Gateway Mortgage Fraud Case: Early-Default Audits and Compliance Warnings

Finance of America Mortgage agreed to pay $14.5 million in the Gateway mortgage fraud case to resolve allegations that Gateway knowingly originated and underwrote deficient loans insured by the Federal Housing Administration. Gateway admitted missing required early-default audits, ignoring compliance warnings and failing to report loans with material deficiencies. If you worked in quality control, underwriting or branch management, the case turns on a familiar distinction: what the loan reviews told the company and what the company told the Department of Housing and Urban Development.

The lender was Gateway Funding Diversified Mortgage Services, L.P., which Finance of America Mortgage acquired in 2015. This page follows Gateway’s forward-lending audits and executive warnings. Finance of America Reverse’s separate case concerned Urban Financial Group and Home Equity Conversion Mortgages, the FHA reverse mortgages.

What Did Gateway’s Early-Default Audits Miss?

Gateway admitted that it failed to audit all early-payment-default loans required by HUD. When it did audit those loans, it also admitted ignoring calls from its compliance department about its poor early-default rate. The Justice Department’s December 12, 2018 announcement describes both failures: reviews that never happened and warnings that did.

The warnings reached senior executives. In late 2011, some learned that Gateway’s one-year compare ratio was increasing partly because of originations from its Horsham, Pennsylvania headquarters and certain branch offices. HUD uses that ratio to compare lenders, with a higher ratio signaling an unusually high default percentage relative to peers.

The later warning identified the same sources of trouble. The Justice Department’s account of Gateway’s admissions says:

We see the absurdity in Gateway’s admission, reported by the Justice Department, that senior executives received warnings about the same underwriters and offices years apart. The later warning already knew the names.

An audit-completion log and a management report tell different parts of that story. The log can show which early defaults received a review, while the report can show what the completed reviews found and who was told.

Why Did Gateway’s Reviews Matter to FHA Insurance?

Gateway’s reviews mattered because the Federal Housing Administration relied on the lender to determine whether loans qualified for federal insurance. Gateway was a Direct Endorsement lender, authorized to originate, underwrite and endorse mortgages for FHA insurance. The Justice Department explained that FHA did not review each loan for compliance before endorsement.

That delegation came with underwriting, certification, quality-control and self-reporting responsibilities. The lender’s quality-control program was supposed to prevent and correct underwriting deficiencies, and deficient loans identified through that program had to be reported. In Gateway’s case, the company admitted failing to follow HUD’s self-reporting requirements for loans containing material deficiencies.

The money connection followed the insurance. If an approved loan later defaulted, its holder could submit an insurance claim to HUD for losses from the default. A lender’s certification of the loan file therefore mattered beyond the closing table: it helped put the government behind a mortgage that could later produce a claim.

Gateway acknowledged that its failures led HUD to insure many loans the company approved that were ineligible for FHA mortgage insurance. Taxpayers were backing loans the company’s own admissions said should not have qualified.

Gateway’s Settlement and Whistleblower Recovery

A former Gateway employee’s qui tam case triggered the investigation that led to Finance of America Mortgage’s settlement. The Justice Department announced that the whistleblower would receive $2.4 million from the settlement proceeds. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. The investigation and settlement involved the U.S. Attorney’s Office for the Northern District of New York, the Justice Department’s Civil Division, HUD and HUD’s Office of Inspector General.

Gateway’s warnings preceded its acquisition by Finance of America Mortgage, which agreed to pay for the settlement. An employee who worked through the ownership change may know different stages of the story. We connect the original underwriting decision and later review to the people responsible at each date, then follow the loan into its insurance and claim history.

How Does Gateway Differ From Finance of America Reverse?

Gateway’s case concerns forward FHA lending and the handling of early-default reviews and compliance warnings. The Finance of America Reverse settlement announced in March 2020 concerned alleged conduct by Urban Financial Group, acquired by that company in November 2013.

In the reverse-mortgage case, the Justice Department alleged that Urban used appraisal-order forms and communications to influence property values for HECM loans. Gateway’s case follows missed reviews, repeated warnings and deficient reporting within a different lending business.

Which Records Connect Gateway’s Warnings to the Loans?

The useful records connect a loan’s underwriting and insurance certification to its review findings, management warnings and later claim history. We work with insiders to make those connections through the records they know from their work:

• The early-default population and completed audits. The list of loans due for review and the audit-completion record show the reach of the review process. The original underwriting file and dated review findings show what the reviewer could see at the time.
• The warning and management’s response. Branch and underwriter identifiers, report recipients, compliance messages and follow-up decisions connect a recurring defect to the people told about it. The lender’s actual report to HUD shows what information left the company.
• The insurance and payment history. The lender certification, endorsement record, servicing history and claim documents connect the underlying loan to federal insurance and a request for payment. HUD’s payment record shows what was actually disbursed.

FHA can pay an insurance claim and acquire a mortgage or property, with later collections returning money to the government. Following the payment and what the government gets back connects the original lending decision to its financial result.

The records behind the claim certification distinguish a prepared claim, a corrected submission, an approved claim and a HUD remittance. We trace those events alongside the warning history to connect what the lender knew to the government payment.

The Same Review Problem Appeared at Freedom Mortgage

Freedom Mortgage also admitted failures involving early-default reviews and the flow of findings to management. In its April 2016 settlement announcement, the Justice Department described admissions that Freedom failed to circulate early-default quality-control findings to production and underwriting management and lacked enough staff for timely, complete reviews.

Gateway’s admissions add the other side of that comparison: senior executives did receive warnings, including a later warning naming the same underwriters and offices. Together, the cases show why we examine the review work, the recipients and the response. A completed report is only part of that history.

You Know Where the Warnings Went

If you saw early-default reviews skipped or the same underwriting problems return after management was warned, talk with our whistleblower experts about what happened inside the lender. We build the mortgage fraud case with you and bring in FHA mortgage fraud whistleblower lawyers who understand the connection between the loan file, the certification and the government’s money. We stay beside you as your knowledge becomes the foundation of the case.