Concealed Early Mortgage Default Payments: The Payments Stopped When the Clock Ran Out

Lenders can use concealed early mortgage default payments to make troubled loans appear current while repurchase and early-default monitoring periods run out. If you know the lender supplied the money appearing in a borrower’s payment history, you may know why a default stayed out of view. This page follows the funding, the reported loan performance and the later claim for government money.

How Rainy Day Allegedly Hid Early Mortgage Defaults

The Rainy Day Foundation allegedly served as the intermediary between mortgage lenders and the banks holding their loans. In its September 2015 complaint announcement, the Justice Department described lenders that originated mortgages insured by the Federal Housing Administration and then sold them to federally insured banks. The insurance protected against default, while the banks’ contracts gave them rights to require the lenders to repurchase loans.

The Justice Department alleged that the lenders’ loans entered early payment default at more than twice the average rate of other lenders. It said the lenders conspired with Rainy Day to hide those high rates from the Department of Housing and Urban Development and avoid removal from its program.

The lenders allegedly sent their own money through the purported charitable counseling fund to cover defaulting borrowers’ monthly payments to the banks. The complaint described at least 865 instances of the alleged scheme. The department’s inspector general and the Federal Deposit Insurance Corporation’s inspector general helped investigate the arrangement.

The complaint tied the end of the assistance to the lender’s exposure. The Justice Department described the stopping point:

For someone handling those payments, the stopping instruction could connect the assistance to the lender’s reason for funding it. We see a peculiar kind of charity in the Justice Department’s allegation. Its generosity expired with the lender’s exposure.

The Justice Department also alleged that Rainy Day reorganized as Default Mitigation Services after attracting federal scrutiny. According to the announcement, the operation then described the payments as charitable grants from a tribe while routing lender money through tribal bank accounts to the banks holding the mortgages. The charity story changed. The lenders still supplied the money.

The Lenders Admitted Changing Default Rates

Intercontinental Capital Group admitted making indirect payments that changed its delinquency and default rates. The Justice Department’s same announcement described a separate action and settlement involving eleven payment occasions. The company, its president and its former chief executive agreed to pay $424,859 to resolve the claims. Their admissions connected the lender-funded payments to the rates the Federal Housing Administration compiled and calculated.

Continental Mortgage Bankers, doing business as Financial Equities, and its president settled for $300,000 in March 2016. That resolution concerned at least eight loans and included admissions that the payments altered default rates.

Franklin First Financial and three executives undertook a shared $1,250,000 obligation in a January 2017 consent decree. The Justice Department’s account of the Franklin First resolution says they admitted making improper payments and changing the company’s delinquency and default rates.

What the Payment History Leaves Out

Lender-funded payments hiding an early default become visible when the funding records are connected to the borrower’s ledger and the performance reported outside the lender. The Rainy Day allegation turns on that connection: lender money covered missed payments while the banks and the housing department received a distorted picture of loan performance. An insider who saw the funding instructions can explain something the resulting current balance leaves out.

Who Supplied and Posted the Money

The funding source, payment recipient and posting date identify how assistance reached a particular loan. In the Rainy Day allegations, the intermediary received lender money and directed payments to the banks holding the mortgages. The intermediary’s name on a payment therefore carried only part of the story.

In our work on reporting mortgage fraud, we connect the funding instructions with the borrower-payment entries and the authority under which the assistance was offered. For an employee in finance or servicing, the useful detail may be who selected the loan for assistance or who approved the money. Those decisions can connect an apparently routine posting to the business that stood to benefit from the reported payment history.

Which Clock Controlled the Payments

The relevant clock comes from the loan’s contract and the applicable program rules. The Rainy Day complaint identified both the bank’s contractual repurchase period and the housing department’s early-default monitoring period as reasons the lenders allegedly kept payments going. The date funding stopped belongs beside those terms. For someone reviewing an older loan, we examine the rule and agreement governing that loan when the payment was made.

What Reached HUD and the Purchaser

The comparison includes what the company reported, when it reported it and who received it. Intercontinental’s admissions specifically connected the indirect payments to its comparative delinquency and default rates as calculated by the federal mortgage insurer. For a reporting employee, the useful evidence can be the relationship between the loan-level postings and the performance figures sent outside the business.

The originator, servicer, subservicer and company submitting an insurance claim can occupy different places in that chain. Servicing work, ownership of the mortgage and responsibility for the claim each have their own records and agreements. We follow those handoffs with you because the person who knows how the payment was posted may work somewhere other than the business that later sought reimbursement.

Early-Default Reviews Can Also Be Buried

Freedom Mortgage’s admissions in a separate federal mortgage insurance settlement show another way early-default information failed to reach the people responsible for lending decisions. The company admitted that it did not share early-payment-default review findings with production and underwriting management during 2006 through 2008. It also admitted certifying loans that were ineligible for federal mortgage insurance.

The Justice Department reported that Freedom’s completed early-payment-default reviews showed defect rates exceeding 30 percent during 2008 through 2010. In 2012, after identifying hundreds of loans potentially requiring reporting to HUD, the company reported only one.

Freedom’s admissions concerned the handling of review findings, while the Rainy Day complaint alleged payments that changed the reported performance being monitored. Both put the decisions around early defaults inside the business in view. If you worked in quality control, the original finding, the management recipients and the response can show what the company knew before a later insurance claim reached the housing department.

How a Hidden Default Connects to Government Money

A Federal Housing Administration insurance claim brings the payment history into the request for government money. The housing department’s claims framework separates mortgage and payment-history information from expenses, interest, receipts and disbursements affecting the insurance payment. The mortgagee remains responsible for the claim even when a subservicer prepares it.

For a claims employee, that creates a concrete comparison between the servicing history and what the company submitted. Original submissions, corrected claims, approval records and the actual HUD payment show successive parts of the transaction. We connect those records to the concealed payment and the company’s knowledge of how it changed the loan’s reported history.

The Rainy Day complaint alleged that the scheme required the United States to pay more than $5,605,237 in false claims. It puts the assistance arrangement in the same story as the eventual bill to taxpayers.

The bank’s repurchase rights, the lender’s reporting and the federal mortgage insurance claim each help explain whose money and decisions the alleged concealment affected. We assess that connection with you when considering a potential whistleblower case. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know Who Kept the Loan Current

If you saw lender money cover missed payments until a monitoring period expired, speak with our whistleblower experts about the funding and the instructions behind it. We work beside you to build the case around the payment history, the reporting decisions and the government money at stake. We bring in mortgage fraud whistleblower lawyers who understand FHA claims and lender repurchase arrangements, and remain your partners through the process.