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United States v. Carrington Mortgage Services LLC

United States District Court, S.D. Indiana, Indianapolis Division

January 10, 2018




         In this action Relator Michelle Calderon (“Calderon”) contends that Defendant Carrington Mortgage Services, LLC (“Carrington”), committed multiple counts of fraud under the False Claims Act (“FCA”), 31 U.S.C. §§ 3729 et seq., in connection with its residential mortgage lending business. (Filing No. 40, Am. Compl. ¶ 5). The United States of America (the “Government”), which would be a plaintiff in this qui tam action, declined to intervene. (Filing No. 10). Pending before the court is Carrington's motion to dismiss the Amended Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. (Filing No. 48).

         For the reasons set forth below, Carringtons's motion to dismiss is GRANTED.

         I. Legal Standard

         Under the Supreme Court's directive in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), to survive Carrington's motion to dismiss pursuant to Rule 12(b)(6), Calderon must provide the grounds for her entitlement to relief with more than labels, conclusions or a formulaic recitation of the elements of a cause of action. See Id. at 555 (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)). The court assumes that all the allegations in the Amended Complaint are true, but the “allegations must be enough to raise a right to relief above the speculative level.” Id. See also Vesely v. Armslist, LLC, 762 F.3d 661, 664 (7th Cir. 2014). The touchstone is whether the Amended Complaint gives Carrington “fair notice of what the … claim is and the grounds upon which it rests.” Twombly, 550 U.S. at 555 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Legal conclusions or conclusory allegations are insufficient to state a claim for relief. See Lodholtz v. York Risk Servs. Grp., Inc., 778 F.3d 635, 639 (7th Cir. 2015); McCauley v. City of Chicago, 671 F.3d 611, 617 (7th Cir. 2011). The court may also consider documents attached to or referenced in the Amended Complaint, as well as take judicial notice of publicly available documents, to decide the motion. See Williamson v. Curran, 714 F.3d 432, 436 (7th Cir. 2013).

         “[C]laims brought under the FCA are subject to the heightened pleading standard of Rule 9(b) . . . .” United States ex rel. Hanna v. City of Chicago, 834 F.3d 775, 778-79 (7th Cir. 2016) (quotations and citations omitted). Rule 9(b) states: “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” To claim fraud with particularity, Calderon must allege “the who, what, when, where, and how: the first paragraph of any newspaper story.” Hanna, 834 F.3d at 779 (quotation and citation omitted). See also United States ex rel. Presser v. Acacia Mental Health Clinic, LLC, 836 F.3d 770, 776 (7th Cir. 2016); United States v. Lockheed-Martin Corp., 328 F.3d 374, 376 (7th Cir. 2003).

         II. Background

         A. The Parties

         Carrington is a California company with its principal place of business in Santa Ana, California. (Am. Compl. ¶ 11). Carrington operates various centers that provide mortgage loan servicing. (Id.). Carrington has been authorized to approve residential mortgage loans for government insurance and refinancing by the Federal Housing Administration (“FHA”) between at least March 2013, and March 2015. (Id. ¶ 6).

         Calderon is a former employee of Carrington who worked as a mortgage underwriter in Carrington's Fishers, Indiana, office. (Id. ¶ 10).

         B. The Federal Endorsement Lender Program

         The FHA, as part of the Department of Housing and Urban Development (“HUD”), is the largest insurer of residential mortgage loans in the world. (Id. ¶ 12). Pursuant to the National Housing Act of 1934, HUD offers various mortgage insurance programs. (Id.). Through these programs, FHA insures approved lenders against losses on mortgage loans made to buyers of single-family homes. (Id.). Under these mortgage insurance programs, if a homeowner defaults on an FHA insured loan and the mortgage holder forecloses on the property, HUD will pay the mortgage holder the balance of the loan and assume ownership and possession of the property. (Id.). By protecting mortgage holders against defaults on mortgages, FHA mortgage insurance encourages lenders to make loans to millions of creditworthy Americans who might not qualify for loans under conventional underwriting criteria. (Id.). FHA mortgage insurance also makes mortgage loans valuable in the secondary markets because FHA loans are expected to have met HUD underwriting requirements and because they are secured by the full faith and credit of the United States. (Id.).

         HUD's Direct Endorsement Lender program is one of HUD's mortgage insurance programs. (Id. ¶ 14). Under this program, an approved lender is authorized to underwrite mortgage loans, decide whether the borrower represents an acceptable credit risk for HUD, and certify loans for FHA mortgage insurance without prior review or approval of the loans by the FHA or HUD. (Id.). Direct Endorsement Lenders are private entities such as banks and mortgage companies. (Id.).

