WASHINGTON — First Tennessee Bank N.A. has agreed to pay the federal government $212.5 million to resolve allegations that it violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements, the Justice Department announced Monday.

“First Tennessee’s reckless underwriting has resulted in significant losses of federal funds and was precisely the type of conduct that caused the financial crisis and housing market downturn,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer in a Justice Department news release.

Between January 2006 and October 2008, Memphis-based First Tennessee, through its subsidiary First Horizon Home Loans Corp. (First Horizon), participated in the FHA insurance program as a Direct Endorsement Lender (DEL). As a DEL, First Tennessee had the authority to originate, underwrite and endorse mortgages for FHA insurance.

If a DEL such as First Tennessee approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD, FHA’s parent agency, for the losses resulting from the defaulted loan. Under the DEL program, neither the FHA nor HUD reviews a loan before it is endorsed for FHA insurance. DELs such as First Tennessee are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance, to maintain a quality control program that can prevent and correct deficiencies in their underwriting practices and to self-report any deficient loans identified by their quality control program.

In August 2008, First Tennessee sold First Horizon to MetLife Bank N.A. (MetLife), a wholly-owned subsidiary of MetLife Inc., which thereafter originated FHA-insured mortgages under the MetLife name. In February 2015, MetLife agreed to pay $123.5 million to resolve its False Claims Act liability arising from its FHA originations after it acquired First Horizon from First Tennessee.

“First Tennessee admitted failings that resulted in poor quality FHA loans,” said Acting U.S. Attorney John A. Horn of the Northern District of Georgia. “While First Tennessee profited from these loans, taxpayers incurred substantial losses when the loans defaulted.”

Allegations resolved

According to the release, the settlement announced Monday resolves allegations that First Tennessee failed to comply with FHA origination, underwriting and quality control requirements.

As part of the settlement, First Tennessee admitted to the following facts: From January 2006 through October 2008, it repeatedly certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements. Beginning in late 2007, First Tennessee significantly increased its FHA originations. The quality of First Tennessee’s FHA underwriting significantly decreased during 2008 as its FHA lending increased.

Beginning no later than early 2008, First Tennessee became aware that a substantial percentage of its FHA loans were not eligible for FHA mortgage insurance due to its own quality control findings. These findings were routinely shared with First Tennessee’s senior managers. Despite internally acknowledging that hundreds of its FHA mortgages had material deficiencies, and despite its obligation to self-report findings of material violations of FHA requirements, First Tennessee failed to report even a single deficient mortgage to FHA.

First Tennessee’s conduct caused FHA to insure hundreds of loans that were not eligible for insurance and, as a result, FHA suffered substantial losses when it later paid insurance claims on those loans.

The investigation of the allegations in the government’s complaint was a coordinated effort between the Civil Division’s Commercial Litigation Branch, the U.S. Attorney’s Office of the Northern District of Georgia, HUD and HUD’s Office of Inspector General.

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