FIRREA Whistleblower Lawyers
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) authorizes the Attorney General to bring a civil lawsuit for fraud involving a federally-insured financial institution. Although it was enacted in response to the savings and loan crisis of the 1980s, FIRREA has been a key tool in the government’s arsenal for prosecuting mortgage fraud in the aftermath of the financial crisis of 2008. The Department of Justice (DOJ) utilizes several important aspects of the statute to assist in the prosecution of misconduct by financial institutions. The burden of proof under FIRREA is lower than many other laws used to prosecute fraudulent conduct. 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 U.S. will pay up to $1.6 Million to FIRREA whistleblowers for information about fraud involving federally-insured financial institutions.”
The DOJ has used FIRREA, sometimes in conjunction with the False Claims Act, to assert claims for massive 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 2014, the Department of Justice has recovered more than $68 billion from separate settlements involving allegations of FIRREA violations against major financial institutions.
FIRREA offers whistleblowers another program, separate from the False Claims Act, to report bank fraud that can potentially lead to a reward for information involving certain forms of financial fraud. Whistleblowers can receive up to $1.6 million for information involving FIRREA violations that leads to a successful monetary recovery.
The History of FIRREA and FIAFEA
FIRREA was passed in 1989 to restore public confidence in lending institutions following the savings and loan crisis in 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 declared insolvent during the 1980s.
FIRREA also strengthened the civil enforcement powers of federal regulatory agencies against those perpetrating fraud that involves federally-insured financial institutions. FIRREA contains a list of fourteen criminal statutes which serve as predicate offenses. A violation of any one of these offenses can result in significant civil monetary penalties. As adjusted for inflation, the statute imposes penalties up to $ 2,048,915 per violation, and up to $ 10,244,577 for a continuing violation. 12 U.S.C. § 1833a(b)(1)-(2). 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 gain or loss. 12 U.S.C. § 1833a(b)(3).
In the prosecution of FIRREA violations, the government need only prove its case by a “preponderance of the evidence” rather than the higher “beyond a reasonable doubt” standard applicable in criminal cases. The law also grants the government broad pre-trial investigation powers which allows DOJ to issue administrative subpoenas for documents as well depose key witnesses without judicial approval.
In a separate piece of legislation enacted shortly after FIRREA, the government is authorized to provide payment for information about violations of FIRREA. The Financial Institutions Anti-Fraud Enforcement Act (FIAFEA) of 1990 authorizes rewards to eligible individuals who submit a declaration to the Attorney General of the United States involving a violation of any offense enumerated in 12 U.S.C. § 1833a, including:
- Receipt of commissions or gifts for procuring loans, 18 U.S.C. § 215);
- Theft, embezzlement, or misapplication by bank officer or employee, 18 U.S.C. § 656;
- Lending, credit and insurance institutions; 18 U.S.C. § 657);
- Bank entries, reports and transactions (18 U.S.C. § 1005);
- Federal credit institution entries, reports and transactions, 18 U.S.C. § 1006;
- Federal Deposit Insurance Corporation transactions,18 U.S.C. § 1007;
- Loan and credit applications generally; renewals and discounts; crop insurance, 18 U.S.C. § 1014;
- Bank fraud, 18 U.S.C. § 1344;
- False statements; overvaluation of securities, 15 U.S.C. § 645(a); or
- 18 U.S.C. §§ 287, 1001, 1032, 1341, or 1343 (involving fraud or false statements affecting a federally-insured financial institution.
A 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.
Noteworthy FIRREA Settlements
The civil monetary penalties imposed for FIRREA violations can be potentially devastating. Consequently, most financial institutions facing such charges eventually settle to limit their potential exposure.
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 or without 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 also 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 that created liability under FIRREA.
Former Deutsche Bank Executive
In 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.
In April 2019, General Electric (GE) 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, 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. The WMC 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. However, the company allegedly failed to disclose that those 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
In 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
In 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, onto 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.
In 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.
In January 2017, the Department of Justice 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 allegedly based on VW’s offering of 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. The vehicles served as collateral for the underlying the loan and lease 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.
In 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.
Our whistleblower attorneys have helped clients report their misconduct and suspected violations of various federal financial laws. McEldrew Young Purtell attorneys have helped the government recover billions of dollars lost due to fraud. Our attorneys can assist you through all stages of the process while maintaining your confidentiality. If you have information involving a violation of any federal financial statutes or regulations, call for a free, no-obligation consultation with one of our whistleblower attorneys.