U.S. sues Quicken for improper mortgage lending

Washington — The Justice Department sued Quicken Loans on Thursday, saying the Detroit-based lender violated mortgage underwriting rules and ignored "red flags" on dicey home loans, costing the federal government millions of dollars on FHA-insured mortgages.

In a 66-page lawsuit filed Thursday in Washington, D.C., the government claims that from September 2007 through December 2011, the online mortgage giant knowingly submitted claims for hundreds of improperly underwritten FHA-insured loans. These loans involved inflated appraisals, poor credit risks and borrowers with insufficient incomes. Quicken also failed its obligation to disclose problems with the loans to the FHA, the government alleges.

In a pre-emptive strike last Friday, Quicken filed suit in U.S. District Court in Detroit against the government, seeking to quash the three-year government investigation.

Hours after the government's lawsuit was filed, Quicken President Jay Farner, interviewed by phone, denied the allegations and said the lawsuit was a pressure tactic to get Quicken to settle and pay a substantial fine, which, he said, the company refuses to do. It was "not a small sum of money," he said, declining to be specific.

"We were focused on doing the right thing," Farner said. "We would absolutely, positively not do a loan unless the income was accurate."

In a written statement released Thursday, Quicken said its loans have generated billions in profits for the FHA even after claims have been paid. Quicken said it would continue making FHA loans "for now," but said "like nearly every lender in the country, we will be evaluating the prudence of our continued participation in the FHA program."

"The real victims in this unjust claim are the millions of middle-class American families who rely on FHA financing to reach their goal of affordable home ownership," Quicken said in the statement. "Today's DOJ filing is simply the continuation of the abusive actions and a make-good on the DOJ's threats since their witch-hunt began three years ago."

The Justice Department contends Quicken had a culture of encouraging approvals rather than following the rules, in part because the U.S. government, and not Quicken, would pay if borrowers defaulted. Underwriters were pressured to approve loans even if they thought borrowers couldn't or wouldn't be able to pay their mortgages.

Quicken's compensation practices encouraged employees not to follow the rules, the Justice Department said. Underwriters got "speed bonuses" and sanctioned underwriters who were not reviewing loans fast enough. Employees who didn't hit production numbers would be disciplined or fired. "Quicken's underwriting focus was clear — underwrite loans as quickly as possible, and approve as many as possible," the complaint said, saying the compensation "incentivized quick work rather than quality work."

"Quicken's underwriters were expressly encouraged and compensated by management for pushing through as many loans as possible, with little regard for FHA requirements. Thus, management created a culture where its employees were sufficiently incentivized to ignore FHA's requirements and improperly approve loans," the lawsuit said.

The company has been rated as one of America's best workplaces 12 times by Forbes Magazine and received numerous accolades from other publications for its workplace atmosphere and perks.

Dan Gilbert, the company's founder, is also founder and chairman of Rock Ventures and majority owner of the NBA's Cleveland Cavaliers. He has been a champion of downtown Detroit, channeling more than $1.6 billion there, and owns more than 70 buildings, garages and parking decks.

In making the case against Quicken, the lawsuit cites numerous emails between high-level Quicken supervisors.

In one email, Quicken's operations director, Mike Lyon, wrote that a lender had "bastard income," which was defined as "trying to put some kind of income together that is plausible to the investor even though we know its creation from something evil and horrible."

Asked about the "upside" of one loan, Lyon responded by email that taken as a whole: "we would be hard pressed to lend this guy a dime out of pocket," adding that "the only upside here is we have FHA insurance."

Quicken said the lawsuit "is riddled with inaccurate and twisted conclusions from fragments of emails cherry-picked from 85,00 documents that the DOJ subpoenaed. Worse than that, the DOJ appears to be basing their entire case on a handful of out-of-context email conversations skimmed from the communication between Quicken Loan employees."

The Justice Department didn't say precisely how much money it believes was paid out because of Quicken's alleged improprieties, except to say the government paid out "millions of dollars in insurance claims on hundreds of bad loans." The government said that between September 2007 and March, the Department of Housing and Urban Development paid more than $500 million in claims on 3,885 defaulted loans. Another 8,329 FHA-insured Quicken loans have unpaid mortgage balances of $1.1 billion and are 60 days or more delinquent.

Between 2007 and 2011, Quicken's quality control monthly audits found on average 61 percent of loans had violations of FHA rules, but were not disclosed as required. Instead, Quicken "systematically concealed the underwriting defects" by only reporting borrower fraud, the government said. None of the 120 reports filed over the four-year-period acknowledged errors on the part of Quicken underwriters.

The Justice Department's complaint noted one borrower's bank account statement showed bounced checks in multiple months and during the loan application process "requested a refund of the $400 mortgage application fee so that the borrower would be able to feed the borrower's family ... The borrower made only five payments before becoming delinquent and as a result, HUD ultimately paid an FHA insurance claim of $93,955.19."

dshepardson@detroitnews.com