The U.S. government has reached a $133-million settlement with Flagstar Bank, resolving a civil fraud lawsuit which accused the bank of fraudulent mortgage lending practices. The lawsuit, filed by the U.S. Attorney for the Southern District of New York and the U.S. Department of Housing and Urban Development, alleged that Flagstar used unqualified employees to approve mortgage loans backed by HUD, approved mortgage loans that did not comply with HUD and Federal Housing Administration underwriting requirements, and made false certifications on mortgage loans. Preet Bharara, U.S. Attorney for the Southern District of New York, said in a statement:

The lawsuit is another stark example of how certain lenders put profit ahead of responsibility by recklessly churning out mortgage loans without regard to the risk that those loans would default or the significant consequences for the individual homeowners who would inevitably default on their loans.

Flagstar’s CEO and president Joseph Campanelli said in a statement that the bank “is one of the leading originators and servicers of FHA-insured loans, and we remain committed to continuing in that capacity. This agreement with the Department of Justice allows us to move forward and to continue to focus on core operations and on serving our customers.”

This is the fourth lawsuit brought by the U.S. Attorneys’ office in New York against residential mortgage lenders. The government also has sued Deutsche Bank, Allied Home Mortgage and CitiMortgage, a subsidiary of Citibank. CitiMortgage reached a $158-million settlement with the government. Under terms of the Flagstar settlement, the company agreed to pay $15 million within 30 business days and to pay an additional $118 million as soon as it meets certain financial benchmarks. An independent third party, to be paid for by Flagstar, will monitor the bank’s compliance with HUD and FHA lending rules for at least one year.

Flagstar also agreed to implement a training program for employees involved in the originating and underwriting of FHA loans. In addition, it agreed to terminate the senior managers who had been overseeing the bank’s manual underwriting process. Because of the settlement, Flagstar will revise its fourth-quarter 2011 and full-year 2011 earnings, which were announced Jan. 24. The bank said while its net loss for the fourth quarter could increase by between $25.9 million and $34.3 million, it still expects to achieve profitability this year. Flagstar is one of the largest residential mortgage lenders in the country, originating $26.6 billion in mortgages in 2010. The bank is the largest publicly-held savings bank in the Midwest, with $13.6 billion in total assets and 113 branches in Michigan. It is majority-owned by MatlinPatterson Global Advisers, a New York-based private equity firm.


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