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Dan Gilbert says government can't 'coerce' him into admitting Quicken Loans committed fraud

cleveland.com | May 6, 2015

By Teresa Dixon Murray

CLEVELAND, Ohio -- Two weeks after his mortgage company was sued by the federal government, Quicken Loans Chairman Dan Gilbert on Monday blasted the U.S. Department of Justice, saying he believes it's trying to score points with Americans by going after big players in the mortgage industry.

Gilbert, also majority owner of the Cleveland Cavaliers, said in a half-hour interview with The Plain Dealer that he is fighting a lawsuit from the government primarily out of principle. Quicken Loans has about 11,000 employees, a few hundred of them in Cleveland. Gilbert is also founder and chairman of Rock Ventures, which operates Cleveland's Horseshoe Casino.

The U.S. government last month sued Quicken Loans, alleging the Detroit-based company committed fraud just to close bad loans insured by the Federal Housing Administration — a practice DOJ says cost taxpayers millions of dollars and hurt neighborhoods when the houses went into foreclosure.

Quicken Loans is the nation's largest FHA lender and a company that FHA itself often turns to for advice on improving the lending process, Gilbert said. Now, he said, the government tried to "coerce" him into paying a multi-million-dollar penalty and admitting his company committed fraud, or else it would file a suit that would become public.

Gilbert's message to the government: "We're not going to write a check and admit something because we fear you ...

"For us, the check would have been one thing," he said. "The worst part about it was them trying to tell us we have to make an admission of something that we weren't even remotely guilty of. You can't take people's reputations that they've built for 30 years and try to force you to say something that isn't true."

The government has gone after at least 15 large lenders in the country during the past few years, with similar claims that they fraudulently approved loans that ultimately defaulted and cost the FHA money. FHA, an 81-year-old program, can help consumers buy homes with lower down payments. As long as the borrower and home meet certain standards, the government will guarantee the loan and reimburse the lender if the loan goes bad.

Now, the Department of Justice is conducting investigations at various lenders, saying a certain percentage of loans violated standards and the lenders must admit wrongdoing and pay big fines, or else they'll be sued.

Quicken Loans last month called the developments "a witch-hunt."

"I don't think they're out for Quicken Loans," Gilbert said. "I think what happened was there was a decision made -- again, this is pure speculation, but it's hard to come to any other reasonable conclusion -- that somebody somewhere said, 'Let's go get the large lenders. Let's go make the large lenders either settle with us or we're going to sue them if they don't settle with us because we need to make a statement to America that we got the mortgage guys.'

"Well, if the mortgage guys did something wrong or fraudulent, you absolutely should go after the mortgage guys," he added. "But I think we got swept up in that ... We just happen to now be the largest FHA lender."

Gilbert is puzzled that, if the government was really trying to crack down on something, why wouldn't it go after some of the smaller FHA lenders whose default rates are much, much higher than the banks that have been targeted?

The issue for Gilbert comes down to the methodology the government used to point out possible problems. The company wrote about 250,000 FHA loans from 2007 to 2011.

Three years ago, Quicken Loans got an unexpected subpoena for files on 322 specific loans. "We were shocked," Gilbert said. "We thought maybe they were investigating whether there was discrimination in lending in some form. We didn't even know what it was. We said, 'OK, we'll send them. We've got nothing to hide.' So we sent them all."

Government auditors decided to look at 116 that had defaulted, and said 55 (47 percent) had "defects" or mistakes. The government then extrapolated that and determined that 47 percent of some large portion of Quicken Loans' portfolio contained fraud.

Quicken Loans' executives have no idea how the government arrived at that number. Gilbert said the sample the government used was unfair because, when you're looking at loans that went into default, there's a higher likelihood of finding a problem compared with a loan that didn't default. But, he argued, you can't reasonably say that just because these handful of defaulted loans had mistakes, then that means the same proportion of all of your loans also must have had mistakes too.

In reality, the 55 loans works out to 0.02 percent of Quicken Loans' portfolio, or one out of every 4,400 loans. Overall, the company generated $60 billion in loans in 2014, including all types of loans. It says that from the $40 billion in FHA volume that Quicken Loans generated from 2007-13, the government enjoyed $5.7 billion in net profits from insurance premiums collected.

In its suit, the government said Quicken Loans "knowingly submitted, or caused the submission of, claims for hundreds of improperly underwritten FHA-insured loans," and said the company has a process that encouraged employees to "disregard FHA rules and falsely certify compliance."

It's ironic that DOJ is targeting Quicken Loans, Gilbert said, because the company has the best loan quality score and lowest default rate among the 30 largest FHA lenders. In one case, the government claimed a person's monthly income was off by $2.10. In another case, it said Quicken Loans approved a loan for $26 too much on a $99,000 loan.

Gilbert isn't saying Quicken Loans is perfect. You can't generate 250,000 FHA loans without an occasional mistake, he said.

"When you have 11,000 employees out there, one or two people might do one wrong thing. We'll catch them because of our own quality control." But he said Quicken Loans has never been hit with anything more than the equivalent of a traffic ticket.

Gilbert said lenders, as a matter of business, often agree to take a loss on an FHA loan that defaults -- and not get reimbursed by FHA insurance -- if they find there was a mistake made in approving that loan. Quicken Loans has done that a few dozen times over the years, he said.

What he would have expected now: If the DOJ really thought there was a problem with 55 loans, perhaps Quicken Loans would have been willing to talk about taking the loss on those. But the DOJ never gave the company that option, Gilbert said.

Instead, the government promised to sue. So a week before the government suit was filed on April 23, Quicken Loans on April 17 sued the government. The company asked for a jury trial to prohibit the sampling it calls flawed. And it asked for attorneys' fees.

Quicken Loans had to take the dramatic action of its own lawsuit, Gilbert said. "They say, write a massive check to us and, by the way, put out a news release saying you violated the False Claims Act, which is tantamount to fraud ... for us, there's no other choice."

 

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