Prospect Mortgage LLC agreed to pay $4.157 million to settle allegations that the company committed mortgage fraud by underwriting loans that failed to meet Federal Housing Administration (FHA) requirements. The U.S. Justice Department announced the settlement agreement on Monday.
The allegations stem from Prospect’s participation in the Direct Endorsement Lender Program, (DELP) which is administered by FHA and the U.S. Department of Housing and Urban Development (HUD).
As a direct endorsement lender, Prospect Mortgage had the authority to originate, underwrite and endorse mortgages for FHA insurance without first receiving approval from FHA. Instead of reviewing mortgages before they are endorsed for FHA insurance, the government relies on lenders participating in the DELP to follow the program’s rules. Among other things, lenders are required to:
- Adhere to HUD mortgage underwriting guidelines.
- Maintain a quality control program that can identify deficiencies in mortgage underwriting practices.
- Self-report any materially deficient loans identified by the quality control program to HUD.
According to HousingWire, Prospect violated the False Claims Act (FCA) by falsely certifying underwriting compliance and quality control requirements when originating mortgages insured by the FHA and HUD.
Between December 2007 and December 2009, Prospect had a 12.29 percent loan default rate within HUD’s Atlanta Home Ownership Center, a percentage well above the national average. HUD determined that approximately 76 percent of the defaults were for loans underwritten by two Prospect branches located in Florida and North Carolina.
A government investigation revealed that the majority of the audited loans from these branches failed to meet HUD underwriting requirements. Specifically, these Prospect branches allegedly failed to properly assess borrowers’ assets, income and credit, which are essential considerations in determining whether the underwritten loans will go into default.
According to the settlement, Prospect Mortgage:
- Endorsed FHA insurance loans that failed to meet HUD requirements.
- Falsely certified to the government that the non-compliant loans originated at two of its branches were underwritten in accordance with HUD underwriting requirements.
- Failed to adhere to HUD’s quality control guidelines.
As a result of the alleged fraud, the United States sustained substantial losses when the mortgages defaulted and Prospect submitted claims to the government for insurance payments.
The government’s mortgage fraud claims against Prospect are allegations only. There has been no determination of guilt.
The Prospect mortgage fraud settlement is one of a number of civil fraud cases the government has pursued against residential mortgage lenders. Since the start of the Great Recession in 2007, the government has secured settlements against Wells Fargo, Walter Investment, Freedom Mortgage and a host of other residential mortgage lenders accused of wrongdoing.
