This article first appeared in the National Law Review.
Congress is on the verge of setting a dangerous precedent. As part of the Build Back Better Act, it has added two provisions equivalent to a “get out of jail free card” for Big Banks that violate federal law when they hand out billions in federal mortgage-related benefits. The two provisions create exemptions to False Claims Act liability by creating blanket immunity from liability when banks fail to exercise due diligence, violate FHA housing regulations, or even directly violate federal laws such as the Truth in Lending Act.
It is obvious why banks want to have their federally sponsored mortgage practices immunized from exposure to the False Claims Act (“FCA”). The FCA works remarkably well and is widely recognized as “the most powerful tool the American people have to protect the government from fraud.” The law has directly recovered over $64.450 billion in sanctions from fraudsters since Congress modernized it in 1986. During the debates on the massive trillion-dollar infrastructure laws enacted or debated this year, corporate lobbyists have been extremely active in successfully preventing Congress from adding any new anti-fraud measures to protect taxpayers from fraud. As part of these efforts, they targeted the False Claims Act as enemy #1 and already have blocked one key amendment needed to close some weaknesses in that law.
With the Build Back Better Act, these corporate lobbyists have taken their opposition to effective anti-fraud laws to a higher level. Instead of trying to repeal the FCA, they are simply exempting Big Banks from liability under that law in two new programs. It is obvious why the Big Banks want the exemption from FCA liability. As a result of illegal or irresponsible lending and foreclosure practices, such as those that fueled the 2008 financial collapse, banks have had to pay billions in sanctions to the United States.
Two words explain why the FCA is “the most powerful tool” protecting taxpayers from fraud: Whistleblowers and sanctions. If you accept federal taxpayer monies, you are required to spend that money according to your contractual agreement or the law. The FCA’s first secret weapon is whistleblowers. The law encourages whistleblowers, known as qui tam “relators,” to report violations of the FCA. Whistleblowers disclosures trigger the overwhelming majority of FCA cases, and the law incentivizes employees to risk their careers to serve the public interest. The second secret weapon is how you prove liability. Second, when an institution accepts federal monies (such as banks that operate various federally sponsored loan programs), liability can attach if the institution acts in “deliberate ignorance of the truth” when spending federal dollars. Similarly, if payments are made with “reckless disregard of the truth,” liability can attach. In other words, corporations (including banks) that accept federal money must ensure that these monies are spent as required by law, regulation, or contract. Safeguards must be in place to prevent fraud. If a bank does not have adequate compliance programs to protect against fraud, it cannot plead ignorance when the law is broken and taxpayers are ripped off.
These two key elements of the False Claims Act are precisely what the banking lobby is attempting to undermine through the Build Back Better Act. The tactics employed by the Big Banks are somewhat devious. They are doing an end-run around the False Claims Act by exempting themselves from having to engage in any due diligence when spending billions in federal dollars. The banks are seeking to add language to the Build Back Better Act that will immunize themselves from liability under the False Claims Act when they make payments in “reckless disregard” to the legality of those payments. The immunities they are seeking legalize “deliberate ignorance” in the use of taxpayer money, in complete defiance of the False Claims Act. Thus, whistleblowers who report these frauds will be stripped of protections they have under the False Claims Act, and the federal government will have no effective way to recover damages from these frauds.
What language in the Build Back Better Act creates an exemption to False Claims Act liability?
Two highly technical provisions are deeply buried within the 2135 pages of the Build Back Better Act’s legislative text. The provisions are sections 40201 and 40202 of the Build Back Better Act. These two sections establish helpful programs that will provide needed financial support to first-generation homebuyers. Section 40201(d)(5) would provide $10 billion in down payment assistance. Section 40202(f) would give an interest rate reduction on new FHA 20-year mortgage products to first-time homeowners with a potential value of $60 billion. But the banking lobby has corrupted these otherwise well-meaning programs. The exemptions obtained by the banks are incubators for massive fraud. It permits the Big Banks to escape any liability when they abuse the generosity of taxpayers and dole out billions to unqualified individuals.
How do the exemptions work? To qualify for these taxpayer-financed benefits, an applicant simply has to “attest” that they are first-time/first-generation homebuyers. That would be the end of the inquiry a bank would need to approve making a payment from the billions allocated in these two programs. Anyone could simply stroll into a bank and “attest” to being such a first-time homebuyer and would thereafter qualify for the federal benefits. The banks would not be required to do any diligence of their own to confirm the borrower’s eligibility. Willful ignorance would be legalized. Reckless disregard in the handling of taxpayer monies would be permitted under this law. Safeguards, such as requiring banks to adhere to the Truth in Lending Act, which requires verification of a borrower’s statements, would not apply.
Under Sections 40201(d)(5) and 40202(f), banks will not be held liable once they are lied to, even if the bank has reason to know that the borrower is not eligible for the federal payout. Banks can spend taxpayer money even if the information on an applicant’s loan application directly contradicts the borrower’s attestation that they are a first-time homeowner. Given the lack of any compliance standards, the temptation to engage in fraud in these programs will be overwhelming.
Permitting banks to escape liability under the False Claims Act opens the door to paying billions of dollars in benefits to unqualified persons. Such payments rip off the taxpayers and severely hurt all honest first-generation homebuyers denied benefits. For every fraudster who benefits from this program, an honest homebuyer will be left in the cold due to the reckless disregard of the banks.
Congress should never use a back-door procedure to undermine the False Claim Act, as it sets a dangerous precedent. It is a devious way to undermine America’s “most effective” anti-fraud law. Instead of undermining the False Claims Act by granting immunities to Big Banks, Congress should be strengthening anti-fraud laws to protect the taxpayers and ensure that the trillions of dollars spent on COVID-19 relief programs and infrastructure improvement are lawfully spent in the public interest.