Quicken, Feds reach $32.5M deal in false claims lawsuit

Dan Gilbert.

Quicken Loans Inc. agreed to pay $32.5 million to the U.S. government in a yearslong case accusing the Detroit home mortgage lender of ignoring red flags in home loans that didn't meet federal standards ahead of the global financial crisis.

U.S. District Judge Mark Goldsmith dismissed Friday the lawsuit following a resolution reached in mediation sessions that included Quicken Chairman Dan Gilbert before he had a stroke on May 25. The deal resolves the matter without findings against Quicken Loans, the largest Federal Housing Administration lender in the United States.

"Dan Gilbert has been involved in this all the way, in the entire seven-year process," Quicken Vice Chairman Bill Emerson told The Detroit News, adding: "He was 100 percent fully involved" in mediation sessions on May 8 and May 9 that culminated in an agreement on May 9 — more than two weeks before his stroke.

Quicken's agreement differs from settlements made between major FHA lenders and the Justice Department following the bursting of the housing bubble and the financial meltdown that followed. Typically, those have totaled billions of dollars and often required the lenders to acknowledge they failed to comply with quality and reporting requirements.

"The small dollar amount and the fact that the government did not insist on an admission of wrongdoing gives the impression that the investigators did not feel they had a strong case of systematic wrongdoing of the sort they found at Wells Fargo," Erik Gordon, a professor at the University of Michigan's Ross Business School, said in an email.

Gilbert and his lawyers previously said the company would fight the accusations and not settle. Emerson denied the agreement resolving the suit is a settlement, instead calling it a "resolution."

Quicken, now the country's No. 1 mortgage lender, made loans in error totaling $25.5 million, he said, which is 0.02% of the company's $108 billion in FHA loans it has originated since 2007. To encourage homeownership, when a debtor defaults on an FHA loan, the government pays, not the lender. Quicken previously had said it would correct any wrongs.

"We didn't settle; we did exactly what we said we would do," Emerson said. "We looked at some of the loans, and there were a few we made a mistake on. We made them whole. That's all we did.

"We did exactly what we said we would do, that we would fight this case. There was no case. There is no case. There are no findings of wrongdoing of us at all. There were a handful of loans that we made a mistake on. That’s exactly what happened."

Emerson did not detail what or how many mistakes had been made. When the Justice Department filed the lawsuit, Quicken CEO Jay Farner said in 2015 that the online lender had found issues with only "eight or nine" loans.

Progress on the case, for the most part, had been behind closed doors and in documents under seal. The agreement comes two months after Goldsmith ordered that the parties undergo mediation with Gerald Rosen, the retired chief judge of the U.S. District Court for the Eastern District of Michigan.

Rosen proposed the "fair path" agreement following several meetings and two full days of mediation that the parties ultimately accepted, he said in a statement. The parties differed as to how the settlement amount should be attributed and calculated.

Ultimately, the proposed $25.5 million would go to making the government whole for any losses it may have incurred, together with $7 million in interest on that amount.

"The parties worked diligently, and in good faith, to mediate for a solution to resolve their differences and to put the dispute behind them," Rosen wrote. "This resolution is in the interests not only of the parties, but of the home-buying public. All parties fully understand the important role the FHA program plays in helping middle-class Americans access home financing, and this resolution allows the parties to move ahead together with that mission and to ensure their future relationship."

The deal also sends a message to all lenders that they will be held to the same regulatory requirements as traditional banks, said Lysa Davis. She has worked on settlement agreements for financial institutions in the past and is the founder of Community-Up, an anti-poverty nonprofit in Detroit.

"The fact that Quicken settled for millions and not billions is not that unusual," Davis said in an email. "This is their first settlement agreement of this type. Quicken, like any other company, has learned from its mistakes over the years; I think it's a great organization — they make solid investments in urban cities across the country creating economic development opportunities and strengthening neighborhoods."

The case was dismissed with prejudice — meaning it cannot be reinstated, according to an order filed Friday. The resolution comes under the leadership of the Housing and Urban Development Department, which oversees the FHA, within the administration of President Donald Trump. The government originally filed the lawsuit in 2015, the seventh year of the Obama administration.

The agreement will allow for the continuation of "safe and sustainable mortgage financing to qualified, creditworthy borrowers," Amy Thompson, the Housing and Urban Development Department's secretary for public affairs, said in a statement.

“FHA relies on its partnerships with lenders, such as Quicken Loans, to advance home buying opportunities for Americans, and we look forward to continuing our relationship with Quicken Loans," she wrote.

The government alleged that Quicken had a culture of bending the rules and gave “speed bonuses” to underwriters. Federal lawyers contended the mortgage company failed to disclose the problems with the FHA-insured loans that cost the federal government millions of dollars when they went bad.

Quicken said it has represented the FHA’s “gold standard” for underwriters. Court documents filed by Quicken attorneys say the company could prove it had proper underwriting practices, complied with program and contractual requirements, and did not make false claims. It denied the existence of speed bonuses.

The lawsuit has not soured Quicken Loans from offering FHA loans or led it to make any significant operations changes, Emerson said.

"We have continued exactly to do the same thing as always," he said. "It's always been our job to do the right thing to underwrite loans correctly. That's what we've done and continue to do."

The Justice Department and the Department of Housing and Urban Development Office of Inspector General began investigating Quicken under the False Claims Act. The investigation originally encompassed about 246,000 FHA loans Quicken had originated from mid-2007 through Dec. 31, 2011. The number of loans in question, however, had been reduced to 109 as of April.

The federal government’s lawsuit alleged 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.

Rosen has presided at previous mediation sessions with the parties. He was the court's chief justice from 2009 to 2015, after President George H. W. Bush nominated him to the federal court bench in 1989. Rosen oversaw a number of high-profile cases during his tenure, and he led the mediation team that helped Detroit exit its record-setting municipal bankruptcy in just 18 months. After retiring from the bench, he opened a Detroit branch of Judicial Arbitration and Mediation Services.

Since the financial crisis, the Justice Department has reached settlements totaling billions of dollars with several major lenders, including the Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co., over poorly underwritten FHA loans. Pontiac-based United Shore Financial Services LLC in 2016 paid $48 million to resolve allegations of knowingly originating and underwriting loans that did not meet FHA requirements.

Quicken also had sued the government preemptively in 2015 after Justice Department officials requested "nine-figure" settlements, Gilbert has said. The company claimed the Justice Department unfairly targeted major lenders after the 2008 mortgage crisis. Goldsmith dismissed the suit. The Justice Department originally filed its case in Washington, D.C., but Quicken won its motion to move it to Detroit.