False Claims Act settlement with United Shore can provide guidance, attorney says

By Sara McCleary | Jan 17, 2017

WASHINGTON (Legal Newsline) – The U.S. Department of Justice (DOJ) has announced that United Shore Financial Services (USFS) will pay $48 million to resolve allegations that it violated the False Claims Act. The agreement was announced on Dec. 28 and was reached after a nearly two-year long investigation.

USFS had been accused of underwriting and endorsing loans insured by the Federal Housing Administration (FHA) that did not meet FHA’s underwriting guidelines. The actions in question occurred between January 2006 and December 2011 and include numerous cases of noncompliance with HUD guidelines.

According to the settlement agreement’s Attachment A, “HUD requirements prohibit paying underwriters ‘commissions’ based on the volume or value of mortgages approved… At certain times during the relevant time period, USFS’s underwriter compensation plan, however, used a formula that expressly tied underwriter compensation, in part, to the percentage of loans approved by the underwriter and closed by USFS.”

The attachment goes on to state that “USFS also did not ensure that a Direct Endorsement Underwriters [sic] always personally reviewed appraisal reports prior to USFS approving and endorsing mortgages for FHA insurance.”

It also points out that despite internal reports by USFS that recognized significant deficiencies, senior management was rarely informed and “USFS failed to self-report materially deficient mortgages and serious violations of FHA requirements to HUD as it was required to do.”

As a result, HUD insured hundreds of ineligible mortgages and “subsequently incurred substantial losses when it paid insurance claims on these released mortgages.”

According to Patricia Stamler, an FCA attorney with Michigan law firm Hertz Schram, Attachment A can be useful to others in USFS’s position.

“Lenders should familiarize themselves with the content of Attachment A, as it provides key directives on compliance matters tied to FHA funding. Quality control and reporting are fundamental to ensuring compliance,” she told Legal Newsline.

The agreement with USFS is one in a series of similar settlements by the DOJ, and is for a smaller sum than some others.

“While $48 million seems like a substantial amount, it is far less than the $1.3 billion Countrywide was ordered to pay,” Matt Lawhon, an attorney with Oberheiden Law Group, told Legal Newsline. “This case announces to the industry that DOJ’s civil division is serious about enforcement activities within the mortgage industry and that those in the industry need to understand the laws and statutes that regulate their field or seek legal help to understand those rules.”

The settlement “was likely negotiated,” said Lawhon, “and took into account what the government believed it could obtain at trial and what USFS… felt it could afford to pay and continue to operate as a company.”

Like Stamler, Lawhon feels that the major lesson from this settlement is the importance of compliance with federal guidelines and a quality-control program.

“Based on the information contained in the DOJ announcement, it appears that the government felt USFS completely lacked a compliance component or failed to follow existing program requirements,” said Lawhon. “When a company commits to a culture of compliance, these types of problems can be addressed and exposure to civil or criminal liability can be diminished, if not removed completely.”

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