Franklin American Mortgage Fraud Case: High Quotas, Serious Defects and Very Little Told to HUD

In the Franklin American Mortgage fraud case, the company agreed to pay $70 million to resolve allegations that it knowingly obtained FHA insurance for hundreds of ineligible mortgages. The Justice Department’s account of the company’s admissions connected unqualified junior underwriters, production quotas and bonuses to serious loan defects that reached management but rarely reached HUD. If you worked in underwriting or quality control, this case follows the decisions between the file on your desk and the government’s promise to insure it.

Franklin American’s story is about production pressure, the work behind an underwriting certification and management’s response to its own audits. Our broader page on mortgage fraud whistleblower evidence follows the records across origination, servicing and payment.

Franklin American’s Underwriting Quotas Came With Consequences

Franklin American admitted certifying loans for Federal Housing Administration insurance that failed housing department underwriting requirements between January 1, 2006 and March 31, 2012. The Justice Department’s announcement describes substantial growth in the company’s FHA loan production from 2006 through 2010. During that growth, the company assigned important underwriting functions to unqualified junior underwriters.

The admissions describe pressure from both directions. Franklin American set high underwriting quotas and disciplined underwriters who missed them. It also offered FHA underwriters bonuses to encourage loan production. The production target had teeth.

For an underwriter, the quota, the assigned work and the certification belong together. The distinction is particularly concrete for a junior employee. The relevant work may be the condition that employee cleared, the supporting document they reviewed or the unresolved issue passed to a senior underwriter. In a case built around underwriting defects and false certifications, job titles help locate those decisions, while the dated file shows what happened to the loan.

FHA Insurance Relied on the Lender’s Own Decision

Franklin American participated as a Direct Endorsement lender, with authority to originate, underwrite and endorse mortgages for Federal Housing Administration insurance. As the Justice Department explained the program in its settlement announcement, neither FHA nor its parent agency, the Department of Housing and Urban Development, reviewed each loan before endorsement. The lender made the eligibility decision on which the insurance depended.

That delegation explains why the qualifications of the people doing the underwriting mattered to taxpayers. The lender had to follow federal underwriting and certification requirements, maintain quality control capable of preventing and correcting deficiencies, and report deficient loans identified through that process. The underwriting decision and the later review were both part of the protection for public money.

The loan also moved through distinct stages. Application information and verification supported underwriting, which preceded closing, certification and endorsement. A later default could lead the loan’s holder to submit an insurance claim to the housing department. The original underwriting file shows what the lender relied on before that claim existed.

Serious Audit Findings Reached Management

Franklin American admitted that its post-closing audits identified substantial percentages of seriously deficient loans. The audits often failed the housing department’s standards. They still found the defects.

The next part of the admission is the hinge of the case:

For the employee who circulated those findings, management’s receipt is a concrete part of the case. In the Justice Department’s account, the reporting duty belonged to the same lender that already knew about the defects. We see a remarkable filter here: the audits found serious problems, but very few survived the trip to the housing department.

For a quality-control employee, the useful history runs from the original underwriting file to the audit result, its recipients and the response. A later file can contain information the original underwriter never had. We compare the documents available at certification with the later findings and management’s response.

Junior Underwriters and the Certifications Above Them

The division between work performed and review certified also appears in the Justice Department’s allegations against Guild Mortgage. Its complaint alleged that the loan system distinguished conditions marked cleared from those marked waived, but underwriters waived mandatory FHA conditions and uncertified junior underwriters cleared conditions on manually underwritten loans.

One loan example in the complaint concerned gift-fund conditions cleared by a junior underwriter despite a Direct Endorsement underwriter’s certification of personal review. The complaint connected that loan to a later HUD payment.

United Shore Financial Services provides the closer comparison on incentives. In its separate settlement, the company admitted tying compensation to approved or closed loans and falsely certifying that underwriters had personally reviewed appraisals. The connection ran from what the business rewarded to what its underwriters said they had done.

Franklin American’s admitted use of unqualified junior underwriters gives that comparison a practical point for someone inside a lender. The person who handled a condition and the person whose certification carried the loan forward may have different accounts of the same approval.

From Franklin American’s Loan Defects to FHA Payments

The Justice Department’s account of Franklin American’s admissions connected the ineligible loans to substantial Federal Housing Administration losses. The agency paid insurance claims on loans it should never have insured.

A loan’s certification, subsequent claim and housing department payment allow us to follow the same mortgage through different parts of the business. Our page on insurance payments and the government’s loss explains the next part of that accounting, including property or loan assets acquired and money recovered afterward.

The Franklin American Settlement and the Whistleblower Opportunity

The Justice Department announced the civil settlement on December 2, 2015. It resulted from a joint investigation by HUD, HUD’s Office of Inspector General, the Justice Department Civil Division’s Commercial Litigation Branch and the U.S. Attorney’s Office for the District of Colorado.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Our page on mortgage whistleblower rewards explains the connection between a case and the recovery it produces.

You Saw the File Before It Became an Approval

If you saw junior staff doing work they were unqualified to perform, quotas driving approvals or serious findings stopping at management, talk with our whistleblower experts about the loans behind those decisions. We build your strongest case with you, bring in mortgage fraud whistleblower lawyers who know FHA underwriting and quality-control failures, and stay alongside you as the case moves forward.