Branch Banking & Trust Company (BB&T) has agreed to pay $83 million to resolve allegations brought by the U.S. Department of Justice (DOJ) that the lender knowingly cut corners when it underwrote mortgages submitted to the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) insurance program.
The DOJ alleges that BB&T violated the False Claims Act when it knowingly failed to comply with certain FHA requirements related to origination, underwriting and quality control. The lender was a participant in the FHA’s Direct Endorsement Lender (DEL) program, which gives selected lenders the authority to submit mortgages for FHA insurance without having to put each loan through the usual due diligence “up front.”
“The FHA program depends on Direct Endorsement Lenders endorsing only eligible loans for FHA mortgage insurance, and complying with HUD’s quality control requirements,” said Benjamin C. Mizer, principal deputy assistant attorney general and head of the Justice Department’s civil division, in a release. “Lenders like BB&T that participate in the FHA program must make adherence to the FHA program rules a priority. The department has and will continue to hold accountable those lenders that prioritize profits over program compliance.”
“While profiting from the FHA program, BB&T exposed the taxpayers to losses by failing to comply with HUD guidelines, and then took the additional step of falsely certifying that it had complied with such guidelines,” added U.S. Attorney John Horn of the Northern District of Georgia. “This settlement recovers substantial losses caused by BB&T’s decision to place its own profits above its commitment to adhere to HUD underwriting and quality control requirements.”
The faulty underwriting took place from at least January 2006 through September 2014, officials said.
The DOJ’s press release notes that BB&T significantly increased its loan volume between 2006 and 2009 – more than doubling all loan originations, while increasing the number of FHA insured loans six fold.
This increase in volume was accompanied by an increase in the number of loans internally rated “serious-marketability” by BB&T’s quality control department. This is a significant quality control defect rating that, under normal circumstances, would render a loan ineligible for FHA insurance.
Officials allege that between 2007 and 2011, more than 30% of the FHA loans that BB&T underwrote each year were rated “serious-marketability.” What’s more, in 2010 and 2011, these loans accounted for more than 50% of the FHA loans that BB&T endorsed for coverage.
Officials also allege that BB&T management knew about these loan defects. In 2011, an internal memorandum at BB&T stated that “increased volume of FHA requests and changes to regulatory requirements have resulted in origination, processing and underwriting errors. Some employees are not applying current and accurate FHA guidelines,” the DOJ’s release states.
A proposal to improve BB&T’s underwriting of FHA loans, with additional training as well as a testing and certification process for underwriters, was prepared in 2010, but neither recommendation was implemented until after 2014.
Officials also allege that as BB&T’s FHA program grew in size, it failed to add employees to its quality control department that was in charge of reviewing the loans to ensure they met guidelines.
Because BB&T’s quality control department did not have adequate staff, it instituted a cap on the number of loans it reviewed, the DOJ said in its release. As a result, between 2009 and 2014, the quality control department did not always review the number of loans necessary to comply with HUD’s loan review sampling requirements. Additionally, BB&T did not perform reviews of its lender branch offices, as required by HUD, before beginning the reviews again in late 2014.
BB&T also failed to self-report any loans containing material underwriting defects until 2013, authorities allege.