The Department of Justice (DOJ) and Department of Housing and Urban Development (HUD) have published a memorandum of understanding related to violations by Federal Housing Administration (FHA) lenders. Citing a shared goal of addressing FHA program requirements and “in particular, the submission of knowingly false and fraudulent claims to the Government,” the agencies will work together to identify and prosecute potential FCA claims.
Under the interagency agreement, if HUD identifies FHA violations that meet HUD’s FCA evaluation standards, then HUD’s mortgage review board will review and determine whether the violation should be referred to the DOJ. HUD uses Defect Taxonomy, a four-tiered system to rank loan defects or violations. Tier 1 includes the severest violations, such as fraud, material misrepresentations, statutory violations, or where loan information is significantly inconsistent and untrustworthy. Tier 4 encompasses minimal violations, such as defects that would not impact loan approval. The mortgage review board may refer violations to the DOJ where (1) Tier 1 or equivalent violations exist in 15 or more loans, (2) Tier 1 or equivalent violations exist in loans with an unpaid principal balance, (3) where there is a claim of at least $2 million, and (4) when there exist aggravating factors, such as widespread violations. When a violation meets the requirements for referral to the DOJ, HUD sends the DOJ a written referral for FCA litigation. Importantly, HUD’s mortgage review board may pursue administrative action, even if it declines to refer a violation to the DOJ or does not recommend suing under FCA.
When another party, including a qui tam whistleblower, refers a matter to the DOJ partly based on FHA violations, the DOJ will work with HUD during the investigative, litigation, and settlement phases. For instance, HUD will inform the DOJ of the extent to which any violation is material to HUD so the DOJ can determine whether an FCA claim will succeed. The DOJ will also consider HUD’s recommendations, including dismissal recommendations. According to the interagency agreement, HUD may recommend dismissal where the alleged conduct is not a material violation of FHA requirements or when FCA litigation may interfere with HUD’s policies and the administration of the FHA lending program. Although the DOJ considers HUD’s recommendations, the DOJ has exclusive authority to determine whether to pursue or dismiss an FCA action.
Although the majority of government recoveries each year under the FCA are typically from healthcare providers, the DOJ-HUD interagency memorandum demonstrates the viability of the FCA in areas outside of the healthcare. Businesses and individuals doing business with the federal government or receiving any federal funding should be aware of the FCA and how even unintentional regulatory violations could result in significant civil and administrative liability.
The interagency memorandum is downloadable at: https://www.hud.gov/sites/dfiles/SFH/documents/sfh_HUD_DOJ_MOU_10_28_19.pdf