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U.S. Bank Settles Claims of FHA Lending Violations

The Department of Justice announced Monday that U.S. Bank has agreed to pay the United States government $200 million to settle claims that it violated the False Claims Act by knowingly originating and underwriting loans insured by the Federal Housing Administration (FHA) that did not meet underwriting requirements for eligibility.

"We are gratified that U.S. Bank has agreed to put this matter behind it, and we want to thank the Department of Justice and HUD's Office of Inspector General for all of their efforts in helping us make this settlement a reality," said Damon Smith, acting general counsel for HUD. "This settlement underscores our consistent message that following Federal Housing Administration rules for underwriting FHA-insured loans is a requirement, not an option."

During the time period covered by the settlement, U.S. Bank participated as a direct endorsement lender (DEL) in the FHA insurance program. A DEL has the authority independently to originate, underwrite, and certify mortgages for FHA insurance. As part of the settlement, U.S. Bank confessed that it repeatedly certified for FHA insurance mortgages that did not meet HUD underwriting requirements from 2006 to 2011.

U.S. Bank also admitted that its quality control program fell short of FHA requirements. Consequently, the bank failed to identify shortcomings in many of the loans it had certified for FHA insurance. It also failed to self-report many deficient loans to HUD and failed to take the curative action that is obligatory under the program.

Further, because of its lack of diligence, the Justice Department says the bank's conduct caused FHA to insure thousands of loans that were actually ineligible for insurance. FHA suffered substantial losses when it later paid insurance claims on those loans.

"By misusing government programs designed to maintain and expand home ownership, U.S. Bank not only wasted taxpayer funds, but inflicted harm on homeowners and the housing market that lasts to this day," said Stuart F. Delery, assistant attorney general for the Justice Department's Civil Division. "As this settlement shows, we will continue to hold accountable financial institutions that violate the law by pursuing their own financial interests at the expense of hardworking Americans."

The agreement is solely limited to U.S. Bank's conduct relating to the deficient origination of FHA insured mortgages. It does not prevent state and federal authorities from pursuing other origination misconduct.

In a statement, U.S. Bank said, "The company cooperated fully with the DOJ investigation and chose to settle this matter for $200 million without an admission of liability to avoid the path of costly and protracted litigation as well as distractions to the business. U.S. Bancorp has a legacy of being a respected mortgage lender, including a decades-long, strong working relationship with HUD and its FHA loan programs."

The bank also announced the sale of 3.0 million shares of Class B common stock of Visa Inc., resulting in a pretax gain of $214 million. Combined with the sale, U.S. Bank expects the settlement to be neutral in its second-quarter results.

About Author: Derek Templeton

Derek Templeton is an attorney based in Dallas, Texas. He practices in the areas of real estate, financial services, and general corporate transactional law. His experience includes time as an Attorney Adviser for the U.S. Small Business Administration and as General Counsel for a nonprofit organization in Dallas. A self-avowed "policy junkie," he has a keen interest in the effect that evolving federal policy has on the mortgage, default servicing, and greater housing industries.

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