The United States government recently filed suit in New York federal court against Deutsche Bank AG and its wholly owned subsidiary, MortgageIT, Inc., for alleged misrepresentations relating to mortgages insured by the Federal Housing Administration. United States v. Deutsche Bank AG and MortgageIT, Inc., No. 11-02976. The lawsuit, which seeks recovery of over $1 billion in damages, is believed to be the first of several lawsuits to be brought by the United States against major banks pursuant to the federal False Claims Act. Private lenders who endorsed federally insured mortgages should be on notice that the United States can, and likely will, pursue litigation against lenders who it believes made misrepresentations in connection with mortgages they endorsed for Federal Housing Administration mortgage insurance.


The Federal Housing Administration (“FHA”) of the Department of Housing and Urban Development (“HUD”) has provided mortgage insurance to millions of borrowers who might not otherwise be able to obtain mortgages due to their inability to meet standard underwriting requirements. FHA operates the Direct Endorsement Lender program, which grants lenders in the private sector “the authority to endorse mortgages that are qualified for FHA insurance.” The private lenders that participate in the program, known as Direct Endorsement Lenders, underwrite and close mortgages without any prior review or approval of HUD.  

In 2007, Deutsche Bank AG (“Deutsche Bank”) acquired MortgageIT, Inc. (“MortgageIT”) for $430 million. Between 1999 and 2009, MortgageIT was a Direct Endorsement Lender and, during this time, Mortgage IT endorsed more than 39,000 mortgages for FHA insurance “totaling more than $5 billion in underlying principal obligations.” On May 3, 2011, the U.S. government (the “Government”) sued both Deutsche Bank and MortgageIT for allegedly misleading the Government into giving federal insurance for non-qualifying mortgages in order to make “substantial profits through its resale of these endorsed FHA-insured mortgages.” The suit was brought by the Office of U.S. Attorney Preet Bharara for the Southern District of New York, which opened a new civil unit in March of 2010 to fight mortgage and other types of fraud.  

Direct Endorsement Lenders’ Duties  

The complaint alleges that Direct Endorsement Lenders “are entrusted with safeguarding the public from taking on risks that exceed statutory and regulatory limits . . . [and] act as fiduciaries of HUD in underwriting mortgages and endorsing them for FHA insurance.” In addition to the fiduciary duty of good faith existing between Direct Endorsements Lenders and HUD, the complaint alleges that Direct Endorsement Lenders owe HUD “a common law duty of due diligence.” A duty of due diligence is also owed by Direct Endorsement Lenders to HUD, pursuant to federal regulation 24 C.F.R. § 203.5(c).  

To qualify as a Direct Endorsement Lender, a private lender must implement a quality control plan that ensures that it is in full compliance with all HUD rules. To comply with HUD rules, lenders must conduct due diligence on all mortgages to ensure that they are eligible for FHA insurance, in addition to “auditing [] all early payment defaults, i.e., those mortgages that default soon after closing.” For every mortgage it endorses, a Direct Endorsement Lender must certify that it has conducted due diligence in accordance with HUD rules. Further, Direct Endorsement Lenders must make an annual certificate of compliance that states that it has met the program’s qualification requirements, including the implementation of a compliant quality control plan.  

After Deutsche Bank acquired MortgageIT in 2007, Deutsche Bank allegedly managed the quality control functions of MortgageIT’s Direct Endorsement Lender business. In addition, Deutsche Bank was allegedly responsible for the annual certifications to HUD regarding MortgageIT’s compliance with Direct Endorsement Lender program rules.  

The Claims  

The Government asserts that 12,500 FHA-insured MortgageIT-endorsed mortgages have gone into default — almost one-third of the mortgages that MortgageIT endorsed as a Direct Endorsement Lender. The complaint alleges that, in connection with these defaults, Deutsche Bank and MortgageIT misrepresented both MortgageIT’s qualifications for the Direct Endorsement Lender program and the eligibility of the mortgages that MortgageIT endorsed for FHA insurance. The complaint alleges that these actions constitute violations of the False Claims Act for causing false claims, using false statements and for “knowingly ma[king], us[ing] or caus[ing] to be made or used false records and/or statements to conceal, avoid, or decrease an obligation to pay or transmit money or property to the United States.” The complaint further alleges claims for breach of fiduciary duty, gross negligence and negligence.

With regards to the Direct Endorsement Lender program, the complaint alleges that Deutsche Bank and MortgageIT “repeatedly lied to HUD to obtain and maintain MortgageIT’s Direct Endorsement Lender status.” Specifically, the complaint alleges that Deutsche Bank and MortgageIT made annual certifications that MortgageIT was eligible to be a Direct Endorsement Lender despite not meeting the qualifications and that, when HUD found evidence supporting the fact that MortgageIT had violated the quality control plan requirement, MortgageIT “deceived HUD by falsely promising HUD that it had corrected the failures.” The failures specifically mentioned in the complaint included failing to audit early payment defaults, failing to dedicate sufficient staff members to quality control, and failing to “address dysfunctions in the quality control system, which were reported to upper management.” The Government’s complaint takes specific issue with the fact that the only person at MortgageIT dedicated to auditing the federally insured mortgages was allegedly reassigned to “increase production instead.” As a result of Deutsche Bank’s and MortgageIT’s “false annual certifications and deceptions,” the complaint alleges that “hundreds of millions of FHA dollars [were put] at risk.”  

The complaint claims that Deutsche Bank’s and MortgageIT’s failure to implement a quality control program in accordance with HUD rules “rendered them unable to prevent patterns of mortgage underwriting violations and mortgage fraud.” As such, the mortgages endorsed by MortgageIT were not eligible for FHA insurance in accordance with HUD rules. Specifically, the Government alleges that MortgageIT falsely certified that it had conducted due diligence for the mortgages it endorsed for FHA insurance, when in fact it had not. The Government alleges that the false certifications and failure to conduct due diligence as required by HUD rules was “reckless, grossly negligent, and/or negligent.”  


As a result of the defaults, the Government alleges it has paid out more than $386 million in FHA insurance claims and related costs “arising out of MortgageIT’s approval of mortgages for FHA insurance . . . based on MortgageIT’s false certifications of due diligence.” Further, the Government “expects to pay at least hundreds of millions of dollars in additional FHA insurance claims as additional mortgages underwritten by MortgageIT default in the months and years ahead.” Thus, the complaint seeks the recovery of damages of $386 million trebled “for past claims paid by the Government . . . compensatory damages for past claims paid, and future claims expected to be paid . . . civil penalties as are required by law . . . punitive damages . . . an award of costs pursuant to 31 U.S.C. § 3729(a) . . . [and] an award of any such relief as is proper.”  


Private lenders that participate in the Direct Endorsement Lender program should be vigilant in meeting the strict program requirements as set forth by HUD rules. Specifically, Direct Endorsement Lenders should conduct due diligence to ensure the eligibility of mortgages for FHA insurance, audit early default payments, assign sufficient staff to handle quality control, and diligently work to improve any alleged violations in the quality control system. Private lenders that are considering participating in the Direct Endorsement Lender program should ensure that they have the necessary resources and infrastructure to meet the stringent requirements as set forth by HUD.