On February 7, the US Attorney for the Eastern District of New York, the Office of the Inspector General for the Department of Housing and Urban Development (HUD), and the Inspector General for the Federal Deposit Insurance Corporation (FDIC) issued a press release announcing a settlement agreement with residential mortgage lender, Franklin First Financial, Ltd. (Franklin First).

The lawsuit , which was filed in September 2015, alleged that Franklin First and several executives conspired to hide their high default rate from HUD so it could continue to issue loans insured by the Federal Housing Administration (FHA). This settlement resolves allegations that Franklin First violated the False Claims Act, the Financial Institutions Recovery, Reform and Enforcement Act (FIRREA), and common law theories of gross negligence, breach of fiduciary duty and unjust enrichment.

Franklin First participated in HUD’s Direct Endorsement Program that allowed the mortgage lender to issue mortgage loans that were insured against default by the FHA. If the FHA determined, however, that Franklin First’s mortgages defaulted at a certain rate within the first two years, Franklin First could have been suspended or permanently removed from the Direct Endorsement Program.

The government’s complaint alleged that Franklin First’s loans went into “early payment default” at more than twice the average default rate of other lenders. The complaint also alleged that Franklin First took actions to conceal those high default rates and avoid removal from HUD’s program.

According to the press release, Franklin First allegedly made “surreptitious mortgage payments for borrowers on over 100 FHA-insured loans that otherwise would have become delinquent or gone into default within two years of origination by Franklin First.” These actions deprived HUD of “critical loan performance information needed to determine whether Franklin First should remain eligible” for participation in the program. Further, the payments may have delayed individual borrowers and secondary purchasers of the mortgages in their ability to use HUD’s Loss Mitigation program, which offers various remedies to cure borrower delinquencies and defaults.

Franklin First and its executive admitted in the settlement agreement to making payments in order to bring mortgages out of default or delinquency, which had the effect of suppressing Franklin First’s overall delinquency and default ratios. Under the terms of the settlement agreement, Franklin First and its executive officers will pay $1.25 million to the United States to resolve the claims.