Franklin American Mortgage Company Settled Allegations of Failing To Comply With HUD's Federal Housing Administration Loan Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-08.

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 8, 2016
                                                                                              MEMORANDUM NO:

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

FROM:         Christeen Thomas
              Director, Joint Civil Fraud Division, GAW

SUBJECT:      Final Civil Action: Franklin American Mortgage Company Settled Allegations of
              Failing To Comply With HUD’s Federal Housing Administration Loan


The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General
(OIG), assisted the U.S. Department of Justice, Washington, DC, and the U.S. Attorney’s Office,
District of Colorado, in the civil investigation of Franklin American Mortgage Company.
Franklin American has its principal place of business in Franklin, TN.


The Federal Housing Administration (FHA) is a component of HUD. It 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.

HUD’s direct endorsement lender program authorizes private-sector mortgage lenders to approve
mortgage loans for FHA insurance. Lenders approved for the program must follow FHA
requirements, including providing annual and per loan certifications that the lender complied
with these requirements when underwriting and approving loans for FHA insurance.

Franklin American became an FHA-approved direct endorsement lender in 1995. As a direct
endorsement lender, Franklin American was authorized by HUD to originate and underwrite

                                               Joint Civil Fraud Division
                                400 State Avenue, Suite 501, Kansas City, KS 66101
                          Visit the Office of Inspector General Web site at www.hudoig.gov.
mortgage loans on HUD’s behalf, including determining a borrower’s creditworthiness and
whether the proposed loan met all applicable requirements. When a borrower defaults on an
FHA-insured loan underwritten and endorsed by a direct endorsement lender, such as Franklin
American, the lender (or its representative) has the option of submitting a claim to HUD to
compensate the lender for any loss sustained as a result of the default. Therefore, once a
mortgage loan is endorsed for FHA insurance, HUD insures the risk of the borrower’s defaulting
on that mortgage, which is realized if an insurance claim is submitted.

                                     RESULTS OF INVESTIGATION

On December 2, 2015, Franklin American entered into a settlement agreement with the Federal
Government to pay $70 million to avoid the delay, uncertainty, inconvenience, and expense of
lengthy litigation of certain civil claims the Government contended it had against Franklin
American. As part of the settlement, Franklin American agreed that it engaged in certain
conduct in connection with its origination, underwriting, and quality control of certain single-
family residential mortgage loans insured by FHA. 1 The settlement was neither an admission of
liability by Franklin American nor a concession by the United States that its claims were not well

As a result of Franklin American’s conduct, HUD insured hundreds of loans approved by
Franklin American that were not eligible for FHA mortgage insurance under the direct
endorsement lender program and that HUD would not otherwise have insured. HUD incurred
substantial losses when it paid insurance claims on the loans covered by the settlement


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

1A.       Acknowledge that the attached settlement agreement for $70 million represents an
          amount due HUD.

          As of December 2, 2015, the settlement agreement of $70 million had been reached, and
          it represents an amount due HUD. Included in the settlement agreement is a repayment
          agreement that explains an initial payment of $10 million and the balance in monthly
          payments of $1 million, with final payment expected by June 1, 2021. In accordance
          with HUD Handbook 2000.6, REV-4, the final action target date will be set at July 1,
          2021. At issuance of this memorandum, HUD OIG will enter a management decision
          into HUD’s Audit Resolution and Corrective Action Tracking System, along with any
          supporting payment information received to date.

    Loans covered in the settlement agreement included loans insured by FHA between January 1, 2006, and
    December 31, 2012, that resulted in claims submitted to HUD on or before July 10, 2015, excluding origination or
    underwriting of home equity conversion mortgages under 12 U.S.C. (United States Code) 1715z-20 and
    streamlined refinances under 12 U.S.C. 1715n(a)(7).