action against the national bank alleging that from 2009 to 2013, as an employee of the bank, she witnessed “numerous violations of [the bank]’s obligations under [government] loan modification programs.” The bank moved to dismiss the action on five separate grounds, including statute of limitations and public disclosure bar. The court first addressed the statute of limitations claims, applying the six-year limitation after the violation and holding that because the relator filed her action against the bank on June 2, 2018, any claims occurring before June 2, 2012 are barred as untimely.

    The court then addressed the public disclosure bar, which requires courts to dismiss an action under the FCA “if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed….” The bank argued, and the relator did not contest, that the relator’s allegations “had already been publicly disclosed through the news media, a federal lawsuit, and federal reports.” The court rejected the relator’s claims that she should qualify as an original source of the information. Specifically, the court concluded that while the relator may have independent knowledge of the information provided in her complaint by virtue of her employment, she did not “materially add[] to” the public disclosures and thus, did not carry “her burden to prove the inapplicability of the public disclosure bar.” Accordingly, the court dismissed all remaining allegations postdating July 2, 2012.

    Courts False Claims Act / FIRREA Mortgages Loan Modification

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  • DOJ reaches $25 million settlement with mortgage lender to resolve false claims allegations

    Federal Issues

    On October 20, the DOJ announced a nearly $25 million settlement with a California-based mortgage lender in connection with alleged violations of the False Claims Act (FCA) related to originating and underwriting mortgages insured by the Federal Housing Administration (FHA). According to the DOJ, the lender “knowingly approved ineligible loans that later defaulted and resulted in claims to FHA for mortgage insurance,” failed to comply with material program rules requiring lenders to maintain quality control programs to prevent underwriting deficiencies, and failed to self-report identified materially deficient loans. The mortgage lender agreed to pay the DOJ $24.9 million to resolve the FCA claims. In addition, a whistleblower will receive nearly $5 million under the settlement. The DOJ’s press release noted that the claims “are allegations only, and [that] there has been no determination of liability.”

    Federal Issues False Claims Act / FIRREA DOJ FHA Mortgages

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  • DOJ: Lender allegedly violated FIRREA, False Claims Act by forging certifications and using unqualified underwriters

    Federal Issues

    On September 25, the DOJ filed a complaint against a lender alleging that it forged certifications and used unqualified underwriters to approve FHA-insured Home Equity Conversion Mortgages (HECMs) to increase its loan production in violation of the Financial Institutions Reform, Recovery and Enforcement Act and the False Claims Act. In addition, the DOJ claims that, because the lender allegedly did not employ enough direct endorsement underwriters to review each HECM loan endorsed for FHA mortgage insurance, it bypassed FHA’s underwriter requirements and (i) allowed “unqualified temporary contractors to underwrite, approve, and sign certifications for HECM loans”; (ii) “[f]orged signatures of qualified underwriters on certifications for other HECM loans” to create the appearance that they had been reviewed and approved by a qualified underwriter; (iii) pre-signed blank certifications representing that appraisals had been reviewed and approved; and (iv) used these forms and certifications to insure HECM loans that did not meet the underwriting requirements. The DOJ alleges that, accordingly, the FHA insured overvalued and underwater properties, which increased borrower expenses and raised the chances of default. The DOJ also asserts that the lender’s purported false claims for FHA mortgage insurance payments were material, as it led to the government making payments it would otherwise not have been required to make.

    Federal Issues DOJ False Claims Act / FIRREA Underwriting FHA Mortgages HECM

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  • District court dismisses False Claims Act suit at DOJ’s request

