M&T Bank will pay $64 million to settle allegations that hundreds of Federal Housing Administration (FHA)-backed mortgages which the bank originated from 2006 to 2011 contained significant underwriting errors, leading to severe losses when borrowers went into default during the Great Recession that began in 2008.
The settlement is similar to dozens of others paid by the largest U.S. banks in recent years as part of the government’s effort to recoup on losses tied poorly underwritten FHA-backed loans and to compensate affected borrowers.
In the case of Buffalo, N.Y.-based M&T Bank, it was an internal whistleblower who alerted authorities that the bank had violated the federal False Claims Act, according to a U.S. Department of Justice press release. As a result, federal authorities conducted a series of audits that revealed that some loans originated by the bank contained “major errors.”
False Claims Act cases let whistleblowers pursue claims on behalf of the government and share in recoveries. However, an award for M&T employee and whistleblower Keisha Kelschenbach is yet to been determined or awarded, according to the release.
Authorities also allege that M&T Bank failed to meet its obligations as a direct endorsement lender (DEL) in the FHA insurance program. The U.S. Department of Housing and Urban Development’s (HUD’s) DEL program gives lenders that meet certain requirements the authority to originate, underwrite and endorse mortgages for FHA insurance without going through the usual upfront quality control checks. These lenders are to self-report any deficient loans identified by their quality control program.
Authorities allege that M&T Bank self-reported only seven deficient loans during the period in question – but hundreds of other loans approved by the bank contained underwriting errors that were not reported.
The bank is also accused of failing to promptly review loans when they went into early stage default and for failing to review an adequate sample of FHA loans, as required by HUD.
“Additionally, M&T created a quality control process that allowed it to produce preliminary major error rates that were significantly lower – sometimes below one percent – than what the rate would have been if M&T had calculated its preliminary major error rate by dividing the number of loans with preliminary major errors by the number of loans reviewed to determine what percent of loans contained a preliminary major error,” the DOJ states in its press release.
“This recovery on behalf of the Federal Housing Administration should serve as a reminder of the potential consequences of not following HUD program rules and the value of private citizen assistance, including whistleblowers, in pursuing lenders that violate the rules,” says David A. Montoya, inspector general for HUD, in the release.
“It is critically important that FHA-approved lenders comply with HUD’s underwriting standards and originate mortgages that borrowers can sustain,” adds HUD General Counsel Helen Kanovsky. “We are pleased M&T Bank worked with the Department of Justice and HUD to arrive at an agreeable settlement that protects FHA’s insurance fund.”