“Mortgage lenders that fail to follow FHA program rules put taxpayer funds at risk and increase the chances of borrowers losing their homes,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.  “We will continue to hold lenders accountable for knowingly submitting ineligible loans for FHA insurance.”

“M&T Bank bypassed its responsibility to originate and underwrite mortgages in accordance with the standards required by the FHA,” said First Assistant U.S. Attorney James P. Kennedy Jr. for the Western District of New York.  “This case demonstrates that when a financial institution takes such a detour, we will work to ensure that it does not bypass the consequences of that conduct.”

During the time period covered by the settlement, M&T Bank participated as a direct endorsement lender (DEL) in the FHA insurance program.  A DEL has the authority to originate, underwrite and endorse mortgages for FHA insurance.  If a DEL approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD, FHA’s parent agency, for the losses resulting from the defaulted loan.  Under the DEL program, the FHA does not review a loan for compliance with FHA requirements before it is endorsed for FHA insurance.  DELs are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance, to maintain a quality control program that can prevent and correct deficiencies in their underwriting practices, and to self-report any deficient loans identified by their quality control program.

The settlement announced today resolves allegations that M&T Bank failed to comply with certain FHA origination, underwriting and quality control requirements.  As part of the settlement, M&T Bank admitted to the following facts: Between Jan. 1, 2006, and Dec. 31, 2011, it certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements and did not adhere to FHA’s quality control requirements.  Prior to 2010, M&T Bank failed to review all Early Payment Default (EPD) loans, which are loans that become 60 days past due within the first six months of repayment.  Between 2006 and 2011, M&T also failed to review an adequate sample of FHA loans, as required by HUD.

Additionally, M&T created a quality control process that allowed it to produce preliminary major error rates that were significantly lower (sometimes below one percent) than what the rate would have been if M&T had calculated its preliminary major error rate by dividing the number of loans with preliminary major errors by the number of loans reviewed to determine what percent of loans contained a preliminary major error.

M&T Bank also failed to adhere to HUD’s self-reporting requirements.  While M&T Bank identified numerous FHA insured loans with “major errors” between 2006 and 2011, M&T Bank did not report a single loan to HUD until 2008, and thereafter self-reported only seven loans to HUD.  As a result of M&T’s conduct and omissions, HUD insured hundreds of loans approved by M&T that were not eligible for FHA mortgage insurance under the Direct Endorsement program and that HUD would not otherwise have insured.  HUD subsequently incurred substantial losses when it paid insurance claims on those loans.

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“This recovery on behalf of the Federal Housing Administration should serve as a reminder of the potential consequences of not following HUD program rules and the value of private citizen assistance, including whistleblowers, in pursuing lenders that violate the rules,” said Inspector General David A. Montoya of the Department of Housing and Urban Development.

“It is critically important that FHA-approved lenders comply with HUD’s underwriting standards and originate mortgages that borrowers can sustain,” said HUD General Counsel Helen Kanovsky.  “We are pleased M&T Bank worked with the Department of Justice and HUD to arrive at an agreeable settlement that protects FHA’s insurance fund.”

The allegations resolved by this settlement arose from a whistleblower lawsuit filed under the False Claims Act by a former employee of M&T Bank, Keisha Kelschenbach.  Under the False Claims Act, private citizens can sue on behalf of the government and share in any recovery.  The share to be awarded in this case has not yet been determined.

The settlement was the result of a joint investigation conducted by HUD, HUD’s Office of Inspector General, the Civil Division and the U.S. Attorney’s Office for the Western District of New York.

The lawsuit is captioned U.S. ex rel. Kelschenbach v. M&T Bank Corp, 13-CV-0280(S) (W.D.N.Y.).