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Net Branching at Issue in Allied's FHA Suspension

Lawsuit by government alleges fraud

Nov. 1, 2011

By staff

Allied Home Mortgage Corp., which claims to be the "the nation's largest privately held mortgage banker and broker," has lost its ability to originate and securitize loans insured by the Federal Housing Administration and has been sued by the government over allegations of fraud. Claims on FHA loans funded by Allied are on track to exceed $1 billion. The company is accused of operating its offices as net branches in violation of FHA requirements.

The Department of Housing and Urban Development issued a statement Tuesday indicating that Allied has been suspended as an FHA mortgagee.

The company has originated more than 110,000 FHA loans during the past decade, and more than 30 percent of those loans are in default. On just loans originated during 2006 and 2007, the default rate is 55 percent. FHA has paid claims totaling $834 million on Allied originations. Claims on another 2,509 defaulted loans haven't yet been processed but could add another $363 million to the tab.

Also suspended were James Hodge, Allied's president and chief executive officer, and Jeanne L. Stell, an executive vice president for the Houston-based firm.

In addition, Allied has been suspended as an issuer of Ginnie Mae mortgage-backed securities.

Allied spokesman Joe James said that the company just learned of the lawsuit, has not had a chance to review the complaint and could not comment at this time.

HUD claims that Allied originated loans from branches that were not approved by HUD. Allied allegedly tried to cover up the violations by submitting the loan packages using the FHA ID of approved branches. The government alleges that hundreds of "shadow" unapproved branches were originating FHA loans on behalf of Allied without being subject to Allied's oversight.

Although some of Allied's senior managers questioned the faulty practices, Hodge allegedly directed employees to continue.

Allied is also accused of failing to pay the operating expenses for some of its FHA-approved branches, as required by HUD. Operating expenses include equipment, furniture, office rent, overhead, employee compensation and similar expenses.

HUD alleges that the company failed to implement an FHA-required quality-control plan when it didn't conduct a review of 10 percent of the loans it originated. It also didn't review all loans that defaulted on any of the first six payments as required by the housing agency. Annual certifications submitted to HUD between 2006 and 2011 were allegedly false because the QC plan wasn't in compliance.

Required reviews of more than 600 branches were reportedly conducted by a "handful" of unqualified staffers who operated from either St Croix or the U.S. Virgin Islands from a company set up by Hodge to obtain tax benefits. But when the QC manager visited the Caribbean offices, the employees allegedly didn't even know what a mortgage or HUD was. The offshore company reportedly earned millions of dollars in management fees from Allied while doing little.

Stell was named chief compliance officer of Allied in July 2010. At the time, the company said Stell was hired in a consultant capacity to ensure branches meet state and federal compliance and licensing standards as well as the company's own policies and procedures.

In August 2010, Hodge suggested in an interview with Mortgage Daily that the suspension of a Maryland branch by HUD was unfair because the poor performance of loans in that branch were tied to an increase in streamlined refinances. He said the branch underwrote the loans according to HUD's guidelines.

Also on the list of alleged violations was Allied's employment of a principal, officer and director who was suspended.

"These defendants demonstrated a pattern of recklessness and utter disregard for how we do business," HUD General Counsel Helen Kanovsky said in HUD's announcement.

Concurrently with the suspensions, the U.S. Department of Justice filed a civil lawsuit in U.S. District Court for the Southern District of New York against Allied, Hodge and Stell. The lawsuit seeks damages and civil penalties under the False Claims Act and the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

The government can potentially collect $1 million per violation under FIRREA.

Hodge and his wife Kathy Hodge each own 49.5 percent of Allied, while his son, Jamey Hodge, owns 1 percent.

The complaint includes charges of mortgage fraud and numerous violations of FHA requirements.

The Justice Department alleges that Allied concealed misconduct for nearly a decade.

