Utah-Based Lenders Agree to Pay Nearly $10 Million to Resolve Alleged False Claims Act Liability Arising from FHA-Insured Mortgage Lending

WASHINGTON, D.C. – (RealEstateRama) — Primary Residential Mortgage Inc. (PRMI) and SecurityNational Mortgage Company (SecurityNational) have agreed to pay the United States $5 million and $4.25 million, respectively, to resolve separate allegations that they violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements, the Justice Department announced today.  Both lenders are headquartered in Salt Lake City, Utah.

“The FHA program provides important economic support for homeownership and community development,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.  “The department has and will continue to ensure that program participants adhere to applicable requirements and will pursue those that knowingly misuse the program for their own gain and to the detriment of homeowners and the public.”

“PRMI obtained HUD insurance by intentionally claiming its loans met HUD’s quality standards while knowing many of its loans did not meet those standards,” said Acting U.S. Attorney Bob Troyer for the District of Colorado.  “When those loans failed, it was the government who suffered the loss.  We will continue our efforts to hold housing lenders accountable for fraudulent conduct.”

“HUD relies on the Direct Endorsement Lenders like SecurityNational to make sure their loans are made only after a rigorous and thorough review,” said U.S. Attorney Paul J. Fishman for the District of New Jersey.  “In this case, SecurityNational has admitted it approved loans that it had no business endorsing, potentially damaging a vital FHA program and other potential borrowers.”

Since at least January 2006, SecurityNational and PRMI have participated as Direct Endorsement Lenders (DELs) in the FHA insurance program.  A DEL has the authority to originate, underwrite and endorse mortgages for FHA insurance.  If a DEL approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD, FHA’s parent agency, for the losses resulting from the defaulted loan.  Under the DEL program, the FHA does not review a loan before it is endorsed for FHA insurance for compliance with FHA’s credit and eligibility standards, but instead relies on the efforts of the DEL to verify compliance.  DELs are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance.

As part of the settlements announced today, both PRMI and SecurityNational admitted they certified loans for FHA mortgage insurance that did not meet HUD underwriting requirements regarding borrower creditworthiness and eligibility.

PRMI admitted it endorsed loans that were not eligible for FHA mortgage insurance, including loans where:

• PRMI failed to document the assets used to qualify the borrower for FHA mortgage insurance and omitted liabilities owed by the borrower from the underwriting analysis;
• PRMI failed to document income used to qualify the borrower for FHA mortgage insurance;
• PRMI failed to verify the borrower’s earnest money deposit; and
• The borrower was delinquent on a second, pre-existing FHA mortgage.

SecurityNational admitted it endorsed loans that were not eligible for FHA mortgage insurance, including loans where:

• The borrower was delinquent on federal debt and had an unpaid court-ordered judgment;
• The borrower was four months delinquent on the underlying mortgage SecurityNational refinanced into an FHA loan;
• The mortgage loan amount exceeded HUD’s loan to value requirements;
• SecurityNational failed to document income used to qualify the borrower for FHA mortgage insurance; and
• SecurityNational failed to analyze the borrower’s delinquent credit history.

As a result of PRMI’s and SecurityNational’s conduct and omissions, HUD insured loans endorsed by each lender that were not eligible for FHA mortgage insurance under the DEL program and that HUD would not otherwise have insured.  HUD subsequently incurred substantial losses when it paid insurance claims on those loans.

“Today’s settlements resolve allegations that these lenders, entrusted by American taxpayers to abide by FHA rules, failed to comply with certain FHA origination, underwriting and quality control requirements,” said Inspector General David A. Montoya for HUD.  “The settlements demonstrate a continued commitment to address the failures and halt the business practices that potentially harm the FHA program and its participants.”

The settlement with SecurityNational is the result of a joint investigation conducted by HUD, the HUD Office of Inspector General, the Civil Division’s Commercial Litigation Branch and the U.S. Attorney’s Office for the District of New Jersey.  The settlement with PRMI is the result of a joint investigation conducted by HUD, the HUD Office of Inspector General, the Civil Division’s Commercial Litigation Branch, and the U.S. Attorney’s Office for the District of Colorado.

The claims asserted against SecurityNational and PRMI are allegations only and there has been no determination of liability