Government's False Claims Act Complaint Against Major Financial Institution Alleges False Certifications Of Compliance With HUD Underwriting Rules

On May 3, 2011, the U.S. Attorney for the Southern District of New York, Preet Bharara, filed a False Claims Act (FCA) suit against Deutsche Bank AG and its subsidiary, MortgageIT, Inc., for making allegedly false statements and certifications of compliance with HUD rules requiring due diligence in underwriting FHA-insured mortgages. The complaint is notable not just because of the alleged damages, which could exceed $1 billion, but also because of the government's attempt to use the FCA to turn due diligence failures in underwriting mortgages into fraud claims against a major financial institution.

While this lawsuit is the first FCA action the government has brought against a financial institution alleging false certification of compliance with due diligence rules in underwriting FHA-insured mortgages that defaulted during the financial crisis, U.S. Attorney Bharara indicated that it likely will not be the last, stating, "It would not be a fantastical stretch to think we are looking at other lending institutions as well." If the government's theory in this case is upheld by the courts, it could open the door for many additional FCA lawsuits against financial institutions that underwrote mortgages insured by the FHA, which, the complaint alleges, constitute approximately one-third of all new residential mortgages in the United States.

The FCA has been in existence since the Civil War era and has, in recent years, been one of the primary tools in the government's arsenal to attempt to curb Medicare and Medicaid fraud and false claims by government contractors. However, until this week, the FCA had not been used by the government to address alleged underwriting lapses by lending institutions arising out of the mortgage boom and subsequent collapse during the past several years.

The complaint brings claims under three sections of the FCA: 31 U.S.C. §§ 3729(a)(1)(A), 3729(a)(1)(B), and 3729(a)(1)(G). In these claims, the government asserts (1) that defendants knowingly, or with deliberate ignorance or reckless disregard, presented or caused to be presented false claims to an officer or employee of the government, (2) that defendants knowingly or with deliberate ignorance or reckless disregard, made, used, or caused to be made or used, false records or statements material to false or fraudulent claims for payment, and (3) that defendants knowingly made, used, or caused to be made, false records or statements in order to avoid, decrease, or...