First Tennessee Bank Reaches $212.5M Mortgage Loan Settlement

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First Tennessee Bank will pay the federal government $212.5 million in a settlement resolving allegations the bank violated federal law regarding mortgage backed securities between January 2006 and October 2008, the U.S. Department of Justice announced last week.

The consumer banking fraud lawsuit was filed by the U.S. Attorney General, and alleged that First Tennessee Bank, through its subsidiary First Horizon Home Loans Corporation, participated in the U.S. Department of Housing and Urban Development’s Federal Housing Administration (FHA) as a direct endorsement lender.

As a direct endorsement lender, First Tennessee Bank was able to originate, underwrite and endorse mortgages for FHA insurance. When a direct endorsement lender approves a mortgage for FHA insurance and the loan later defaults, the loan holder may submit a claim to HUD for the losses associated with the defaulted loan. Because neither HUD nor the FHA reviews loans that are endorsed for FHA insurance by direct endorsement lenders, the direct enforcement lenders are required to follow specific rules to ensure quality control and ensure they are properly underwriting mortgages for FHA insurance. In addition, they are required to report any deficient loans to the FHA.

As part of the settlement, First Tennessee admitted that it repeatedly certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements between January 2006 and October 2008. In 2007, the bank reportedly increased its FHA originations significantly and the quality of its FHA underwriting subsequently decreased. First Tennessee also admitted that it had been aware that a substantial portion of its FHA loans were ineligible for FHA mortgage insurance, and that these findings were routinely shared with the bank’s senior managers. Despite acknowledging these deficiencies internally since at least early 2008, First Tennessee failed to report any deficient mortgages to FHA.

In a statement released on June 1, the Justice Department indicated the $212.5 million settlement would resolve allegations First Tennessee “violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the [FHA] that did not meet applicable requirements.”

“First Tennessee’s reckless underwriting has resulted in significant losses of federal funds and was precisely the type of conduct that caused the financial crisis and housing market downturn,” Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division said in a statement. “We will continue to hold accountable lenders who put profits before both their legal obligations and their customers, and restore wrongfully claimed funds to FHA and the treasury.”

According to the Justice Department’s statement, the investigation into First Tennessee’s loan origination and underwriting procedures was a joint effort between the Justice Department’s Civil Division, the U.S. Attorney’s Office for the Northern District of Georgia, HUD, and HUD’s Office of Inspector General.

First Tennessee sold First Horizon to Metlife Bank in August 2008 and subsequently originated FHA insured mortgages under the Metlife name. Earlier this year, Metlife agreed to pay $123.5 million to resolve its False Claims Act liability related to its FHA originations after it acquired First Horizon.