FIRREA Whistleblower Lawyers
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) authorizes the U.S. Attorney General to bring a civil lawsuit for fraud involving a federally insured financial institution. FIRREA allows the government to impose significant civil penalties for violations of certain federal criminal statutes.
Although originally enacted in response to the savings and loan crisis of the 1980s, FIRREA has been a valuable tool for the government in prosecuting mortgage fraud in the aftermath of the financial crisis of 2008. The Department of Justice (DOJ) utilizes several important provisions of the statute to assist in prosecuting the misconduct of financial institutions. The burden of proof under FIRREA is lower than in many other statutes used to prosecute fraud. FIRREA also has a ten-year statute of limitations, which is much longer than the typical period of three to five years applicable to most civil lawsuits.
The DOJ has used FIRREA in conjunction with the False Claims Act to assert claims for exorbitant penalties against some of the largest financial institutions in the country. There have been a number of significant settlements for misconduct related to mortgage-backed securities and residential mortgages arising from FIRREA violations. Since 2011, the Department of Justice has recovered more than $89 billion from settlements involving allegations of FIRREA violations, some of which also included allegations of False Claims Act violation.
The DOJ is also using FIRREA to prosecute fraud in connection with the Paycheck Protection Program (PPP) since fraudsters make misrepresentations to federally insured banks on their loan applications. In January 2021, the DOJ entered into the first civil settlement involving allegations of PPP fraud. As part of the settlement, the defendants admitted they made false statements to federally insured banks that their company was not in bankruptcy in order to have their PPP loan application approved. The settlement resolved allegations that defendants’ conduct violated FIRREA as well as the False Claims Act.
The History of FIRREA
FIRREA was passed in 1989 to restore public confidence in lending institutions following the savings and loan crisis of the 1980s. It created a regulatory and enforcement structure that established higher minimum capital requirements and set stricter operating standards for all savings institutions. The Resolution Trust Corporation was established as part of FIRREA to liquidate the assets of savings and loan associations that were declared insolvent during the 1980s.
FIRREA also strengthened the civil enforcement powers of federal regulatory agencies against those perpetrating fraud involving federally insured financial institutions. FIRREA includes a list of fourteen criminal statutes which serve as predicate offenses. A violation of any one of these offenses can result in substantial civil monetary penalties. As adjusted for inflation in 2022, the statute imposes penalties up to $2,202,123 per violation, and up to $11,010,620 for a continuing violation. In cases where a violation results in a pecuniary gain, or a pecuniary loss to someone other than the violator, the civil penalty can exceed the statutory amount and reach as high as the amount of the gain or loss.
In prosecuting FIRREA violations, the government need only prove its case by a “preponderance of the evidence” rather than the higher “beyond a reasonable doubt” standard that applies in criminal cases. The law also grants the government broad pre-trial investigational powers that allows the DOJ to issue administrative subpoenas for documents as well as depose key witnesses without the need for court approval.
