John Gallagher Detroit Free Press
Published 6:00 AM EDT Jun 19, 2019
It’s hard to read last week’s resolution of the U.S. Justice Department’s “bad loans” case against Quicken Loans as anything but a big win for Quicken.
Critics hunting for scalps of wrongdoers who sparked the mortgage industry collapse of a decade ago won’t be satisfied with the resolution. But it’s clear now that the government’s case against Quicken over suspected violations of Federal Housing Administration loan guidelines was always weaker than it seemed.
And the $32.5 million that Quicken agreed to pay to the government, while not beer money, seems easily doable for a company handling almost $100 billion in annual mortgage lending.
To recap: In a case that began in 2015, the Justice Department claimed in its civil lawsuit that Quicken’s leadership had conspired to defraud the government by making mortgages insured by the FHA even though the borrowers did not always meet strict FHA guidelines.
In effect, the government charged that Quicken was pocketing the lucrative fees for originating the FHA-backed mortgages and then let the government pick up the bill when the homebuyers defaulted on their loans.
To prove its case, the Justice Department cited a few hundred of Quicken’s FHA loans out of about 100,000 total mortgages to illustrate the defects the government said were proof of wrongdoing.
But, in hindsight, a lot of those violations seemed nitpicky rather than conspiratorial.
A Quicken loan officer may have approved a loan, say, even if there was no water heater in the basement as required by FHA guidelines. Or a Quicken loan officer may have included a client’s overtime pay as part of the annual income to qualify for a loan, again bending the rules on income guidelines.
But those violations by individual loan officers never, to me, seemed to rise to the level of the government’s charge of “false claims” — a Civil War-era law in effect charging a conspiracy at the highest levels of Quicken to defraud the government.
Big case grew smaller over time
Over the past couple of years, U.S. District Judge Mark Goldsmith in federal court in Detroit had narrowed down the issues in contention and the number of loans in contention in a way that seemed to benefit Quicken. By the time the case was headed for trial later this year, only a little more than 100 of Quicken’s FHA loans were still in question.
And at the time of the resolution last week, Judge Goldsmith had yet to rule on whether the individual loans cited by the Justice Department could be used to extrapolate to Quicken’s entire body of loans — from a few dozen to a hundred thousand or more.
Had Goldsmith ruled that he wouldn’t allow the government to make that leap, the government’s case would come down to a relative handful of technical violations — and Quicken’s cost would have been a lot less than what it agreed to pay.
Another resolution process was available
As it happens, the FHA loan program includes a dispute resolution process that Quicken maintained from the beginning was the proper venue to look at loans that Quicken may have mishandled. But the Justice Department, having already reaped billions of dollars in settlements going after other big-time lenders whose bad loans had worsened the Great Recession, went after Quicken expecting to get another big win.
But to stretch the mistakes of a few hundred loans out of the 100,000 or so Quicken made always seemed like an overreach. And during the long run-up to trial, as Judge Goldsmith narrowed the issues and pared down the loans in question, the idea of a broad top-down conspiracy to defraud seemed even less likely to hold up.
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So, with trial set to begin later this year, the two sides, mediated by former U.S. Chief Judge Gerald Rosen, agreed to the resolution. Last week, Goldsmith dismissed the government’s case in total, told each side to pay its own legal fees, and Quicken agreed to pay about $25 million to reimburse the government for bad loans plus $7 million interest.
Nobody at Quicken will say so, but it wouldn’t surprise me if what Quicken paid in legal fees over the past few years on this case wasn’t close to or more than the resolution itself.
Bill Emerson, vice chairman of Quicken, could say with justification: “At the end of the day, the resolution is exactly what we said we’d do from the very beginning. We would take a look at any loans the FHA thought there might be some challenges on, we would evaluate them, and if we found they were right, we would make them whole.”
In the end, perhaps the best we can say is that the settlement was fair. Quicken got dinged for some sloppy loans, the government extracted some reimbursement for that, and each side walked away able to claim a reasonable outcome.
But it was a tepid end to a case that at one time looked much bigger than it turned out.
Contact John Gallagher: 313-222-5173 or [email protected].Follow him on Twitter @jgallagherfreep. Read more on business and sign up for our business newsletter.
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