December 2, 2015 / 8:37 PM / 4 years ago

Tennessee lender to pay $70 mln to end U.S. mortgage fraud case

(Reuters) - Franklin American Mortgage Co agreed to pay $70 million to settle U.S. Department of Justice charges that the Tennessee lender knowingly misled the government about the quality of home loans it submitted for Federal Housing Administration insurance.

Wednesday’s accord resolves charges that Franklin American violated the federal False Claims Act by misleading the FHA, part of the Department of Housing and Urban Development, into believing that many of its loans qualified for insurance.

The Justice Department said this led to “substantial losses” when the FHA paid insurance claims on hundreds of deficient loans. It said Franklin American’s improper conduct occurred from 2006 to 2012.

Franklin American settled to avoid a protracted and costly legal process, and did not admit fault, corporate counsel Joe Taylor said in a statement. He also said Franklin American will keep participating in the FHA insurance program.

The privately held company is based in Franklin, Tennessee, a suburb of Nashville.

Franklin American’s case is part of a Justice Department crackdown on financial companies for shoddy mortgage loans that helped fuel the U.S. housing and financial crises.

According to the department, Franklin American offered bonuses to underwriters for generating more loans, employed unqualified junior underwriters to perform key functions, and disciplined underwriters if they failed to meet quotas.

The department also said that while internal audits showed “substantial percentages of seriously deficient loans,” Franklin American reported very few deficiencies to HUD.

Wednesday’s settlement papers quoted from one manager who, during a period of high demand, pressed several underwriters to generate daily at least 50 percent more loans than usual.

“Some of you are constantly hitting this number each and everyday and the company is paying you a bonus for your achievements,” the manager wrote. “EVERYONE needs to be hitting this number each and everyday not just a day here or a day there and we need to be consistent.”

Bank of America Corp, Citigroup Inc and Deutsche Bank AG are among other lenders to settle U.S. government lawsuits over insured mortgage loans. Wells Fargo & Co and former vice president Kurt Lofrano are defendants in once such case in Manhattan federal court.

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