The Financial Institutions Anti-Fraud Enforcement Act (FIAFEA)
The Financial Institutions Anti-Fraud Enforcement Act (FIAFEA) of 1990 was enacted shortly after FIRREA. FIAFEA allows a private individual to file a declaration with the U.S. Attorney General that involves a violation of any of the predicate offenses listed in 12 U.S.C. § 1833a(c)(1)-(3), including:
- Receiving commissions or gifts by an officer, director, employee, agent, or attorney of a financial institution for procuring loans, 18 U.S.C. § 215;
- Embezzlement, theft or willful misapplication of funds by an officer, director, agent or employee of a bank, 18 U.S.C. § 656;
- Embezzlement, theft or willful misapplication of funds by an officer, director, agent or employee of a lending, credit or insurance institution; 18 U.S.C. § 657;
- Issuing or assigning a bank note without authorization, or making false entries in a book, report or statement of a bank by an officer, director, agent or employee, 18 U.S.C. § 1005;
- Issuing or assigning a debt instrument without authorization, or making false entries in a book, report or statement of a federal credit institution by an officer, director, agent or employee, 18 U.S.C. § 1006;
- Knowingly making or inviting reliance on a false, forged, or counterfeit statement or document for the purpose of influencing the action of the Federal Deposit Insurance Corporation, 18 U.S.C. § 1007;
- Knowingly making a false statement or report, or willfully overvaluing land, property or security, for the purpose of influencing the action of the Federal Housing Administration or specific agencies within the Department of Agriculture, 18 U.S.C. § 1014;
- Defrauding a financial institution or obtaining funds from a financial institution through false or fraudulent pretenses, representations, or promises, 18 U.S.C. § 1344;
- Making false, fictious or fraudulent claims to any person or officer in the civil or military service of the United States, or to any related agency or department, 18 U.S.C. § 287;
- Falsifying or concealing a material fact through trickery or deception; or making a materially false or fraudulent statement or representation; or making or using a false writing or document in any matter within the jurisdiction of the United States government, 18 U.S.C. § 1001;
- Concealing an asset or property from certain government agencies while acting in the capacity as conservator, receiver or liquidating agent, 18 U.S.C. § 1032;
- Devising a scheme to defraud or obtain money or property by fraudulent means through the United States Postal Service, 18 U.S.C. § 1341;
- Devising a scheme to defraud or obtain money or property by fraudulent means through interstate transmission of wire, radio, or television communication, 18 U.S.C. § 1343
- Making a false statement or overvaluing a security to obtain a loan; to influence the action of the Small Business Administration; or obtain money or property under Chapter 14A of Title 15 of the United States Code, 15 U.S.C. § 645(a)
An eligible FIAFEA whistleblower can receive a reward of 20% to 30% of any recovery up to the first $1 million recovered; 10% to 20% of the next $4 million; and 5% to 10% of the next $5 million, up to a maximum of $1.6 million.
The United States government will pay a reward of up to $1.6 million to whistleblowers who provide information about fraud involving federally insured financial institutions.
Noteworthy FIRREA Settlements
Physician Partners of America LLC
April 12, 2022 – A Florida-based practice management company, its founder, and its former chief medical officer agreed to pay $24.5 million to resolve allegations which included making a false statement in connection with a loan obtained through the Paycheck Protection Program. The United States alleged that the company violated FIRREA by falsely representing to the Small Business Administration that it was not engaged in unlawful activity to obtain a $5.9 million PPP loan.
June 22, 2022 – DOJ announced that a Michigan-based trucking company pleaded guilty to conspiring to commit bank fraud in connection with a $290,855.00 loan under the Paycheck Protection Program. In a related civil case, the company and its owners agreed to pay a total of $1,000,000.00, including a substantial civil monetary penalty under FIRREA.
September 2021 – Wells Fargo Bank agreed to pay $72.6 million to resolve allegations that it violated FIRREA by fraudulently overcharging hundreds of commercial customers, including many federally-insured financial institutions, that used the bank’s foreign exchange (“FX”) service. The government’s civil fraud complaint alleged that, from 2010 through 2017, Wells Fargo’s FX sales representatives repeatedly charged higher markups to commercial customers with fixed-pricing agreements on FX transactions. The FX sales reps allegedly applied larger sales margins to the transaction and then concealed the overcharges through misrepresentations and deceptive practices.
February 2020 – Wells Fargo Bank agreed to pay $3 billion to resolve its potential criminal and civil liability arising from a practice of imposing unrealistic sales goals on its employees. As of result of pressure from the bank, thousands of Wells Fargo employees opened millions of accounts, or sold products under false pretenses, without the customers’ consent between 2002 and 2016.
Many of the illegal acts carried out Wells Fargo employees involved creating false records or misusing customers’ identities. Wells Fargo entered a civil settlement agreement under FIRREA based on the creation of false bank records. The $3 billion settlement payment included resolution of the FIRREA violations.
