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The State Bar of California
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Federal Credit Assistance Fraud

Tax FraudThe federal government provides more than a trillion dollars each year in loans, financial guarantees, and other subsidies to support a wide range of activities, including home mortgages, student loans, small business, infrastructure development, and exports. Whistleblowers are urgently needed to help prevent unscrupulous participants from defrauding and abusing these federally funded credit programs.

Mortgage Guarantee and Loan Fraud

More than 90% of credit assistance provided by the federal government involves mortgage guarantees and loans designed to support homeownership. This includes Federal Housing Administration (FHA) and Department of Housing and Urban Development (HUD) mortgage insurance, and the mortgage guarantees offered through the Department of Veterans Affairs (VA) and the government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac, Ginnie Mae.

Authority to determine eligibility for and to monitor compliance with program requirements and guidelines is largely delegated to the lenders, originators, and servicers that participate. Nevertheless, those parties are not always trustworthy. In fact, fraud by participating financial institutions has resulted in hundreds of billions of dollars of credit assistance being provided for high-risk and ineligible loans that ultimately defaulted, causing significant losses to the federal government. Common fraudulent practices to which prospective whistleblowers should be alert include:

  • Falsely certifying that loans meet FHA conditions of eligibility.
  • Falsely certifying that loan comply with FHA credit and underwriting guidelines.
  • Falsely certifying that underwriters conducted required due diligence.
  • Falsely certifying the integrity of loan data.
  • Submitting loans for federal insurance using false branch office ID numbers.
  • Failing to implement required quality control procedures or to conduct required audits.
  • Ignoring problems flagged by compliance staff or quality control departments or reported to senior management.
  • Ignoring improper conflicts of interest such as the payment or receipt of incentive compensation based on loan volume or improper gifts or commissions.
  • Failing to self-report quality assurance or compliance problems or the ineligibility of loans that were previously submitted for insurance.
  • Mispresenting compliance with deadlines and requirements for mortgage insurance claims.
  • Claiming reimbursement for unlawful referral fees.

Qui tam whistleblower lawsuits have played a critical role in holding mortgage credit program participants accountable for such wrongdoing, resulting in numerous significant settlements and whistleblower rewards.

In 2014, for example, JP Morgan Chase paid $614 million to settle allegations that it violated the False Claims Act by submitting non-compliant and ineligible mortgage loans for insurance coverage and guarantees by HUD, FHA, and the VA. The whistleblower who exposed this fraudulent conduct received an eye-popping $64 million reward.

Student Loan Fraud

The second largest form of federal credit assistance is student aid provided through the Department of Education (ED). It includes subsidized and unsubsidized Stafford loans, PLUS loans, Pell Grants. Qui tam whistleblower lawsuits have been effective at combatting fraud by for-profit trade-schools, colleges, and universities that receive federal student financial aid. Commonly targeted illegal practices include:

  • Falsifying the educational institution’s eligibility to participate in the student aid program.
  • Falsifying compliance with the Department of Education’s “90/10 Rule” which requires for-profit schools to receive at least 10% of their revenues from private sources and no more than 90% from federal financial aid.
  • Engaging in deceptive or fraudulent marketing to prospective students by, for example, overstating graduate job placement rates.
  • Paying recruiters incentive compensation, bonuses, or commissions based on the number of students enrolled, which is a violation of the Higher Education Act (HEA).
  • Submitting claims for federal financial aid on behalf of students that are ineligible.
  • Tainting the underwriting process by influencing the outcome of appraisals.

For example, in 2015, Education Management Corp. – the second-largest for-profit education company in the country – paid $95.5 million to settle allegations it violated the False Claims Act by paying recruiters illegal incentive compensation and by engaging in deceptive and misleading practices to convince students to enroll.

Export Credit Program Fraud

Through the Export-Import Bank (Ex-Im), the federal government provides billions of dollars each year in loans and loan guarantees to help support the purchase of American-made products and services. Specifically, the Ex-Im Bank guarantees loans to creditworthy foreign businesses made by approved U.S. lenders. Those lenders are responsible for ensuring that applicable requirements are met.

A similar program is run by US Department of Agriculture (USDA) to support the export of agricultural products. In addition, the Overseas Private Investment Corporation (OPIC) provides loans to U.S. companies for certain overseas business projects.

Knowingly making false statements to obtain federal export financing violates the False Claims Act. Whistleblowers are needed to expose such fraud.

In 2015, for example, lender Hencorp Becstone Capital L.C. paid $3.8 million to settle a whistleblower lawsuit alleging that it made false claims and statements to the Ex-Im Bank to obtain loan guarantees for a client based on export transactions that were fictitious. The recipient of the loan simply diverted the funds for his own use. The whistleblower received a $608,000 reward.

If you know about parties engaging in credit assistance fraud and would like to speak to an experienced whistleblower attorney, reach out to us for a free and confidential consultation.

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