         HUD relies upon the experience and expertise of Direct Endorsement Lenders in approving loans for FHA insurance. (Id. ¶ 16). HUD expects Direct Endorsement Lenders to determine whether borrowers represent an acceptable credit risk for HUD. (Id.). And, to qualify for FHA mortgage insurance, a mortgage must meet all of the applicable HUD underwriting requirements, which relate to, among other things, the adequacy of the borrower's income and assets to meet his or her mortgage payments, and the borrower's credit history. (Id. ¶ 15). Therefore, Direct Endorsement Lenders are obligated to act with the utmost good faith, honesty, fairness, undivided loyalty, and fidelity in their dealings with HUD. (Id. ¶ 16). The duty of good faith requires all Direct Endorsement Lenders to make full and fair disclosures to HUD of all material facts and to take on the affirmative duty of employing reasonable care to avoid misleading HUD. (Id.).

         More specifically, Direct Endorsement Lenders are responsible for all aspects of the mortgage application, the property analysis, and the underwriting of a mortgage loan. (Id. ¶ 17). This requires Direct Endorsement Lenders to employ underwriters to “evaluate [each] mortgagor's credit characteristics, [the] adequacy and stability of [the mortgagor's] income to meet the periodic payments under the mortgage and all other obligations, and the adequacy of the mortgagor's available assets to close the transaction, and render an underwriting decision in accordance with applicable regulations, policies and procedures.” (Id. quoting 24 C.F.R. § 203.S(d)).

         HUD also relies on Direct Endorsement Lenders to conduct due diligence on all loans before approving them for FHA insurance and has set specific rules for such due diligence. (Id. ¶¶ 19 & 20). The relevant regulations on due diligence provide that a Direct Endorsement Lender must: (1) evaluate each borrower's ability and willingness to repay the mortgage debt (i.e., conduct a credit analysis), to limit the possibility of default and collection difficulties, 24 C.F.R. § 203.5(d); and (2) examine the property offered as security for the loan to determine if it provides sufficient collateral (i.e., conduct an analysis of the specific property), 24 C.F.R. § 203.5(e)(3). (Id. ¶ 19). In doing such analyses, the Direct Endorsement Lender must “exercise the same level of care which it would exercise in obtaining and verifying information for a loan in which the mortgagee would be entirely dependent upon the property as security to protect its investment.” (Id. quoting 24 C.F.R. § 230.5(c)). Further, HUD requires Direct Endorsement Lenders to comply with all governing HUD Handbooks and Mortgagee Letters, which set forth the applicable minimum underwriting requirements. (Id. ¶ 20).

         Carrington is a Direct Endorsement Lender. (Id. ¶¶ 6, 11).

         To evaluate and, ultimately, extend loans, Carrington uses FHA's underwriting software, Technology Open to Approved Lenders (“TOTAL”) and its own HUD-approved automated underwriting system (“AUS”). (Id. ¶¶ 23-24). When using these systems to underwrite a loan, Carrington enters various credit variables into the AUS, such as the dollar amount of the borrower's monthly income and available assets, then uses TOTAL to evaluate the borrower's overall credit and assign the loan a rating. (Id. ¶ 24). The rating indicates the level of underwriting that must be performed on the loan. (Id.). An “accept/approve” rating means that the loan may be underwritten with less stringent documentation requirements and without an underwriter's evaluation of the borrower's creditworthiness. (Id. ¶ 25). However, if TOTAL assigns a “refer” rating to the loan, it must be manually underwritten and is subject to more stringent documentation requirements. (Id.). Manual underwriting requires Carrington to analyze credit histories; analyze debt obligations; calculate debt and income ratios, and compare those ratios to the fixed ratios set by HUD rules; and consider any compensating factors permitting deviations from the fixed ratios. (Id. ¶ 26). According to guidance provided to Carrington by the FHA, it is not permitted to manipulate the information input into the AUS/TOTAL system, rather, there must be a factual basis for each variable Carrington enters into the system. (Id. ¶ 27).

         At the end of this process, regardless of whether the TOTAL rating is “accept/approve” or “refer, ” Carrington provides loan-specific certification that the data used by Carrington had “integrity” and that the loan is “eligible for HUD mortgage insurance.”[1] (Id. ¶¶ 31, 36). According to the regulations, once FHA insures a loan based on Carrington's recommendation, a Mortgage Insurance Certificate issues, which creates a “contract of insurance” between the lender and HUD that incorporates HUD's regulatory requirements and binds both ...

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