Danger Ahead: Increased Federal Involvement in the Mortgage Market Means More Potential False Claims Act Liability

Mortgage Banking
05.11.11
In this article, Adam Feinberg explains how increased federal involvement in the mortgage market means more potential False Claims Act liability. Among other things, the False Claims Act imposes liability on anyone who knowingly submits, or causes to be submitted, a false or fraudulent claim for payment to the United States or to an entity funded by the United States. One common application of the False Claims Act to the mortgage industry involves FHA or other federally insured loans. Any misconduct in connection with the origination of a federally insured mortgage can create False Claims Act liability if the mortgage goes into default and the federal government pays out insurance claims. In addition, some have argued that fraud against Fannie Mae and Freddie Mac -- for example, the sale of an improperly documented mortgage -- could also give rise to False Claims Act liability. This is because the act provides liability not only for fraud against the U.S. government, but also for fraud against entities that receive money from the government. Feinberg also argues that the courts are making matters worse, as many compute False Claims damages in mortgage cases in a draconian -- and arguably improper -- manner.
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