Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

On May 26, 2011, the U.S. Department of Justice announced a $20 million settlement with units of Bank of America and Morgan Stanley to resolve allegations of improper foreclosures on about 160 military members between 2006 and 2009.  The government alleged that the foreclosures, many concerning foreclosures that were taken or started by Countrywide Mortgage prior to Bank of America's acquisition, violated the Servicemembers Civil Relief Act (SCRA).  In April, JPMorgan Chase & Co. agreed to settle similar allegations in a lawsuit filed in federal court in South Carolina.

The agreement is included in a "Memorandum of Agreement Between the United States of American and Bank of America Corporation."  No litigation was filed.

The DOJ's Civil Rights Division has added scores of lawyers and other professionals to its Housing & Civil Enforcement Section, which is charged with enforcing the SCRA and Fair Lending laws, including the Fair Housing Act and Equal Credit Opportunity Act.  Continued, aggressive prosecution of cases involving mortgage lending is expected out of that section for the foreseeable future.

Read DOJ Press Release.

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On Wednesday, May 25, 2011, the Securities and Exchange Commission (the "SEC") adopted rules to create a whistleblower program that rewards individuals who provide the agency with tips that lead to successful enforcement actions. The SEC implemented the rules under Section 992 of the Dodd-Frank Act.  (Read the SEC press release.)

Under the SEC's proposed rule, whistleblowers are eligible for an award if they voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.  The SEC’s new whistleblower rule will be effective 60 days after they are submitted to Congress or published in the Federal Register.

The controversial program has been criticized for a number of reasons, including for incentivizing external reporting rather than using internal reporting programs required under the Sarbanes-Oxley Act. (Read Fred Rivera's article regarding the inherent conflict between Dodd-Frank's whistleblower program and SOX the April issue of Complinet, originally published with Thomson Reuters-GRS; in ThomsonReuters http://accelus.thomsonreuters.com).

Read Perkins Coie Update: SEC's New Whistleblower Rules Redefine Reporting Landscape.

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In what may signal a trend in the government's enforcement efforts in the financial services industry, on May 3, 2011 the Department of Justice filed a False Claims Act suit against Deutsche Bank AG and its now defunct unit MortgageIT Inc. seeking over $1.1 Billion in damages.  The Complaint filed in Manhattan federal court alleges that the Federal Housing Administration (FHA) paid over $386 million in insurance claims on defaulted mortgages that MortgageIT Inc. approved for the U.S. Department of Housing and Urban Development 's FHA program between 1999 and 2009.   The Complaint alleges that MortgageIT and its parent failed to maintain quality control standards over the FHA insured loans, resulting in false certifications that the lender had complied with the requirements of HUD's Direct Endorsement Lender program.  The case originated from a HUD investigation subsequently referred to the U.S. Department of Justice.

Companies faced with alleged False Claims Act violations have significant exposure. The FCA provides for mandatory civil penalties of up to $11,000 for each false claim to the government, as well as treble damages. In the MortgageIT case, which involves thousands of FHA endorsed loans, the government alleges damages of at least $386 million, trebled to over $1.1 billion, plus civil penalties.

The MortgageIT False Claims Act case is unique because of the number of alleged false claims and because it is tied alleged programmatic issues rather than specific false claims on individual loans. The government's prior False Claims Act cases in connection with the FHA-endorsed loan program involved alleged false claims at the loan-loss level, not a systemic allegation of false statements tied to controls and processes.  The wide-reaching scope of the false claims alleged in the MortgageIT case is startling.  Rather than alleging false claims specific to each loan, the government claims that all FHA loans that MortgageIT endorsed during the time period that it allegedly submitted fraudulent certifications of compliance with HUD's FHA program regulations are "false claims" under the Act.  It remains to be seen whether this broad allegations, not tied to any specific, is actionable under the FCA.

The MortgageIT FCA case is significant for additional reasons.  First, the case is likely the government's opening salvo of financial industry enforcement actions using the FCA.  Future claims may include, not only the FHA program, but claims in connection with Small Business Administration loans and other government-sponsored programs tied to the financial industry.  Second, the MortgageIT case is an advertisement to relators and whistleblowers; the case will undoubtedly result in actions under the FCA's "qui tam" provisions, which allow private individuals to file FCA suits on behalf of the government and obtain monetary rewards if the case is successful.

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On May 5, 2011, the U.S. Department of Justice announced a $3.6 million settlement with Citizens Republic Bankcorp Inc. (CRBC) to resolve allegations that Republic Bank, acquired by Citizens in 2006,  refused to lend in predominately minority areas of Detroit in violation of the Fair Housing Act and the Equal Credit Opportunity Act.  The Complaint alleges that CRBC engaged in "redlining" by serving the credit needs of the residents of predominantly white neighborhoods in the Detroit metropolitan area to a significantly greater extent than in majority African-American neighborhoods. 

The settlement, which is subject to court approval, includes a $1.625 million neighborhood stabilization fund that, in a partnership with the city of Detroit, will be used to provide existing homeowners with grants fund exterior improvements; $1.5 million in a special financing program to increase the amount of credit the banks extend to majority African-American areas in Wayne County; and a $500,000 fund for outreach to potential customers, promotion of their products and services, and consumer financial education.  The bank also will open a loan production office in a majority African-American area in Detroit and conduct fair lending training for its employees.

Kristine Brenner, director of investor relations for Citizens Bank, said the lawsuit has no merit and the bank reached a settlement to avoid costly legal fees. “The execution of this agreement is not an admission or finding of any violation,” she said.

The lawsuit originated from a 2010 referral by the Board of Governors of the Federal Reserve System to the Justice Department’s Civil Rights Division.  

The Citizens' case, along with an on-going redlining investigation of St. Louis-based Midwest BankCentre, is a clear announcement by DOJ that redlining prosecutions are a priority of this administration.  According to a  recent BloombergBusinessweek.com article ("A Renewed Crackdown on Redlining," May 5, 2011), the DOJ is stepping up its review of potential redlining issues in the aftermath of the subprime lending crisis. In 1994, DOJ reached a landmark settlement with Chevy Chase FSB based on allegations that the bank refused to provide residential mortgage loans in predominately minority areas of the Washington, D.C. metropolitan area. (Read: U.S. v. Chevy Chase Press Release)  Chevy Chase was the first DOJ suit--and last since the recent Citizen's settlement--focusing solely on a bank's refusal to market its services in minority neighborhoods.
 

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