Rainy Day Mortgage Fraud Case: Lender Money Behind the Borrower Payments

The Rainy Day mortgage fraud case included a $424,859 settlement with Intercontinental Capital Group and two executives over lender-funded payments that altered reported delinquency and default rates. The wider civil action alleged that mortgage lenders routed their own money through a purported charity to conceal borrowers’ early defaults from the Department of Housing and Urban Development and the banks holding their loans. If you handled the transfers, payment postings or delinquency reports, you may recognize the split between who appeared to be keeping a mortgage current and who actually supplied the money.

The Justice Department’s September 2015 announcement described the Rainy Day Foundation’s role and the separate Intercontinental resolution. Continental Mortgage Bankers, doing business as Financial Equities, and Franklin First Financial later reached their own settlements. Their admissions show how payments presented as borrower assistance changed the information used to monitor the lenders themselves.

How Did the Lenders Hide Early Defaults?

According to the Justice Department’s complaint announcement, the lenders hid early defaults by sending money through the Rainy Day Foundation to make defaulting borrowers’ monthly mortgage payments. The lenders had originated loans insured by the Federal Housing Administration and sold them to federally insured banks. The same lenders then supplied money that kept the loans from appearing delinquent to the banks and HUD.

That sequence matters in the mortgage business. The originating lender makes the loan, the purchaser holds it, and the Federal Housing Administration supplies insurance against default. A servicer handles the loan’s day-to-day records, while the payment source may sit in another company’s accounts. Seeing a payment credited to a borrower tells only part of that story.

The Justice Department alleged that the lenders’ early-payment-default rates exceeded twice the average for other lenders. Concealing those rates helped them avoid removal from the Department of Housing and Urban Development’s program. The alleged payments continued until the loans passed the bank’s contractual repurchase window or HUD’s early-default monitoring period, then stopped, leaving borrowers without further support. We see the trick: the payment stopped when the clock protected the lender.

The complaint announcement described at least 865 instances and more than $5,605,237 in alleged false claims paid by the United States. The allegation connected the concealed defaults to both the banks that bought the loans and the federal insurance money behind them. An employee who knew why payments began or stopped could explain something the reported default rate obscured.

A New Name and Another Set of Accounts

The Justice Department alleged that Rainy Day reorganized as Default Mitigation Services after attracting federal scrutiny, continuing the payment arrangement under a new name. The announcement described another layer between the lenders and the banks receiving the mortgage payments: Ely Shoshone tribal bank accounts.

According to that account, the defendants presented the payments as charitable grants from the tribe, while Default Mitigation Services routed money supplied by the mortgage lenders through the tribal accounts. The allegation concerned the origin and movement of the money behind the charitable label. For an insider who handled those accounts, the incoming transfer and the outgoing mortgage payment would tell the story together.

What Did the Participating Lenders Admit?

The participating lenders admitted making payments that altered their delinquency and default rates. The separate resolutions identify whose money moved, which conduct each lender accepted responsibility for and what each agreed to pay.

Intercontinental Capital Group

The Justice Department announced a separate lawsuit and simultaneous settlement with Intercontinental, its president and its former chief executive. Its complaint alleged eleven occasions on which they transferred money to Rainy Day to make payments for borrowers on the lender’s behalf. Intercontinental and the executives admitted making the payments and admitted that those payments changed the company’s delinquency and default rates.

The reporting consequence was part of the admission. The Justice Department described indirect payments that artificially suppressed the comparative rates FHA compiled for Intercontinental. The company’s funding decision reached all the way into the performance figures used to evaluate it.

Continental Mortgage Bankers and Financial Equities

Continental and its president agreed to pay $300,000 in the March 2016 resolution. The complaint alleged that, for at least eight loans, they funneled payments through Rainy Day to avoid defaults and delinquencies that could trigger a government investigation. They admitted making the payments and that the payments altered Continental’s delinquency and default rates.

Franklin First Financial

Franklin First and its president, a manager and its chief operating officer agreed to pay a shared $1,250,000 settlement. In the filed consent decree, they admitted transferring funds in 101 instances from February 2009 through March 2010. The borrowers had loans Franklin First originated or refinanced and could not make a payment within the first two years after issuance. Their accounts were delinquent, approaching default or already in default.

The admission identifies who directed the next step:

The defendants admitted that the money came from Franklin First and that the payments suppressed its reported ratios in HUD’s Neighborhood Watch system. They also admitted that the financial institutions that bought the mortgages did not know about the payments made at their direction. The purchaser saw a payment history without knowing the originating lender was financing it.

How Franklin First’s Payments Changed Neighborhood Watch

Franklin First admitted lowering the delinquency and default rates reported in HUD’s Neighborhood Watch system by funding borrower payments. The decree explains that HUD used those rates to monitor Direct Endorsement lenders and relied on prompt, accurate early-default reporting.

The complaint’s claims against Franklin First concerned those later payments and the information they changed. The decree identifies FIRREA, the federal bank fraud penalty law, as a basis for those claims.

The admission also reaches the borrower. The decree states that the payments may have delayed borrowers and mortgage purchasers in using HUD’s loss-mitigation program, which offered remedies for delinquencies and defaults. The company-funded payments changed the warning visible to the people who could respond to the underlying trouble.

Which Records Show the Concealed Payment?

The useful mortgage fraud evidence connects the payment’s source to its posting and reported effect. We follow the same loan through the lender, intermediary, borrower account and later claim.

The Rainy Day allegations and Franklin First admissions point to records an insider may recognize: lender transfers and instructions, intermediary disbursements, borrower payment postings and default reports. The bank’s repurchase terms and HUD’s monitoring period explain why a payment’s stopping date matters. Those records connect the changed performance figures to the government money at issue.

Different people may see different parts of that sequence. An accounting employee may know the source account, a servicing employee the posting date, and a quality-control employee the reported default rate. Your knowledge of the decision behind a transfer can explain why the records diverge.

Early defaults also expose reporting failures elsewhere in the mortgage business. Freedom Mortgage admitted failing to circulate early-default review findings to production and underwriting management and lacking staff for timely, complete reviews. That case concerned review findings and reporting decisions. The Rainy Day cases concerned payments that changed the default figures themselves.

The Whistleblower’s Knowledge Behind the Numbers

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For an insider considering a mortgage whistleblower reward, we build the case around what you know about the payments and who directed them. A transfer instruction, an account entry or a reporting decision gives us a concrete place to begin.

You Know Who Funded the Payment

If you saw lender money routed into borrower payments while the default reports told a different story, talk with our whistleblower experts about the transactions you know. We develop the case with you, bring in mortgage fraud whistleblower lawyers who understand FHA reporting and insurance claims, and stay beside you as your knowledge becomes the foundation of the case.