Final Civil Action - JPMorgan Chase Settled Allegations of Failing to Comply With HUD's FHA Loan Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-02.

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

                                                    September 2, 2014

                                                                                                     MEMORANDUM NO:

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

FROM:               Kimberly Randall
                    Director, Joint Civil Fraud Division, GAW

SUBJECT:            Final Civil Action: JPMorgan Chase Settled Allegations of Failing To Comply
                    With HUD’s FHA Loan Requirements


The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General
(OIG), assisted the U.S. Attorney’s Office, Southern District of New York, in conducting an
investigation of JPMorgan Chase Bank, N.A., and JPMorgan Chase & Co. (Chase). The
investigation began due to a qui tam 1 filing in the U.S. District Court for the Southern District of
New York. The relator alleged that Chase had not followed Federal Housing Administration
(FHA) requirements when underwriting loans under the FHA insurance program, and the
insurance fund incurred significant losses when the borrowers defaulted on the loans.


The FHA program is a component of HUD. The program provides mortgage insurance for a
person to purchase or refinance a principal residence. The mortgage loan is funded by a lending
institution, such as a mortgage company or bank, and the mortgage is insured by FHA.

Chase has participated in the FHA program since 1964 and became a direct endorsement lender
in 1983. The direct endorsement lender program authorizes private-sector mortgage lenders to
    The False Claims Act allows private persons to file suit for violations of the False Claims Act on behalf of the
    Government. A suit filed by an individual on behalf of the Government is known as a qui tam action, and the
    person bringing the action is referred to as a “relator.”
                                                            Joint Civil Fraud Division
                                           400 State Avenue, Suite 501, Kansas City, KS 66101-2406
                                       Visit the Office of Inspector General Web site at www.hudoig.gov.
approve mortgage loans for insurance by FHA. Lenders approved for the program must follow
FHA requirements and provide annual and per loan certifications that the lender complied with
these requirements when underwriting and approving loans for FHA insurance.

                                      RESULTS OF INVESTIGATION

On February 4, 2014, the U.S. Attorney’s Office of the Southern District of New York filed suit
against Chase for not complying with FHA requirements based, in part, on our review of the
underwriting and refinancing of FHA loans. 2 The U.S. Attorney’s Office sought damages and
civil penalties under the False Claims Act and common law. The lawsuit alleged that during the
period January 1, 2002, through February 4, 2014, Chase routinely approved loans for FHA
insurance and refinancing that did not meet applicable underwriting requirements and were,
therefore, ineligible for insurance. However, FHA had insured the loans based on per loan
certifications submitted by Chase that it had complied with FHA requirements when
underwriting the loans. When the borrowers defaulted on the loans, FHA incurred substantial
On February 4, 2014, Chase entered into a settlement agreement to pay $614 million to end the
lawsuit, which the U.S. District Judge for the Southern District of New York approved. Of the
settlement total, $564.6 million was attributable to FHA’s direct endorsement lender program.
The FHA insurance fund was to receive $336 million of the $564.6 million, before incurring
related costs; and the remaining $228.6 million was to be remitted to other Federal entities and
the relator. 3
As part of the settlement, Chase admitted, acknowledged, and accepted responsibility for certain
conduct, including that

      •   It failed to report to HUD nearly 600 loans that it identified in a 3-year period that had
          been affected by borrower or correspondent (broker) fraud or other material deficiencies.

      •   It approved for FHA insurance or refinancing thousands of loans that did not meet one or
          more rules of the direct endorsement lender program and, therefore, were not eligible for
          FHA insurance or refinancing.

      •   Certain Chase employees submitted data to HUD’s Technology Open To Approved
          Lenders (TOTAL) Mortgage Scorecard 4 that lacked integrity. Specifically, when loans

    The U.S. Attorney’s Office for the Southern District of New York filed the lawsuit on behalf of HUD, FHA, the
    U.S. Department of Veterans Affairs, and the relator in connection with Chase’s residential mortgage lending
    business. This memorandum addresses only the results directly related to HUD’s FHA program.
    The Department of Justice (DOJ) will remit to the FHA insurance fund that portion of a False Claims Act recovery
    that equals single damages ( i.e., FHA’s actual damages), to compensate FHA for its losses. DOJ will retain up to
    3 percent of the total amount recovered pursuant to 28 U.S.C. §527. The FHA fund retains single damages less
    the DOJ retained portion. DOJ remits the balance of the damages into the general fund of the U.S. Treasury as
    miscellaneous receipts. If the lawsuit is a qui tam, the Court may award the relator a share of the False Claim Act
    award, based on the contributions the relator made to the investigation.
    HUD’s TOTAL Mortgage Scorecard interacts with proprietary automated underwriting systems (AUS) to assess
    the credit worthiness of FHA borrowers by evaluating certain mortgage application and mortgage credit
    information. TOTAL is not an AUS; rather, it is a mathematical equation intended for use within an AUS.

          did not receive an accept-approve rating from TOTAL, these employees resubmitted the
          loans through TOTAL multiple times over a short period, each time entering hypothetical
          data that had not been appropriately corroborated to determine that data would generate
          an accept-approve rating. These employees communicated the qualifying data to
          borrowers, thus increasing the risk of borrower fraud.

      •   It submitted loan-level certifications to HUD for each FHA loan it approved for insurance
          and thus certified to HUD that the loan was eligible for FHA insurance or refinancing
          under the direct endorsement lender program. It also certified to the integrity of the data
          supplied to its AUS and TOTAL in obtaining loan approval and applying for FHA

      •   It induced HUD to accept for FHA insurance or refinancing thousands of loans that were
          not eligible for the FHA program and that HUD otherwise would not have accepted for
          insurance or refinancing. This resulted in substantial losses to the Government when the
          borrowers defaulted on the loans.
Additionally, Chase agreed to comply with all rules of the direct endorsement lender program
and implement an enhanced quality control program to review FHA loans that it underwrites
using TOTAL.


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

1A.       Allow HUD OIG to post the $336 million recovery to HUD’s Audit Resolution and
          Corrective Actions Tracking System as ineligible costs.

HUD’s Office of General Counsel, Office Program Enforcement has agreed to the
recommendation. No further action is required.