U.S. sues Quicken Loans over improper FHA loans

John Gallagher | Detroit Free Press

DETROIT — The U.S. Justice Department sued Quicken Loans on Thursday alleging the Detroit mortgage lending giant had improperly originated and underwrote mortgages insured by the Federal Housing Administration.

The complaint, filed in the U.S. District Court in Washington, D.C., alleges that from September 2007 through December 2011, Quicken knowingly submitted, or caused the submission of, claims for hundreds of improperly underwritten FHA-insured loans.

The government is claiming that Quicken encouraged its employees to disregard FHA rules and falsely certify compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages.

For example, the government's complaint states that when Quicken received an appraised value for a home that was too low to approve a loan, Quicken often requested a specific new and higher value from the appraiser with no justification for the increase. That practice is prohibited by FHA rules.

Jay Farner, president and chief marketing officer of Quicken Loans, said in a phone interview Thursday evening that Quicken would not settle the case but would defend itself against the charges.

"We can't agree to charges that are blatantly false," he said. "We will continue to fight for what's right."

And he added that Quicken's practices were the "gold standard" for processing FHA loans.

The government also said that Quicken granted "management exceptions" whereby managers would allow underwriters to break an FHA rule in order to approve a loan.

Last week, Quicken, in anticipation of such a suit, aggressively denied any wrongdoing and took the unusual step of suing the government for a declaration that its actions were proper and legal.

"Those who do business with the United States must act in good faith, including lenders that participate in the FHA mortgage insurance program," said Benjamin C. Mizer, principal deputy assistant Attorney General of the Justice Department's Civil Division. "To protect the housing market and the FHA fund, we will continue to hold responsible lenders that knowingly violate the rules."

Quicken, founded by billionaire Dan Gilbert, has said it is the nation's largest originator of loans backed by the FHA. In recent fiscal quarters, Quicken has ranked as the nation's second-largest lender for direct-to-consumer mortgage lending, although its total volume, like that of all major mortgage lenders, has declined since the refinancing boom started to fade in 2013.

In its own lawsuit filed last week, Quicken stated that the Justice Department had "cherry-picked" 55 examples that were problematic out of more than 246,000 Quicken originated in 2007-11. The Quicken lawsuit says Justice was threatening a high-profile lawsuit involving a much larger number of loans unless the company agreed to pay a large settlement and admit flawed lending practices and federal Fair Claims Act violations.

The government's complaint filed Thursday alleges that Quicken's senior management was aware of the problems. The complaint alleges that Quicken's divisional vice president for underwriting, the second most senior executive in Quicken's operations department, wrote in an email discussing the process and saying that "I don't think the media and any other mortgage company (FNMA, FHA, FMLC) would like the fact we have a team who is responsible to push back on appraisers questioning their appraised values."

In another email, the same divisional vice president for underwriting wrote to a group of Quicken executives stating that 40% of the management exceptions on FHA's early payment defaults should not have been granted, adding: "We make some really dumb decisions when it comes to client service exceptions."

In yet another email discussing an FHA loan, Mike Lyon, identified as the operations director, a senior level executive, explained that a loan was approved based on "bastard income," which he described as "trying to put some kind of income together that is plausible to the investor even though we know its creation comes from something evil and horrible."

Farner said that the emails the Justice Department cited in its suit were taken out of context and that a fuller reading would support Quicken's version. "I'm very confident about the emails," he said.

The government's complaint alleges that as a result of Quicken's knowingly deficient mortgage underwriting practices, the U.S. Department of Housing and Urban Development has already paid millions of dollars of insurance claims on loans improperly underwritten by Quicken.

In one case, the government said, one mortgage applicant requested the return of his $400 mortgage application fee so that he could feed his family, but Quicken approved the loan instead. The borrower quickly defaulted.

In a statement Thursday, Quicken said it will continue to offer FHA mortgages for now, "but like nearly every lender in the country, we will be evaluating the prudence of our continued participation in the FHA program."