August 2018 – Wells Fargo and several affiliates agreed to pay a civil penalty of nearly $2.1 billion to settle allegations involving misrepresentations made to investors during the housing bubble and subsequent financial crisis of 2008. The DOJ alleged that Wells Fargo knowingly originated and sold tens of thousands of loans between 2005 and 2007 that contained misstated income information and were of lesser quality than what had been represented by the company. It was also alleged that investors, including federally-insured financial institutions, lost billions of dollars through investments in residential mortgage-backed securities with loans originated by Wells Fargo.
April 2016 – Wells Fargo agreed to pay $1.2 billion to settle civil mortgage fraud claims related to its participation in the Federal Housing Administration’s (FHA) Direct Endorsement Lender Program. As part of the settlement, Wells Fargo admitted that, from 2001 through 2008, it certified that certain residential home mortgage loans were eligible for FHA insurance when, in fact, they were not. These false certifications caused the government to pay FHA insurance claims for a number of defaulted loans. The government’s complaint alleged that Well Fargo violated several of the predicate offenses which created liability under FIRREA.
Multiple New York-based Real Estate Companies
January 2021 – DOJ filed a complaint against three individuals and multiple real estate companies alleging that the defendants engaged in fraudulent short sales of residential properties insured by the Federal Housing Administration (FHA). According to the complaint, the defendants, using an array of different corporate entities, manipulated the short sale process to acquire residential properties from distressed homeowners for below-fair market value prices. As part of the alleged scheme, the defendants also obtained broker fees in connection with the transactions and caused lenders to release the FHA-insured mortgages at a loss. The Department of Housing and Urban Development used federal funds to pay lenders’ claims at artificially increased prices. The suit was filed pursuant to the False Claims Act and FIRREA.
Vivint Smart Homes
January 2021 – Vivint Smart Home Inc. agreed to pay $3.2 million to resolve allegations that Vivint employees made false statements to secure financing for customers’ purchases of the company’s home monitoring product. The government contended that some of the company’s sales representatives used their own personal funds to make the initial finance payments for customers who sought financing to purchase Vivint’s products. The sales reps allegedly created the false impression that the borrowers had provided the initial payments themselves by making false and misleading statements to a federally-insured financial institution that provided financing to the company’s customers.
Former Deutsche Bank Executive
November 2019 – A former Managing Director and head of subprime trading at Deutsche Bank agreed to pay $500,000 in civil penalties in exchange for dismissal of a complaint against him. The government alleged that the executive engaged in a scheme to defraud investors in the marketing and sale of two residential mortgage-backed securities. The former bank executive allegedly misrepresented the characteristics of the loans backing the two securities and misled potential investors about the loan origination practices of Deutsche Bank’s wholly-owned subsidiary, which originated a number of the loans backing the two securities. The complaint sought relief under FIRREA based on charges of mail and wire fraud.
April 2019 – General Electric agreed to pay $1.5 billion to resolve allegations relating to subprime residential mortgage loans originated by its subsidiary, WMC Mortgage (WMC). The DOJ alleged that WMC originated more than $65 billion dollars in mortgage loans between 2005 and 2007. During that period, WMC loan analysts, who responsible for underwriting mortgage loans, were allegedly encouraged to approve loans in order to meet volume targets, even where the loan applications failed to meet the company’s published underwriting guidelines. These loan analysts allegedly received additional compensation based on the number of mortgages they approved.
Investment banks that purchased WMC’s loans sometimes declined to buy certain other mortgage loans from the company due to defects in the loan file or suspected fraud. When an investment bank declined to purchase a loan, it typically notified WMC of its reasons for rejecting the file, including the defects identified. WMC allegedly re-offered some of these defective loans to a second potential purchaser as part of a residential mortgage-backed security but failed to disclose that the mortgages had previously been rejected, or the reasons why the first potential purchaser determined they had defects. The DOJ sought civil penalties under FIRREA for violations of various predicate criminal offenses, including wire and mail fraud, because the violations had affected a federally-insured financial institution.
