A recently signed Memorandum of Understanding (“MOU”) between the Department of Justice (“DOJ”) and the Department of Housing and Urban Development (“HUD”) has increased the difficulty prospective qui tam relators will face when filing False Claims Act mortgage fraud whistleblower lawsuits revolving around Federal Housing Administration (“FHA”) regulatory violations.

The MOU, announced in late October, grants a significant amount of influence and discretion to HUD in advising the DOJ regarding qui tam FCA cases or potential FCA cases stemming from internal HUD knowledge of regulatory violations. As HUD Secretary Ben Carson has explained, the ultimate goal of the MOU is to raise the standard required to bring and ultimately succeed on FHA-based FCA claims. HUD hopes this will attract large-scale banks to provide FHA-backed mortgages once again.

Over the past decade, banks such as JPMorgan Chase and Bank of America have mostly stayed away from providing FHA mortgages. Their reason, according to Secretary Carson, is that “the False Claims Act became a monster that started chasing everybody around the room, making their lives miserable and causing them an inordinate amount of pain.” Secretary Carson states that he believes through this MOU the FCA “monster has been slayed.”

Moving forward, “far fewer FCA actions” will arise when applying the standards of the MOU. This, Carson says, will allow HUD to deal with the “vast majority of problems” internally “through administrative remedies,” with only “relatively few things” being referred to the DOJ for the pursuit of FCA claims going forward.

Many items found in the MOU are of particular importance to HUD and FHA mortgage fraud whistleblowers as they directly concern how DOJ and HUD will handle FCA qui tam complaints filed by relators. First, the MOU dictates that once a relevant qui tam lawsuit is filed, “DOJ will . . . confer with and work with HUD during the investigative, litigation, and settlement phases of the matter to obtain HUD’s views, including, for example, HUD’s support of or opposition to the FCA litigation.”

This process includes HUD making it “known to DOJ whether and to what extent any alleged defects or violations regarding the relevant FHA requirements are material or not material to the agency so that DOJ can determine whether the elements of the FCA can be established.” Under the FCA, any alleged violation or fraud is required to have been “material,” meaning that if the government had known of the violation when receiving a claim for payment, it would have refused to pay. HUD’s view that a violation by an FHA lender was or was not material will carry extreme weight in any FCA litigation and will almost always determine whether the FCA claim survives.

Given Secretary Carson’s stated view that the FCA is an out of control “monster,” it seems all but certain that HUD will attempt to regularly use this power to stamp out as many qui tam FCA lawsuits as possible, even meritorious ones.

The MOU also allows HUD to “recommend that DOJ seek dismissal” of any qui tam FCA case that “HUD does not support” either because “the alleged conduct does not represent a material violation of FHA requirements, or the litigation threatens to interfere with HUD’s policies or the administration of its FHA lending program and dismissal would avoid these effects.”

This provision likewise has the strong potential to harm future qui tam relators as HUD now has the ability to persuasively urge DOJ to dismiss qui tam cases that it believes could deter large banks from providing FHA mortgages in the future, even if those cases are otherwise viable.

By providing strong incentives to individuals who are knowledgeable of fraud to come forward, the FCA has proven time and again to be among the best tools available to root out fraud against the government and recover taxpayer dollars. The new procedures adopted in the MOU have the potential to reduce this incentive and deter future mortgage fraud whistleblowers significantly.

By allowing HUD to potentially torpedo many viable qui tam FCA cases, and instead deal with fraud internally, the incentive structure of the FCA will no longer be available to many whistleblowers. Absent the incentives provided by the qui tam whistleblower provisions of the FCA, fewer mortgage fraud whistleblowers could be willing to risk their financial and emotional wellbeing to expose HUD and FHA fraud.

Further, the devastating economic effects of the housing crisis in 2008 illustrate precisely how significant repercussions can be when greed and fraud are allowed to go unchecked in the mortgage industry. The stated goal of the MOU, to bring large financial institutions back into the FHA mortgage scene to provide affordable and secure mortgages, seems to be well-intentioned.

However, HUD and DOJ must now walk a very fine line between oversight and over-leniency when deciding how to deal with False Claims Act lawsuits moving forward. It will be essential to monitor how the two agencies utilize the MOU’s new guidelines to assess whether the efforts to bring large banks back into the FHA lending fold will outweigh the intent of the FCA to protect the government and taxpayer dollars from fraud.

Read more about the False Claims Act: What is Qui Tam? (FAQs)

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Image courtesy of the Department of Justice