When IberiaBank Corp. agreed in December to pay $11.7 million to settle allegations by Arkansas whistleblowers that it filed false claims for mortgage loan guarantees, it became the first lender working in the state to join a lengthy roster of lenders that have settled similar allegations with the U.S. Department of Justice since 2011.
IberiaBank and IberiaBank Mortgage Co. of Lafayette, Louisiana, allegedly violated the False Claims Act between 2005 and 2014 by falsely saying they were complying with federal requirements in order to obtain insurance on mortgage loans from the Federal Housing Administration, part of the U.S. Department of Housing & Urban Development.
Kelley R. Shackleford and Karen Mills, who worked for IberiaBank Mortgage in Little Rock, filed the lawsuit in 2015 in U.S. District Court in Little Rock. As whistleblowers, they will receive $2.34 million from the settlement with the federal government. The case had been under seal until August.
IberiaBank said in a statement to Arkansas Business last week that it “made a business decision to settle this matter, without admitting liability, in order to avoid the time and expense of potential litigation.”
IberiaBank also said that no client had been “negatively affected.” Iberia, which in 2017 had deposits of $21.3 billion and offices in eight states, said it is committed to providing loans, including FHA loans, to homebuyers.
Since 2011, when the Justice Department began its mortgage lending crackdown, nearly two dozen lenders have settled cases brought under the federal False Claims Act. The fallout has meant that mortgage lenders are staying away from FHA lending, fearing that errors will cost them millions, said Laurie Goodman, co-director at the Housing Finance Policy Center at the Urban Institute of Washington, which researches economic and social policy.
Mortgage holders have a no-loss guarantee in handling FHA-insured mortgages, but they have to certify that “every line in a loan file is absolutely correct and the loan complies with all FHA rules,” Goodman said.
If either of those conditions turns out to be false, she said, the fine could be triple the loss amount. “And some of the errors can be very, very small,” she said.
Some lenders have concerns about participating in the FHA program because the regulations aren’t clear, Goodman added.
Ben Carson, HUD secretary, told the Mortgage Bankers Association in October that he was aware of lenders’ concerns about the FHA program.
“Lenders have rightly pointed out that absolute perfection in the lending process cannot be achieved, and that borrowers bear the costs of compliance through higher mortgage rates,” he said in a speech documented on HUD’s website. “We have heard these concerns, and today I am pleased to announce that HUD, in consultation with the Department of Justice, is committed to reviewing and addressing them.”
He asked for the association’s recommendations.
“HUD’s objective ... simple,” Carson said. “We want every good lender who makes responsible loans, and services them well, to feel confident that they can participate fully in HUD’s programs, serving borrowers and enabling housing to continue to spur our economy.”
Since the Great Recession and the housing bust, most of the top mortgage lenders in the United States have faced charges of violating the False Claims Act. For example, all five of the top 2011 lenders — Wells Fargo, JPMorgan Chase, Bank of America, Quicken Loans and Citibank — have been sued over allegations of violating the False Claims Act, Goodman said in a 2015 report. This has resulted in billions of dollars in settlements. (Quicken Loans’ lawsuit remains open.)
In April, Jamie Dimon, chairman and CEO of JPMorgan Chase, told shareholders in the bank’s annual report that it exited FHA lending because of the “aggressive use of the False Claims Act.
“Overly complex regulations have made FHA lending risky and cost prohibitive for many banks,” Dimon said. “In fact, FCA settlements wiped out a decade of FHA profitability, and subsequent losses have kept returns on capital solidly below our target. This has led us to scale back our participation in the FHA lending program ... and we are not alone.”
He said FHA loans from lenders other than banks have increased from about 20 percent in 2011 to 80 percent in 2016.
In 2014, JPMorgan Chase agreed to pay $614 million for submitting false claims for FHA-insured and Department of Veterans Affairs loans.
“There’s no question that there were some loans made that shouldn’t have been made,” Goodman said about the settlements.
Lenders who have the authority to originate and underwrite mortgages for FHA insurance have the benefit of a no-loss guarantee. If a homeowner defaults on an FHA-insured mortgage, the mortgage holder can file a claim with HUD for the losses tied to the default.
Leading up to the Great Recession, lenders were encouraged to help people “live the American Dream,” said William H. Byrnes, a law professor at Texas A&M University School of Law.
As the country would learn after 2008, several lenders failed to conduct due diligence when approving loans, he said.
A number of banks decided to “turn a blind eye” to the regulations because other lenders were approving loans without verifying applications, Byrnes said. The lenders’ thinking was “what could go wrong?” he said.
A lot, it turned out.
Since 2008, Fannie Mae and Freddie Mac, which bought single-family residential mortgages from mortgage companies and other banks, have reported net losses of $208 billion in their single-family mortgage business, according to a 2013 whistleblower lawsuit filed in New York against PHH Mortgage Corp. and PHH Corp. of Mount Laurel, New Jersey. PHH settled the False Claims Act allegations tied to mortgage lending in August for $74.4 million.
The allegations in the whistleblower case against IberiaBank echo similar charges against other lenders: that it certified mortgage loans that did not meet HUD underwriting and origination requirements, making the loans ineligible for FHA insurance.
Shackleford, one whistleblower, began working for IberiaBank in August 2010 as its controller. She stayed in that position earning about $72,000 annually until February 2013, when she resigned to work part time as an executive administrative assistant to Iberia’s Little Rock branch president and CEO at the time, Bill Edwards. She earned $48,000 in that position but left the company in January 2015, according to the lawsuit.
The other whistleblower, Mills, started in 1991 and worked for IberiaBank until August 2015 as a loan servicing manager. (Edwards has since joined Eagle Bank & Trust of Little Rock.)
“During their employment at Iberia, [Shackleford and Mills] became privy to intimate details regarding Iberia’s mortgage lending and payroll practices,” the lawsuit said.
The lawsuit, however, didn’t offer many details about the allegations.
The whistleblowers alleged that when IberiaBank submitted mortgages to the U.S. government for FHA insurance, IberiaBank said the loans met HUD requirements when it knew they didn’t, the suit said.
The whistleblowers also alleged that IberiaBank committed other HUD violations, including continuing to pay commissions to its underwriters after it had been warned not to in 2010.
A HUD review of IberiaBank in 2010 said the bank was not in compliance with the underwriters’ commission prohibition, according to the Justice Department’s Dec. 8 news release. IberiaBank told HUD that it wasn’t paying the underwriter commissions, the news release said.
But Shackleford said in the suit that after a December 2014 IberiaBank management meeting she saw “certain payroll records and documents showing calculations of underwriter commissions based on loan volume, confirming that Iberia’s underwriters were paid commissions based upon the number of loans they approved.”
As a result, the FHA paid insurance claims on numerous defaulted mortgage loans that “IberiaBank knew, or should have known, did not meet HUD’s requirements and were ineligible for FHA insurance.”
One of the whistleblowers’ attorneys, Joel Hoover of the Little Rock law firm Newland & Associates, said his clients didn’t want to comment and declined to provide more details of the alleged wrongdoing. The Justice Department also declined to comment.
Iberia said in a press release in October that it estimated the potential damages were between $6 million and $17 million. It said it entered into a settlement agreement for $11.7 million.
The Justice Department seemed pleased with the settlement.
“This settlement demonstrates HUD [Office of Inspector General’s] commitment to work with our partners, under the False Claims Act, to combat fraud against the Government,” Jeremy Kirkland, acting deputy inspector general for the HUD OIG, said in the news release. “Today’s settlement should serve as a cautionary tale that we will continue to aggressively utilize it in pursuit of those that seek to undermine federal housing programs.”