The U.S. government announced this past week that a federal grand jury found Allied Home Mortgage and its former CEO, Jim Hodge, guilty of committing False Claims Act and FIRREA violations. The jury awarded the United States a total of $92,982,775 in damages, including $7,370,132 against Hodge.

The victory came after a five year court battle in which government autorities brought a $834 million lawsuit against Allied Home Mortgage, and its CEO for engaging in fraud that was said to last 10 years against the Federal Housing Administration (FHA).

According to the USDOJ, Allied Capital operated more than 100 “shadow” branch offices that originated FHA loans without HUD authorization. As part of its scheme to deceive HUD, the jury heard that Allied Capital submitted loans originated by those branches to HUD using the ID numbers of approved branches. Allied Capital’s undisclosed shadow branches were not subject to HUD oversight and their default rates were disguised by the default rates of branches whose IDs they were using. This fraudulent misconduct resulted in $7,370,132 in losses to HUD when some of those loans defaulted.

The jury also heard that Allied Corporation, as a participant in HUD’s Direct Endorsement Lender program, underwrote FHA-insured mortgage loans. For each FHA-insured mortgage loan, Allied Corporation was required to certify to HUD that the loan was underwritten according to HUD’s guidelines. Those guidelines ensure that FHA-insured loans are made only to borrowers who can repay them, thereby seeking to avoid losses to HUD’s FHA insurance fund and foreclosures on borrowers’ homes. Allied Corporation, however, recklessly underwrote and certified at least 1,192 loans for FHA insurance under HUD’s guidelines. This fraudulent misconduct resulted in losses to HUD of $85,612,643 when those loans defaulted.

To compound matters, Allied Capital, Allied Corporation (Allied) and Hodge operated a dysfunctional quality control program and lied to HUD about it. HUD requires lenders participating in its programs to timely perform quality control audits of their FHA loans to identify and correct systemic problems, including underwriting problems. Allied only employed a handful of quality control employees to review loans from as many as 600 branch offices.

Further, many of those employees were unqualified to audit FHA-insured loans. In addition, Hodge personally directed his employees to falsify quality control reports to give the impression that required reviews had been performed, when in fact, they had not. When HUD auditors later asked for those quality control reports, Allied provided the falsified reports. Allied and Hodge also falsely certified to HUD on an annual basis that Allied was in compliance with HUD’s quality control requirements.

“The excellent coordination between personnel from our two U.S. Attorney’s Offices and with HUD investigators has resulted in a tremendous win for the government,” said Magidson. “Working together, we ensured a successful outcome following a lengthy trial and investigation against Allied and its CEO. We will continue to apply our resources whenever and wherever we can to ensure those that perpetuate such egregious fraud against the United States are held accountable for their actions.”

“For years, Hodge and Allied repeatedly lied to HUD in order to fraudulently reap profits from the FHA mortgage insurance program,” said Bharara. “After a month-long public trial where all their misconduct was exposed, a jury has held Hodge and Allied responsible for their lies and has made them pay for losses the United States suffered on loans that would never have been insured by HUD absent their lies. This case represents yet another recovery by the United States – this time after a trial – for fraud perpetrated against HUD by participants in the Direct Endorsement Lender program.”

“The heart of our mission is to weed out actors such as these that are intent on defrauding federal housing programs,” said Montoya. “This should serve as a notice to all those determined to engage in illegal schemes such as these that they are not beyond the reach of the federal law enforcement community.”


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