BMO Harris Bank
October 2018 – BMO Harris Bank agreed to pay $10 million to resolve allegations that M&I Bank, which BMO Harris acquired in 2011, violated FIRREA by engaging in fraud related to a multi-billion-dollar Ponzi scheme perpetrated by Minnesota businessman Thomas J. Petters. The government alleged that M&I Bank participated in a fraudulent scheme whereby it entered into “deposit account control agreements,” at Petters’ request. These agreements promised investors that the bank would monitor and protect the proceeds of their investments with Petters. However, the bank representatives who signed the agreements allegedly knew that those agreements provided no such protection to the investors. The government thus alleged that M&I Bank’s fraudulent conduct allow Petters’ scheme to continue, resulting in millions of dollars in losses to Petters’ investors.
Royal Bank of Scotland
August 2018 – DOJ announced a $4.9 billion settlement with The Royal Bank of Scotland Group (RBS) to resolve allegations that the company misled investors in the underwriting and issuing of residential mortgage-backed securities between 2005 and 2008. DOJ alleged that RBS earned hundreds of millions of dollars while ensuring that it received repayment of billions of dollars it had lent to originators to fund the faulty loans underlying residential mortgage-backed securities. RBS allegedly used the securities to transfer the risk of the loans, and billions in subsequent losses, to unsuspecting investors all over the world. The penalty is the largest imposed by DOJ on a single entity under FIRREA for financial crisis-era misconduct.
Allied Home Mortgage
September 2017 – A judgment totaling $296,298,325 was entered against Allied Home Mortgage Capital Corporation and Allied Home Mortgage Corporation, and a judgment in the amount of $25,340,496 was entered against the companies’ president and CEO, for violations of FIRREA and the False Claims Act. A jury found that the defendants recklessly certified thousands of high-risk loans for FHA insurance that were, in actuality, ineligible under federal guidelines. When ineligible homeowners defaulted on the loans, the defendants submitted insurance claims for reimbursement to FHA.
May 2017 – Financial Freedom, a reverse mortgage servicer, agreed to pay more than $89 million to resolve allegations that it violated the False Claims Act and FIRREA in connection with its participation in a federally insured reverse mortgage program. Financial Freedom allegedly attempted to obtain insurance payments for interest from the Federal Housing Administration despite failing to disclose on government filings that the mortgagees were not eligible for the interest payments because the company failed to meet various deadlines. From 2011 to 2016, the mortgagees on certain reverse mortgage loans allegedly obtained additional interest that they were not entitled to receive as a result of the company’s actions.
January 2017 – DOJ announced that VW agreed to pay a total of $4.3 billion to settle claims arising from the 2015 emissions scandal known as “Dieselgate.” The Environmental Protection Agency found that Volkswagen had intentionally programmed its diesel engines to activate their emissions controls only during laboratory emissions testing to meet U.S. standards. As part of the settlement, VW agreed to pay $50 million in civil penalties for alleged violations of FIRREA.
The FIRREA violations were based on VW allegedly offering competitive financing terms through its purchase of vehicle loans and leases from dealers. Some of the leases and loans involved diesel vehicles that contained the emissions-cheating programming which served as collateral for the underlying transactions. The DOJ alleged that certain of these loans and leases were pooled together to create asset-backed securities, some of which were purchased by federally-insured financial institutions which created liability under FIRREA.
January 2017 – Credit Suisse agreed to pay $5.28 billion to settle allegations that it made false and misleading representations to prospective investors about the characteristics of the mortgage loans it securitized into residential mortgage-backed securities. Under the terms of the settlement, Credit Suisse to paid $2.48 billion as a civil penalty under FIRREA, as well as $2.8 billion in other relief, including loan forgiveness and financing for affordable housing to distressed borrowers and affected communities.