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From Banking and Finance Law Daily, February 5, 2014

JPMorgan agrees to $614 million settlement for securing federal insurance, refinancing for unqualified mortgage loans

By Richard A. Roth, J.D.

JPMorgan Chase & Co. and its national bank subsidiary, JPMorgan Chase Bank, N.A., have agreed to pay $614 million to settle U.S. Justice Department charges of civil fraud in connection with the companies’ origination and underwriting of mortgage loans that were approved for insurance and financing under Federal Housing Administration and Department of Veterans Affairs home mortgage programs. In settling the charges, which originated as a whistleblower’s complaint, the companies admitted a number of violations (U.S. v. JPMorgan Chase Bank, N.A., Feb. 4, 2014, Oetken, U.S. District Judge).

The charges arose from Chase’s handling of loans submitted to the HUD-FHA direct Endorsement Lender program and the VA Home Loan Guaranty program. According to a press release from the office of the U.S. Attorney for the Southern District of New York, the two programs allow mortgage lenders to approve loans based on specified underwriting criteria. If a loan later goes into default, the loan owner can recover its costs from the appropriate program. Since there is no review by either program before a loan is approved for insurance and refinancing, “it is crucial that lenders follow the rules,” the U.S. Attorney said.

Alleged violations. According to the U.S. Attorney, the complaint generally alleged that, beginning in 2002, Chase violated the rules of the two programs in three ways:

  • it approved thousands of loans that did not satisfy all of the underwriting criteria of the program to which the loans were submitted;

  • it failed to report hundreds of loans it discovered were affected by fraud or another material deficiency; and

  • it regularly submitted to credit approval software loan data that were not based on any documents or information.

Chase’s admissions. The U.S. Attorney said Chase admitted that:

  • it failed to report 582 loans submitted to the FHA program that were affected by fraud or other deficiencies;

  • it approved thousands of loans that failed to satisfy at least one of the programs’ rules; and

  • some employees repeatedly submitted to the credit approval software loan data that was not supported by the borrowers’ documents in order to determine what values would be approved and then gave that information to loan applicants, thereby increasing the risk of fraud.

Chase admitted that, as a result of the violations, it induced the two programs to accept thousands of loans that did not qualify for government insurance or refinancing, resulting in substantial losses to the programs.

The case is No. 13 Civ. 0220 (JPO).

Attorneys: Alexander H. Southwell (Gibson, Dunn & Crutcher, LLP) for JPMorgan Chase Bank, N.A., and JPMorgan Chase & Co. Christopher B. Harwood, Assistant United States Attorney.

Companies: JPMorgan Chase Bank, N.A.; JPMorgan Chase & Co

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