Franklin American Mortgage Company will pay $70 million to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements.
Franklin American is headquartered in Franklin, Tennessee.
The company was represented by Phillip Schulman and Stephen Topetzes of K&L Gates in Washington, D.C.
During the time period covered by the settlement, Franklin American participated as a direct endorsement lender (DEL) in the FHA insurance program.
A DEL has the authority to originate, underwrite and endorse mortgages for FHA insurance.
If a DEL approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD, the FHA’s parent agency, for the losses resulting from the defaulted loan.
Under the DEL program, neither the FHA nor HUD reviews a loan before it is endorsed for FHA insurance.
DELs are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance; to maintain a quality control program that can prevent and correct deficiencies in their underwriting practices; and to self-report any deficient loans identified by their quality control program.
The settlement resolves allegations that Franklin American failed to comply with certain FHA origination, underwriting and quality control requirements. As part of the settlement, Franklin American admitted to the following facts: between Jan. 1, 2006, and March 31, 2012, it certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements.
Franklin American’s FHA loan production grew substantially from 2006 until 2010.
During this time, Franklin American employed unqualified junior underwriters to perform important underwriting functions.
Franklin American also set high quotas for its underwriters and subjected underwriters to discipline if they did not meet their quotas.
The company also sought to incentivize the production of loans by offering bonuses to its FHA underwriters.
Loans underwritten by Franklin American were later reviewed in post-close audits. Oftentimes, those audits did not satisfy HUD’s requirements.
Nevertheless, the audits identified substantial percentages of seriously deficient loans underwritten by Franklin American.
Although these deficient loans were shared with management, Franklin American reported very few deficiencies to HUD.
Franklin American’s conduct caused the FHA to insure hundreds of loans that were not eligible and, as a result, the FHA suffered substantial losses when it later paid insurance claims on those loans.