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.
