Prospect Mortgage, once one of the largest independent retail mortgage companies in the nation, sold its operating assets to HomeBridge Financial in a deal completed in February. But according to prosecutors, Prospect defrauded the government during and after the run-up to the housing crisis through its participation in the Direct Endorsement program.
The program is administered by the Federal Housing Administration and the Department of Housing and Urban Development. As a DE lender, Prospect was able to originate, underwrite and endorse mortgages for FHA
insurance. The Justice Department alleged that Prospect falsely certified that FHA
-insured loans it originated complied with critical quality-control requirements.
“Prospect’s knowing failure to comply with material HUD loan origination requirements not only resulted in major losses to the public, but also served to undermine the FHA
program,” said Brian J. Stretch, US attorney for California’s Northern District.
“To participate in the FHA
program, Prospect had to comply with HUD underwriting and quality control requirements and certify that these requirements had been satisfied with respect to each FHA
loan it originated,” said John A. Horn, US attorney for the Northern District of Georgia. “Prospect failed to adhere to these requirements at two Southeastern branches and when many of these loans later defaulted, the United States suffered substantial losses.”
Under the DE program, if a DE lender approves a loan for FHA
insurance and the loan defaults, the holder of the loan can submit a claim to the government to recover its losses. The government, which doesn’t review a DE loan before endorsement for FHA
insurers, relies on DE lenders to follow the program’s rules in order to make sure the loans are actually qualified. According to the DOJ, two Prospect branches originated many loans without adhering to those requirements.
According to the DOJ, between 2007 and 2009 Prospect had a 12.29% default rate – “well in excess of the national average” – within HUD’s Atlanta Home Ownership Center.
“As evidenced by its 12.29% default rate within the Atlanta HOC, and the fact that 76% percent of such defaults were attributable to one branch office in Florida and another in North Carolina, Prospect failed to adhere to HUD quality control guidelines,” the DOJ said.
This isn’t the first time this year Prospect has been under scrutiny. In early February, the company payed a $3.5 million penalty for allegedly participating in an illegal kickback scheme.
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Prospect Mortgage Company will pay a penalty of $4.157 million to resolve claims that it committed mortgage fraud while participating in the government’s Direct Lender Endorsement Program.