    Courts

    On July 2, the U.S. District Court for the Southern District of New York dismissed a False Claims Act suit against a British bank accused of allegedly engaging in banking practices that violated U.S. sanctions against Iran. The bank had entered into deferred prosecution agreements in 2012 and 2019 with the DOJ and agreed to pay penalties to federal and New York authorities to resolve allegations that it had facilitated U.S. dollar transactions for Iranian entities in violation of U.S. sanctions and various New York and federal banking regulations. According to the whistleblower’s suit, the bank mislead the DOJ when negotiating the 2012 deferred prosecution agreement, and allegedly continued to engage in sanctions-violating conduct, “notwithstanding their representations to the [DOJ] that they had thereafter ceased doing so.” The DOJ twice declined to intervene in the case and moved to dismiss, arguing that it was “meritless” and that continuing to discovery would waste government resources. The whistleblower countered that the DOJ “failed to properly investigate its contentions,” but the court determined that this argument was “insufficient to transform the Government’s decision into one that is arbitrary and capricious.” In reaching its decision, the court determined that it did not need to adopt a specific standard, stating, “[l]ike other courts in this [d]istrict to have considered this question, the [c]ourt concludes that it need not definitively determine the appropriate standard of review to resolve this case.” According to the court, this “is because the Government has carried its burden even under the more searching. . .standard” outlined by the U.S. Court of Appeals for the Ninth Circuit in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., which requires the DOJ to identify “‘a valid government purpose’ and ‘a rational relation between dismissal and accomplishment of the purpose.’”

    Courts False Claims Act / FIRREA DOJ Whistleblower Sanctions Iran

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  • DOJ reaches $2.47 million settlement to resolve alleged lending violations regarding FHA-insured reverse mortgages

    Federal Issues

    On March 31, the DOJ announced a $2.47 million settlement with an Oklahoma-based mortgage lender in connection with alleged violations of the False Claims Act (FCA) related to an acquired predecessor entity’s origination and underwriting of home equity conversion mortgages (HECM). According to the DOJ, these HECM loans were insured by the Federal Housing Administration (FHA) but failed to meet HUD requirements. The DOJ alleged that, prior to May 2, 2010, the predecessor entity ordered appraisals for HECM loans on forms that provided loan amounts and “otherwise improperly communicated certain information to [appraisers] in an attempt to influence the appraised value, in violation of FHA requirements.” The mortgage lender agreed to pay the DOJ $1.97 million to resolve the FCA claims, as well as $500,000 to HUD to resolve administrative liability allegations. The DOJ’s press release noted that the claims “are allegations only, and [that] there has been no determination of liability.”

    Federal Issues DOJ False Claims Act / FIRREA HECM HUD Mortgages

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  • District court dismisses FCA claims against student loan collectors

    Courts

    On February 11, the U.S. District Court for the District of Columbia dismissed a relator’s False Claims Act claims, which alleged that a group of prime private student loan debt collectors (defendants) defrauded the federal government of funds intended for small businesses in relation to contracts to service student loans with the Department of Education (Department). The 2015 lawsuit filed by the relator accused the defendants of, among other things, allegedly concealing that “the purportedly small business subcontractors were affiliated with ‘co-conspirator’ larger businesses, ‘making them ineligible to be claimed as small businesses by the prime contractors on the [Department’s private collection agency] task orders.’” The relator also claimed that the defendants convinced the Department to award contracts and provide bonuses they did not deserve. According to the relator, the defendants made claims that hinged “on the factual allegation of undisclosed affiliation and associated submission of false claims and/or misrepresentations concerning business size.”

    In the order, the court determined, among other things, that the relator fell short of alleging the specific facts necessary to convince the court that the defendants engaged in fraudulent inducement and implied certification. The court held that “despite [the relator’s] contrary contentions, [the relator’s] pleading does not establish with the requisite particularity the time and place of the false misrepresentations, what constitutes the allegedly false claim for each discrete defendant, and what, precisely, ‘was retained or given up as a consequence of the fraud.’” Specifically, the court stated that the relator “fail[ed] to connect several critical dots in the alleged scheme, leaving the [c]ourt unclear as to what, precisely, was allegedly actionably false and/or fraudulent.” However, the court allowed the relator leave to file an amended complaint, stating that “because the allegation of further facts might cure the identified deficiencies (although the [c]ourt has its doubts, given the length of the investigation and [the relator’s] counsel’s central role in the investigation), the [c]ourt sees no reason to deviate from the general rule [allowing leave].”

    Courts False Claims Act / FIRREA Student Lending Whistleblower Department of Education Debt Collection

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