"As described in the complaint,
Allied and its CEO exploited a government insurance program to engage in a wholesale shifting of risk away from itself -- playing a lending industry equivalent of heads-I-win and tails-you-lose," U.S. Attorney Preet Bharara said in a news release.

Stell, who originally started with the company in 2001, attempted to avoid legal exposure for her and Hodge by having another senior manager sign the false certifications.

The Justice Department cited an e-mail from Stell that stated, "I had [another senior manager] sign the 'add a branch' form for years for HUD as I knew this would eventually happen. It required that you swear the branches meet
and will continue to meet HUD's regulations. Jim [Hodge] has to be the biggest target personally for his disregard for the regulations. Serves him right never listening and thinking he didn't have to play by the rules."

Even though Allied certified that none of its employees had ever been convicted, the Justice Department said that numerous convicted felons were employed at the company -- with more than a dozen being hired in one year.

In its complaint, the government explained that the company paid its managers on a straight commission basis, required that they set aside their own reserves and didn't cover operating costs for unprofitable branches. It limited its financial obligations by maintaining month-to-month subleases with branch managers who were personally responsible for the primary leases.

Allied only supervised branch revenues, and some branch managers weren't audited by the corporate office for years, according to the lawsuit. On-site branch audits were discontinued entirely in 2009.

Senior managers of the company who were concerned about problem branches began secretly meeting when Hodge would leave town. Known as "The Star Chamber," the group would close problem branches that Hodge refused to close. But after Hodge repeatedly reopened the branches -- the group gave up and discontinued the meetings.

"Allied's 'net branch' system enabled it to open more than 2,000 branches, far more than it could supervise and control," the lawsuit states.

When Hodge did agree to close a branch, the branch manager was left liable for long-term contractual commitments and legal judgments if their branch's conduct was implicated.

A 2006 lawsuit was cited where, after Allied was found liable for the actions of a loan officer, the Ohio branch manager was told to pay the $40,000 judgment.

Another branch manager in Massachusetts was left holding the bag for more than $100,000 on a commercial lease after the company shut down the branch.

In Michigan, a branch manager was sued and faced a judgment of more than $17,000 for the remaining rent owned on a commercial lease after that branch was closed by the company.

HUD, acting on a tip from an Allied employee, audited five branches in 2008 and found that none of the lease agreements on any of the branches were in Allied's name but in the personal names of the branch managers. While Allied signed month-to-month sub-leases with the managers, it wasn't liable for the primary lease -- a violation of HUD requirements.

Allied agreed to a $38,000 civil money penalty as part of a settlement with HUD, though it said in a statement, "only a small number of accounting records for five branch locations could not be located to support payment of the bills."

But even after HUD issued a report on its audit, Allied allegedly continued with the prohibited practices. A subsequent Missouri lawsuit was cited where the branch manager and Allied were named as defendants and Allied filed a cross-complaint to hold the manager liable.

As recently as January, Allied demoted an Iowa branch manager and closed the branch but told her that she was liable for the remaining lease. When she questioned the liability, she was fired.

Other allegations in the lawsuit include Hodge's creation of an offshore shell company, Mercantile Insurance & Fidelity Co., to issue required state bonds even though it wasn't licensed to do so; covert monitoring of key employee and legal counsel e-mail accounts; monitoring of Stell's personal e-mail account; and installation of an electronic listening device under the desk in the chief information officer's office.

The government said that it also joined and expanded "upon a qui tam" private whistleblower lawsuit filed against Allied in May.

United States of America ex rel. Peter Belli, Plaintiff, -against- Allied Home Mortgage Capital Corporation, Defendant.
(U.S. District Court for the Southern District of New York).

United States of America, Plaintiff-Intervenor, -against- Allied Home Mortgage Corp., Allied Home Mortgage Capital Corp., Jim C. Hodge, and Jeanne L. Stell.
Case No. 11 Civ. 05443 (VM), Nov. 1, 2011 (U.S. District Court for the Southern District of New York).

Allied Home Mortgage profile

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