BB&T Corp. has agreed to pay an $83 million penalty to resolve complaints it violated the False Claims Act in its handling of Federal Housing Administration mortgage loans.
The bank was accused of “knowingly originating and underwriting mortgage loans insured” by the FHA “that did not meet applicable requirements,” the U.S. Justice Department said Thursday.
“As a result of BB&T’s conduct and omissions, HUD-insured loans endorsed by BB&T were not eligible for FHA mortgage insurance under the Direct Endorsement lender program, and that HUD would not otherwise have insured,” according to the Justice statement.
“HUD subsequently incurred substantial losses when it paid insurance claims on those loans.”
BB&T said in a statement that it cooperated with all agencies, and that it agreed upon the penalty “without any admission of liability to avoid the cost and uncertainty of potential litigation.”
Nancy Bush, an analyst with NAB Research LLC, said Thursday that “these types of allegations and findings have been pretty common in recent years.”
In June 2015, U.S. Bancorp agreed to pay a $200 million civil penalty to the Justice Department to address similar allegations.
“I really don’t think that they constitute much of a threat to BB&T’s results or reputation,” Bush said. “It is not analogous to (what) Wells Fargo is experiencing.”
BB&T disclosed in February it had received two U.S. Justice Department subpoenas in late 2015 related to an audit inquiry from the U.S. Department of Housing and Urban Development.
In June 2015, BB&T said it had received a letter from the Office of Inspector General for HUD informing the bank it had been selected for an audit survey. The essence of the audit was to assess BB&T’s requirement compliance, particularly with “implementation of a quality-control program associated with the origination of FHA-insured loans.”
In July 2015, BB&T identified “a potential exposure related to losses incurred by the FHA on defaulted loans that ranges from $25 million to $105 million.”
As a result, BB&T put $85 million into reserves during the second quarter of 2015, which had a $53 million negative impact on after-tax results of operations.
BB&T said Thursday “the settlement will have no negative effect on BB&T’s financial condition or results of operations.” The bank added it is pursuing a potential recovery of $70 million in a related matter.
Justice officials said while BB&T “profited from the FHA program, BB&T exposed the taxpayers to losses by failing to comply with HUD guidelines, and then took the additional step of falsely certifying that it had complied with such guidelines,” said U.S. Attorney John Horn of the Northern District of Georgia.
Justice officials said as part of the settlement, BB&T admitted that between Jan. 1, 2006, and Sept. 30, 2014, it certified FHA insurance mortgage loans that did not meet HUD underwriting requirements and did not adhere to FHA’s quality control requirements.
The bank more than doubled all loan originations between 2006 and 2009, while increasing the number of FHA insured loans sixfold.
BB&T also had an increase in the number of loans internally rated “serious-marketability” by its quality control department — the most significant quality control defect rating and a defect that rendered a loan ineligible for FHA insurance.
Between 2007 and 2011, the percentage of loans underwritten by BB&T each year that were rated serious-marketability by its quality control department always exceeded 30 percent, and exceeded as much as 50 percent in 2010 and 2011.
Justice officials said BB&T “nevertheless endorsed many of these loans for FHA insurance and, if they defaulted, sought payment from HUD for the insured loans.”
“This settlement recovers substantial losses caused by BB&T’s decision to place its own profits above its commitment to adhere to HUD underwriting and quality control requirements,” according to the Justice statement.
The monthly reviews and reports that BB&T’s quality control department shared with management alerted BB&T to deficiencies in many of its FHA loans.
A proposal to improve BB&T’s underwriting of FHA loans, with additional training as well as a testing and certification process for underwriters, was prepared in 2010.
However, neither recommendation was implemented until after 2014. The quality control department requested additional employees in 2009, but were not given additional staff until 2013.
“Because BB&T’s quality control department did not have adequate staff, it instituted a cap on the number of loans it reviewed,” according to Justice officials.
“As a result, between 2009 and 2014, the quality control department did not always review the number of loans necessary to comply with HUD’s loan review sampling requirements.
“Additionally, BB&T did not perform reviews of its lender branch offices, as required by HUD, before beginning the reviews again in late 2014.”
BB&T also was accused of not self-reporting any loans containing material underwriting defects until 2013.