OIG Final Civil Action: Lender Official Settled Violations of Federal Housing Administration Lending Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-03-26.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                         U.S. DEPARTMENT OF
                                        HOUSING AND URBAN DEVELOPMENT
                                                 OFFICE OF INSPECTOR GENERAL

                                                       March 26, 2014
                                                                                                       MEMORANDUM NO:

TO:                 Dane M. Narode
                    Associate General Counsel for Program Enforcement, CACC

FROM:               Nikita N. Irons
                    Regional Inspector General for Audit, 4AGA

SUBJECT:            Final Civil Action:
                    Leo Thomas
                    Lender Official Settled Violations of Federal Housing Administration Lending


The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General
(OIG), assisted the Office of the United States Attorney, Civil Division, of the Eastern District of
North Carolina with a review of loans allegedly improperly originated by Numerica Mortgage,
LLC. Numerica was a Federal Housing Administration (FHA) direct endorsement mortgagee.
The allegations originated with the office of the North Carolina Commissioner of Banks, 1 which
referred the matter to OIG. The assigned assistant United States attorney (AUSA) filed a civil
case using the False Claims Act and common law.


HUD's Federal Housing Administration (FHA) insures mortgages made by qualified lenders to
people purchasing or refinancing a primary residence. FHA approves some lenders for direct
endorsement authority. This allows the lender to underwrite and close loans without prior
review by HUD. For each loan originated and endorsed under the program, the lender provides
HUD with a written certification asserting that the lender followed HUD rules in originating and

  The North Carolina Office of the Commissioner of Banks is responsible for the chartering and regulation of North Carolina’s
State banks, trust companies, and mortgage companies, as well as registration and licensing of various financial entities operating
in North Carolina.
                                                        Office of Audit (Region 4)
                                     75 Spring Street SW, Box 42, Room 330, Atlanta, GA 30303
                                               Phone (404) 331-3369, Fax (404) 730-2382
                                   Visit the Office of Inspector General Web site at www.hudoig.gov.
endorsing the loan. Actions to the contrary can constitute false statements and false claims to the

The North Carolina Commissioner of Banks provided the OIG a referral alleging that Numerica
Mortgage, LLC, had used its status as a direct endorsement lender to endorse loans with FHA
insurance that were originated by lenders not approved to originate FHA mortgages. The referral
alleged that lenders not approved to do FHA business would originate loans and send the loan
packages to Numerica. They would then receive a fee from Numerica for the loan package, and
Numerica officers or staff would sign off on the loan documents as if Numerica had originated
the loan. The false documents were processed and submitted to HUD as part of endorsed FHA
loans. Numerica’s actions resulted in a “net branching” arrangement prohibited by HUD. 2

On August 21, 2012, the AUSA filed a complaint in U.S. District Court for the Eastern District
of North Carolina to recover statutory damages and civil penalties under the False Claims Act
(31 USC (United States Code) 3729-3733) and common law. The complaint sought damages for
mortgages wrongfully endorsed by Numerica that had insurance claims paid by HUD, as well as
expected future insurance claims. Among other parties, the complaint named owner and
company president Leo Thomas as a defendant.

                                        RESULTS OF REVIEW

On September 24, 2013, the U.S. Attorney’s office notified OIG that defendant Leo Thomas had
executed a settlement agreement to resolve the complaint. The defendant denied all liability for
the alleged wrongdoing and settled any civil liability in the matter solely to save the time and
expense of defending the proposed civil actions. For cash payments totaling $115,000 over 5
years, the settlement agreement resolved the Government’s complaint.


We recommend that HUD’s Office of General Counsel, Office of Program Enforcement,

        1A.    Agree to allow HUD OIG to record the $115,000 settlement in HUD’s Audit
               Resolution and Corrective Action Tracking System as ineligible costs.

 Mortgagee Letter 00-15: “…the practice of taking on an existing, separate mortgage company or broker as a
branch and allowing that separate entity to originate insured mortgages under the approved mortgagee’s HUD
Mortgagee Number. Some mortgagees refer to this arrangement as a “net branch.” This, however, constitutes a
prohibited net branch arrangement.”