Quicken, feds to square off in mortgage case

Jennifer Chambers
The Detroit News

Attorneys for the Justice Department and Quicken Loans Inc. will face off in a Detroit courtroom Monday in what could be a lengthy legal battle over whether the loan giant ignored “red flags” in dicey home loans that didn’t meet federal standards.

Both sides will appear before U.S. District Judge Mark A. Goldsmith, first for a hearing on Quicken’s request to dismiss the case. Then, if necessary, both sides will go over a schedule of court dates leading to an April 11, 2019, trial date in the contentious case.

The Justice Department sued Quicken in April 2015, alleging the company knowingly submitted claims for hundreds of improperly underwritten Federal Housing Administration-insured loans.

The loans involved inflated appraisals, poor credit risks and borrowers with insufficient incomes, the suit claimed. The government alleges Quicken had a culture of bending the rules and gave “speed bonuses” to underwriters. The mortgage company failed to disclose the problems with the loans that cost the federal government millions of dollars when they went bad, federal lawyers contend.

Dan Gilbert, Quicken chairman and founder, has said the company won’t settle. Quicken describes the suit as “nonsensical” and “ludicrous” and said its FHA-backed loans are the “highest quality” in the nation.

“The baseless and groundless government lawsuit has no merit. There is nothing in the DOJ’s trumped-up, distorted claims worthy of prompting or causing Quicken Loans to change any of our underwriting practices,” Quicken wrote in a statement to The Detroit News.

Quicken said its FHA-backed loans perform three times better than others, defaulting at a rate of less than 1 percent. It contends the lawsuit is the result of a strategy by the Justice Department to sue banks following the mortgage collapse, which resulted in $6 billion in settlements.

In a statement, Quicken contends the government “made a conscious, intentional decision to file claims against the largest FHA lenders because they are the largest lenders.” The mortgage lender contends the government’s case is built on 55 “cherry picked” loans out of the 250,000 FHA loans Quicken closed from 2007-11.

“Not only is Quicken Loans the FHA lender with the highest quality ratings (using the agency’s own measure), FHA continues to work so closely with Quicken Loans that the company is FHA’s largest lender partner, accounting for 6 percent of all new FHA loans nationwide,” Quicken attorney Jeffrey B. Morganroth wrote in court papers filed last week.

Court documents filed by Quicken attorneys contend the company can prove it had proper underwriting practices, complied with program and contractual requirements, and did not make false claims. It denies the existence of speed bonuses.

Court records show that, as of Dec. 12, both sides were unable to reach an agreement to mediate the case.

Justice Department officials in Detroit declined comment. Recent court filings show both sides are fighting over discovery, the collection of evidence either through documents, deposed witnesses or other means.

The government alleges that Quicken refuses to let it depose additional witnesses and won’t produce documents related to profit on FHA insured mortgages and related to mortgage bankers.

“Quicken Loans has frustrated the United States’ attempt to obtain documents necessary to support its allegations,” wrote Assistant U.S. Attorney Samuel J. Buffone. “The parties appear to have reached an impasse on these issues and the United State intends to seek judicial intervention.”

Quicken argues it is cooperating, producing 146,053 documents in response to 153 requests for information and allowed one of its employees to be deposed. The government, Quicken alleges, has produced 20,846 documents in response to 158 requests for information.

Morganroth agrees they are at an impasse on these issues, but does not think court intervention is necessary.

Settlement unlikely

Amiyatosh Purnanandam, a professor of finance at the University of Michigan’s Stephen M. Ross School of Business, said the case is intriguing because Quicken won’t settle, unlike other big banks.

“In broad terms, what the government is doing is similar to what it did to large banks in four to five years ago, when those banks diluted their underwriting standards,” said Purnanandam, who is not part of civil case. “This is not something that is only happening to Quicken Loans.”

In recent years, the Justice Department has reached settlements with several prominent lenders over accusations of fraud in FHA lending practices. Last April, Wells Fargo agreed to pay $1.2 billion, following deals by JP Morgan Chase, SunTrust, U.S. Bank and Bank of America.

Gilbert told The News in 2015 the federal government proposed a “nine-figure settlement,” suggesting it was more than $100 million. At the time, he said agreeing to a deal is an admission to “fraud” and would be “untrue.”

Purnanandam said the reason Quicken decided not to engage in settlement talks “could be that Quicken has a good case and that’s why they want their day in court, or the government is coming hard and they have a good case.”

Either way, he said Quicken likely would do whatever is necessary to remain eligible to issue FHA loans. In 2015, the loans represented about 12 percent of Quicken’s business.

“Quicken does a whole lot of FHA loans. Their business model depends a lot on qualifying as a FHA lender,” Purnanandam said.

False Claims Act key

The Justice Department and the HUD Office of Inspector General began investigating Quicken — an FHA-approved lender for nearly 27 years — under the False Claims Act. The scope of the investigation encompassed about 246,000 FHA loans Quicken originated from mid-2007 through Dec. 31, 2011.

The lawsuit alleges Quicken employees regularly spoke of “fudging” a borrower’s income to get approval for FHA insurance. It included emails from company officials discussing the “bastard income” of borrowers. One email described how a customer was approved for a loan after he stopped paying other bills and his credit score dropped 100 points.

Quicken has contended the government built its case by “cherry picking” scant evidence among numerous loans.

Last year a federal judge in Washington, D.C., moved the case to Detroit, saying the Eastern District of Michigan is the appropriate forum because the alleged unlawful activity occurred in or near Detroit.

The government claims the case is not a local controversy but involves mortgages for properties across the country that adversely affect taxpayers throughout the nation.