Prospect Mortgage Fraud: Two Branches and One FHA Settlement

Prospect Mortgage agreed to pay $4,157,000 to resolve a mortgage fraud case over false Federal Housing Administration underwriting and quality-control certifications involving branches in Florida and North Carolina. Prospect acknowledged endorsing loans that failed Department of Housing and Urban Development requirements and falsely certifying that they complied. For someone who worked in underwriting or quality control, the case connects what the loan file showed to what the company told the government.

The Justice Department announced the settlement on July 3, 2017. This page follows the branch failures, company certifications and insurance claims behind that resolution. Our broader account of FHA mortgage fraud explains the program’s underwriting and payment chain.

How Prospect’s Loan Certifications Reached FHA

Prospect participated in the Federal Housing Administration’s Direct Endorsement program, with authority to originate, underwrite and endorse mortgages for FHA insurance. The Justice Department explained that the government did not review a loan before endorsement. The Federal Housing Administration and the housing department relied on Prospect to follow the program’s rules.

That arrangement placed the lender’s assessment between the borrower’s application and federal insurance. The ordinary loan process runs from application and verification through underwriting, closing, certification and endorsement. The loan file supports the decision to approve the mortgage, while the certification tells FHA that the lender satisfied its requirements. For an employee who reviewed assets, income or credit, those are decisions with a government payment behind them.

If an insured loan later defaulted, its holder could submit an insurance claim to recover its losses. In Prospect’s case, the Justice Department said loans from the two branches defaulted and became claims by Prospect for federal insurance payments, causing substantial losses to the United States. The branch’s underwriting decision reached beyond the closing table to the public insurance fund.

Two Branches, One Company’s Certification

The Florida and North Carolina branches were part of one Prospect settlement. The investigation joined the U.S. Attorneys’ Offices for the Northern Districts of California and Georgia with the Department of Housing and Urban Development and its Office of Inspector General. An audit by the housing department’s Inspector General in Atlanta exposed loans from the two branches that had not followed its requirements.

For an insider, the connection is the company certification attached to the branch’s loan. We examine who supplied the borrower information, who assessed it, and who adopted it for insurance. The branch file and the lender’s certification connect the local work to the company’s promise to FHA.

Prospect’s Defaults Concentrated in Two Branches

Between December 2007 and December 2009, Prospect had a 12.29% default rate within HUD’s Atlanta Home Ownership Center, which the Justice Department described as well above the national average. The housing department attributed approximately 76% of those defaults to the Florida and North Carolina branches.

The investigation identified failures in the underlying loan files. According to the Justice Department, the majority of audited loans from the branches failed the housing department’s underwriting requirements concerning the assessment of borrower assets, income and credit. Those were the inputs used to assess whether borrowers could repay their mortgages.

For someone reviewing loan performance, the useful next connection is between the underwriting failure, the reason the borrower defaulted and the insurance payment. Our account of how defective-loan evidence connects to government loss follows that question in more detail. In this case, the Justice Department described both the branch underwriting failures and the resulting claims on FHA insurance.

What Did Prospect Acknowledge About Quality Control?

Prospect acknowledged that it endorsed loans for FHA insurance without meeting the housing department’s requirements for assessing assets, income and credit. It also acknowledged falsely certifying that the noncompliant loans had been underwritten according to those requirements. We call that compliance by signature.

The Justice Department also listed Prospect’s failure to follow Department of Housing and Urban Development quality-control guidelines among the conduct the company acknowledged. Its explanation of the program described a quality-control system with a practical job: identify and correct underwriting deficiencies, and report materially deficient loans to the housing department. The lender was responsible for checking the work as well as certifying it.

That makes the history of a quality-control finding and the company’s response valuable to someone who saw the problem inside a lender. A review can show the original concern, the investigation, the final finding, who in management received it, and what correction or report followed. We use those records to understand what the company knew when it stood behind a loan.

Residential Home Funding provides a close comparison. In a separate case, the Justice Department described that company’s admissions involving deficient quality control, unreviewed early defaults, unreported serious defects and false eligibility certifications. The shared issue is the distance between reviewing a loan, recognizing a serious problem and continuing to certify eligibility. Someone in quality control may see that distance in the findings and the response to them.

The Loan File Behind the FHA Payment

The evidence behind a mortgage whistleblower case connects the underwriting decision to the certification and the later claim. Prospect’s acknowledged failures identify concrete places to look within that account: assets, income, credit and quality control. An insider’s value is often knowing how one decision affected the next, including who had authority to approve the loan or respond to a finding.

The records serve different purposes along that chain:

• The underwriting file shows the borrower information assessed and the basis for the approval that Prospect certified to FHA.
• The quality-control history shows the findings, their recipients and the company’s response, including corrections and reporting.
• The insurance claim and payment records connect the defaulted mortgage to the request for government money and the payment that followed.

The holder, servicer and claim preparer can occupy different roles, so we follow who made the representation and who requested the money. An employee in claims may know the part of that chain an origination reviewer never saw.

The Federal Housing Administration can acquire a loan or property when it pays a claim, and collections can follow. Our account of what the government paid and recovered follows those transactions beyond the initial insurance payment.

What the Prospect Settlement Resolved

The settlement resolved the Justice Department’s False Claims Act allegations about Prospect’s underwriting and quality-control certifications. The company’s acknowledgments supplied a more specific account of what went wrong at the branches: ineligible endorsements, false certifications and failed quality control.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For an insider with knowledge of similar loan certifications or claim practices, we assess how that knowledge connects to the recovery a whistleblower case can pursue.

You Saw the File Before FHA Saw the Claim

If you know where an underwriting finding disappeared between the branch file and the company’s certification, speak to one of our Whistleblower Experts about where the finding went. We work with you to build your strongest mortgage fraud whistleblower case around those decisions and bring in mortgage fraud whistleblower lawyers who understand FHA underwriting and insurance claims. We stay beside you as your knowledge becomes the evidence behind the case.