The $89 million settlement in May between Financial Freedom and the United States regarding claims under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 resulted in a $1.6 million bounty for a FIRREA whistleblower.
The United States alleged that Financial Freedom failed to meet certain obligations to FHA as a mortgage insurance provider on their reverse mortgage loans. Financial Freedom collected interest from the FHA despite failing to obtain an appraisal within 30 days of the reverse mortgage becoming due and payable. Services that miss the 30-day appraisal deadline before a foreclosure are not entitled to interest that accrues after the loan becomes due.
This is the first FIRREA whistleblower award that I have seen confirmed in a Department of Justice press release. For some time, the law initially developed in response to the savings and loan crisis, went unused. It was reinvigorated following the Great Recession when it became the primary theory for prosecution of mortgage fraud.
It has since seen expanded utilization in other areas. In 2014, the DOJ issued subpoenas to two large subprime auto lenders investigating whether their origination and securitization practices violated FIRREA. In 2016, Volkswagen was charged with violations of FIRREA for the use of defeat devices to cheat on emissions tests. It ultimately settled these allegations for civil penalties of $50 million.
The reverse mortgage award demonstrates the substantial difference between the award structure for awards under the False Claims Act and FIRREA. The award of $1.6 million was paid under FIRREA. FIRREA has a different payout structure compared to the False Claims Act and a maximum award of $1.6 million. There is no maximum award under the False Claims Act. Under it, any award would have been between 15 and 25 percent of the recovery (for an intervened lawsuit). This would have resulted in a minimum payout of $13.3 million (assuming that the individual met the requirements under the law).
Former Attorney General Eric Holder, before he left the office, suggested in a speech at NYU School of Law that FIRREA should be amended to lift the maximum available award. Holder called 1.6 million “a paltry sum in an industry in which, last year, the collective bonus pool rose above $26 billion, and median executive pay was $15 million and rising.” As far as we are aware, Congress has not attempted to increase the maximum award recently.