JP Morgan Chase will pay $45 million to settle whistleblower claims by two metro Atlanta mortgage executives contending that the bank defrauded the federal government through a program that helped veterans refinance their homes. JPMorgan is the first of ten of the nation’s largest banks sued in federal court in Atlanta to settle. The banks were accused of illegally billing legal fees and other barred costs to an estimated 1.2 million veterans who refinanced their homes through the U.S. Veterans Administration. The lawsuit is pending before U.S. District Judge Amy M. Totenberg in Atlanta.

It was reported that 74% of the settlement will go to the federal government to reimburse it for fraudulent VA loans it guaranteed that fell into default. The whistleblowers, Victor E. Bibby and Brian J. Donnelly, will receive 26% of the settlement award. These men are executives of Veterans’ Mortgage Co., a Georgia mortgage broker that arranged thousands of veterans’ loans in the Southeast. The suit by Donnelly, vice president of operations at the Veterans’ Mortgage Co., and Bibby, the company president and CEO, was filed in 2006. But it was not unsealed until last fall, some five years later. Donnelly and Bibby uncovered billing improprieties by the big banks that financed the loans, which were guaranteed by the VA.

The VA program, known as the Interest Rate Reduction and Refinancing Loans Program (IRRRL), was intended to encourage retired and active-duty veterans to take advantage of low interest rates by exempting them from legal fees and other costs typically associated with refinancing their VA home loans. Because the loans are federally guaranteed, lenders originating IRRRL loans may collect only a flat rate of 1% of the loan amount as an origination fee, plus a limited number of allowable fees for recording a loan, obtaining a title search and insurance, and acquiring a borrower’s credit report.

The banks’ legal fees can’t be charged to veterans. That’s because the VA is barred by law from guaranteeing any refinanced loans for which veterans were charged the banks’ legal fees. Interestingly, the banks hid these fees in the loan paperwork. In addition to overcharging veterans who refinanced their homes, the suit also accuses the Defendant banks of securing federal loan guarantees by falsely certifying to the VA that they weren’t charging veterans the disallowed fees. Because of the federal loan guarantees, the refinanced loans were very attractive to the banks. The risk to the lender was diminished and that appealed to the banks.

It was reported that as much as 18% to 20% of the refinanced VA mortgages have been driven into default by the faltering economy. In connection with the resulting foreclosures, the federal government has reimbursed the banks for 25% of each guaranteed loan up to $417,000—even though, loans that contained hidden legal fees didn’t qualify for the federal loan guarantees. According to data submitted to Congress by the VA, the agency has paid more than $2.5 billion since 2001 to banks that have made guarantee claims in connection with IRRRL loans to veterans.

The guaranties are void because the banks failed to follow the rules related to the VA loan guaranties. The fraudulent practices that Bibby and Donnelly uncovered “was industry-wide fraud” on the part of the Defendant banks that had occurred over the past decade. If Bibby and Donnelly had not come forward and reported the fraud, it’s quite probable the fraud would never have been discovered.

Marlan Wilbanks, an Atlanta lawyer, along with Butler Wooten & Fryhofer, a Columbus, Ga., firm, represented the whistleblowers. They have done a very good job in the case thus far. There is still more work to be done in this litigation. It will be interesting to see how the rest turns out.

Source: Daily Report Online

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