Deloitte & Touche Mortgage Fraud Case: Audits and FHA Eligibility
Deloitte & Touche agreed to pay $149.5 million to settle Justice Department allegations under the False Claims Act that its audits missed mortgage fraud and enabled Taylor, Bean & Whitaker to keep making loans insured by the Federal Housing Administration. For an audit or lender-compliance insider, the case reaches the reports that kept a mortgage company eligible for federal backing.
This page follows the outside auditor’s reports into lender eligibility and the government’s insurance exposure. Our FHA mortgage fraud overview follows the broader underwriting, endorsement and claims process.
How Did the Audits Affect FHA Lender Eligibility?
Annual audit reports were part of what Taylor, Bean & Whitaker had to submit to remain a Direct Endorsement Lender. The Justice Department’s February 28, 2018 announcement explains that the required submissions included reports on the lender’s financial statements, internal controls and compliance with certain requirements of the Department of Housing and Urban Development. Deloitte served as the independent outside auditor and issued reports for the lender’s fiscal years 2002 through 2008.
That status carried a practical power: Taylor, Bean & Whitaker could originate and underwrite mortgages insured by the Federal Housing Administration. If a borrower defaulted, the loan’s holder could submit an insurance claim to the United States for losses resulting from the default. The independent audit was part of the lender’s access to that federal insurance, before the holder of a defaulted loan asked the government to pay.
The Justice Department alleged that Deloitte’s audit failures enabled Taylor, Bean & Whitaker to continue originating FHA-insured mortgages until the lender collapsed and declared bankruptcy in 2009. The alleged connection runs from the audit report, through continued program participation, to loans carrying federal insurance. For someone who worked on financial reporting or eligibility, the decisive document may have concerned the whole lender before a particular borrower ever applied.
What Did Deloitte’s Audits Allegedly Miss?
The Justice Department alleged that Deloitte’s audits failed to detect fictitious or double-pledged mortgage loans and financial statements that concealed Taylor, Bean & Whitaker’s severe financial distress. It also alleged that the audits knowingly departed from applicable auditing standards.
A fictitious loan puts a mortgage into the reported business that does not exist. A double-pledged loan puts the same mortgage behind competing claims to the asset. In the Justice Department’s account, Taylor, Bean & Whitaker’s purported mortgage sales helped produce financial statements that failed to show the lender’s condition.
The department went further than alleging a general failure to spot trouble. It said Deloitte’s audit failures extended to the specific financial arrangements through which Taylor, Bean & Whitaker carried out the alleged fraud. The same announcement reported criminal convictions of Taylor, Bean & Whitaker officials in connection with the conduct at issue in those audit allegations. The alleged blind spot was inside the arrangements being audited.
The Department of Housing and Urban Development required an independent check on the lender’s finances and controls. In the Justice Department’s allegation, failures in that check helped the lender keep making federally insured loans. We see a safeguard working backward: the audit kept the door open.
Why the Outside Audit Mattered Before Loan Certification
The Deloitte case concerns an outside auditor’s reports supporting a lender’s continued participation. Loan-level certifications sit at another point in the FHA process: the mortgagee adopts information about a particular loan and submits it for insurance. An insider may see the financial reporting, the individual mortgage files or the certification decisions, and those records answer different questions.
The Deutsche Bank and MortgageIT FHA case supplies a useful comparison. Its May 2012 settlement addressed allegations of false certifications, deficient underwriting and quality-control failures at the lender. Both cases connect representations to FHA participation, but the work being represented differs. In MortgageIT’s case, the lender’s underwriting and certification practices were at issue. In Deloitte’s case, the Justice Department challenged the outside audit that allegedly helped the lender remain eligible.
What Could an Audit or FHA Insider See?
An audit or FHA-compliance insider may know how the lender’s mortgage transactions differed from the financial account presented to HUD. We connect that knowledge to the audit reports, the information available to the audit team and the eligibility decision those reports supported. Where you saw a discrepancy, the question is how it traveled from the underlying arrangement into the report the agency received.
Different parts of the operation may hold different parts of that explanation. The audit work can show what was reviewed and how an issue was treated. Management’s responses can show what the lender said about the same arrangement. The eligibility submission can show which account reached HUD. We work with you to connect those records to the affected lending and the insurance claims that followed.
The mortgagee and subservicer may perform different claims work. The lender’s insurance claim connects the audit and eligibility story to the mortgage evidence behind a government claim. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.
You Know What the Audit Left Unanswered
If you worked on an audit, financial report or FHA eligibility submission that concealed the lender’s condition, speak to one of our Whistleblower Experts about what the audit missed. We build your strongest mortgage fraud whistleblower case with you and bring in mortgage fraud whistleblower lawyers who understand auditor representations and FHA claims. We stay beside you through the case, with your knowledge of the lender’s finances at its center.
