The legal aid group Advocates for Basic Legal Equality (ABLE) has taken a novel approach to using the False Claims Act by initiating a lawsuit against U.S. Bank. The case claims that U.S. Bank collected payments from the Federal Housing Administration (FHA) for FHA-backed loans deemed to be in default, rather than meeting its obligations to work out options with the borrowers.

ABLE relied on the information it obtained from customers and borrowers of U.S. Bank in bringing its suit. Borrowers, such as Mr. Hayward Ferrell, obtained mortgages from U.S. Bank guaranteed by the FHA. If a borrower defaults on an FHA loan, the government agency makes payments to the loan-issuing bank to make the bank whole. The FHA requires, however, that these banks make an effort to work with their borrowers to mitigate loss — so the government can limit expenditures on these loans.

In this lawsuit, ABLE has taken the position that U.S. Bank failed to take the necessary steps to work with borrowers like Mr. Ferrell to prevent them from defaulting on their mortgages. Instead, the group claims that the bank defaulted Mr. Ferrell and other borrowers between 2001 and 2011 so that it could make false claims for payment to FHA, receiving at least $2.37 billion in payments on these claims.

The Department of Justice has declined to intervene in the lawsuit against U.S. Bank. Although government intervention would have bolstered the case, it is not necessarily a death knell.

The precise fact pattern of this lawsuit is an innovative use of the False Claims Act, and its outcome could have far-reaching implications. Another interesting aspect of this False Claims Act suit is that it was not initiated by a whistleblower, as many False Claims Act lawsuits are. ABLE obtained the factual basis for its case from borrowers forced into foreclosure. It is not hard to envision that such individuals would willingly step forward to help build a case and potentially reap the benefits of a settlement or damages award.

The results of this lawsuit and any regulatory changes may affect lenders in the coming year and may alter the future False Claims Act landscape in the banking and financial industry.