In recent years, federal legal actions against financial institutions that misbehaved in the run up to the recession all began to all look very similar with outcomes to match: settlement and payment of fines big enough to put a dent in the federal deficit.
The Justice Department recently announced a lawsuit against Quicken Loans, though, that is different in several ways. First, it didn’t start the litigation battle this time. Quicken Loans did.
On April 17, the company filed a lawsuit against the Justice Department and the Department of Housing and Urban Development alleging that the federal government was using threats in order to force Quicken into paying for and confessing to fraud it didn’t commit. Five days later, the civil division of the Justice Department filed its own lawsuit.
Another thing that is different about this case is that it involves direct and indirect agencies of the federal government that have financial-market relationships unlike those of the usual bureaucracies. The Justice Department’s lawsuit, for example, refers to HUD, but the underlying charges involve the Federal Housing Administration which was attached to HUD in the 1980s for reasons never fully made clear.
FHA is essentially an insurance company, and funded through premiums paid by borrowers. It sets lending standards and premiums, but despite being at the center of this legal case is really more of an observer than a party to the action.
The allegations made in the federal lawsuit relate to Quicken’s writing mortgages that were insured through FHA. Quicken, however, because it is one of the largest mortgage lenders in the country, is a Direct Endorsement Lender, or DEL. This allows them to approve its own mortgage loans for FHA insurance coverage — essentially becoming an underwriter for FHA with the authority to commit the agency’s insurance coverage.
The DEL relationship is at the core of the Justice Department case. The feds note that Quicken Loans, as a DEL, had a responsibility to “…certify that every loan endorsed for FHA insurance is underwritten according to the applicable FHA standards.”
Under the law, there is no room for error. Every loan must comply with the standards perfectly, or the lender is liable for triple damages under the False Claims Act. And it could get worse than that.
Quicken Loans, for its part, asserts that the Justice Department is improperly using its investigative and litigation authority to pressure lenders to settle claims. It also says that the government’s case is overly reliant on a tiny sample (about 2 one-hundredths of a percent) of the 246,000 mortgages it wrote during the period. It also states that some of the errors found were trivial and non-material — but, of course, still count as false under the standards of perfection.
The last difference in this case is probably the most interesting. In its lawsuit, Quicken Loans alleges that the Justice Department is following a political agenda rather than a regulatory or legal one as it investigates and threatens mortgage lenders — seeking money and admissions of guilt.
The political agenda part may be difficult to prove in court, but it could provide Quicken with some powerful leverage in the case. It is not likely that the Justice Department would enjoy having its methods and tactics probed, dissected, and made a matter of public record, even if they are, as is likely, fully compliant with the law.
While the federal government’s actions in this case follow the pattern set over the past few years of investigating the housing market collapse, Quicken is a different sort of animal. To start with, it is not a bank and not a regulated institution in that sense.
Quicken is a private company and not subject to the kind of SEC regulations that affect publicly held corporations. And, lastly, Quicken apparently is a company that does not believe it is guilty of anything and is tired of being treated as if it is.
In the 1976 movie, “Network,” news anchor Howard Beale exhorts his viewers to open a window and shout, “I’m mad as hell and I’m not going to take this anymore.” There is a Howard Beale element in the Quicken Loans case that makes it both more human and more interesting than the typical government litigation. It does seem as if the low-hanging fruit in these actions against mortgage lenders and packagers has already been harvested. But we will have to wait to see how it comes out.
James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.