Banking and Finance Law Daily PHH to pay $75 million for certifying faulty loans
Wednesday, August 9, 2017

PHH to pay $75 million for certifying faulty loans

By Colleen M. Svelnis, J.D.

Under a settlement with the Justice Department, PHH Mortgage Corporation and its affiliate, PHH Home Loans LLC, one of the largest non-bank originators and servicers of residential mortgages in the United States, has agreed to pay a penalty of about $75 million to settle claims that the mortgage company submitted defective loans for government insurance and then sold the loans to Fannie Mae and Freddie Mac. The loans at issue resulted in claims for payment submitted to the government.

The separate settlements pertain to certain mortgage loans insured by the Veterans Administration (VA) and the Federal Housing Administration (FHA) and sold to Fannie Mae and Freddie Mac during the period between Jan. 1, 2006 and Dec. 31, 2011, and resolve allegations that PHH did not comply with certain FHA, Department of Veterans Affairs, Fannie Mae, and Freddie Mac origination, underwriting, and quality control requirements. Under the terms of the agreements, PHH will pay approximately $75 million to the DOJ, including $65 million to resolve the FHA allegations and $9.45 million to resolve the VA and Federal Housing Finance Agency allegations.

Acting Assistant Attorney General Chad A. Readler stated that the Justice Department "has and will continue to hold accountable lenders that knowingly cause the government to guarantee, insure, or purchase loans that are materially deficient and put both the homeowner and the taxpayers at risk."

Allegations in suit. PHH has participated as a Direct Endorsement lender (DEL) in the FHA insurance program and was a VA approved lender. The suit alleged that PHH violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the FHA, guaranteed by the VA, and purchased by Fannie Mae and Freddie Mac.

As part of the settlements, PHH admitted that between Jan. 1, 2006, and Dec. 31, 2011, it certified for FHA insurance single-family residential mortgage loans that did not meet U.S. Department of Housing and Urban Development (HUD) underwriting requirements and did not adhere to FHA’s self-reporting requirements.

Examples of loan defects that PHH admitted resulted in loans being ineligible for FHA mortgage insurance include:

  • failing to document the borrowers’ creditworthiness, including paystubs, verification of employment, proper credit reports, and verification of the borrowers’ earnest money deposit and funds to close;
  • failing to document the borrower’s claimed net equity in a prior residence or obtain documentation showing that the borrower had paid off significant debts (Including these debts in the borrower’s liabilities resulted in the borrower exceeding HUD’s debt-to-income ratio requirements for FHA-insured loans.); and
  • insuring a loan for FHA mortgage insurance even though the borrower did not meet HUD’s minimum statutory investment for the loan.

The settlements were the result of joint investigations conducted by HUD, the HUD Office of Inspector General, the Veterans Administration’s Office of Inspector General, the FHFA Office of Inspector General, the Department of Justice’s Civil Division, and the U.S. Attorney’s Offices for the District of Minnesota, District of New Jersey, Southern District of Florida, and Eastern District of New York.

PHH statement. PHH Corporation issued a statement in response to the settlement that the mortgage company has "agreed to resolve these matters, which cover certain legacy origination and underwriting activities, without admitting liability, in order to avoid the distraction and expense of potential litigation."

Companies: Fannie Mae; Freddie Mac; PHH Corporation; PHH Mortgage Corp.; PHH Home Loans

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