Date: April 24, 2015Author: Denbeaux & Denbeaux
by Adam Deutsch Esq.
Privately owned Detroit Michigan based mortgage origination company Quicken Loans used to love doing business with the Federal Government. Now it seems, the love affair has cooled off. On Friday April 17, 2015, Quicken filed a pre-emptive lawsuit against the U.S. Department of Housing and Urban Development and the Justice Department. The lawsuit claims that the company has been unfairly singled out as part of a “political agenda under which the DOJ is investigating and pressuring large, high-profile lenders into paying nine- and 10-figure sums and publically admitting wrongdoing.” Quicken suggests it is being blackmailed into submission under the threat of lawsuit from the Federal Government.
At the core of the lawsuit is the Quicken business model. Unlike traditional mortgage originators, Quicken does not retain ownership of the loans it creates. Instead, the firm maintains contracts guaranteeing its ability to sell the loan shortly after origination. This business model lends itself to high risk, but not for Quicken. Because Quicken sells its loans shortly after origination, it makes money through the origination, not loan servicing business. Regardless of whether a borrower pays off the full value of the loan, or defaults after a couple of years, Quicken gets paid. By exclusively focusing on the origination process, Quicken has created a successful niche and has consistently ranked first by consumers in terms of customer satisfaction according to J.D. Power.
According to the lawsuit, Quicken has originated approximately 250,000 loans insured by the Federal Housing Agency since 2007. Since the housing crisis the Federal Government has conducted regular audits of loans backed by the FHA. The process is essential to the national interest because every time a loan backed by the FHA fails, the Federal Government is forced to pay the value of the loan to its owner. As part of the FHA lending process, Quicken must certify that each FHA backed loan it originates has no errors.
Quicken’s lawsuit does not deny that errors were made in the origination of FHA loans. Instead, the company claims that the Justice Department has made unfair demands of Quicken. According to the Complaint the Justice Department threatened penalties against Quicken based upon an sampling audit of only 55 loans. Quicken asserts that the errors found were de-minimus and included miscalculating a borrower’s income by only $17. However, even minor infractions are a violation of the FHA lending requirements because each time corners are cut it amplifies the financial risk carried by the American taxpayer.
The Quicken lawsuit highlights the central problem with the Federal Government’s FHA program. A central purpose of FHA loans is to permit access to home ownership and to encourage savings for Americans in the lower and middle class for whom access to traditional mortgage loans may not be available. However, by insuring the full value of loans, lenders are more likely to cut corners and take risk. Quicken can sell FHA loans more easily than conventional loans because the guarantee of repayment is secured. There exists an inherent conflict when a lender issues a loan it knows it will be fully repaid upon regardless of the borrower’s financial capacity. It has been argued that the risky lending leading up to the 2008 crises was in part caused by loan originators having no “skin in the game.” Financially, the owner of an FHA loan may prefer to own a loan that defaults because they will recoup their principal more quickly.
It is against this conflict that the Department of Justice, Federal Housing Association, and Consumer Financial Protection Bureau have increased scrutiny of lenders and loan servicing companies in the past couple of years. Quicken cries foul, but it should be cautious not to bite the hand that feeds it. It is refreshing to see the Federal Government working diligently for the people. So long as a loan originator chooses to create loans backed by the FHA or otherwise sponsored by the American Government, it must accept that the cost of doing business includes a guarantee of paper work accuracy and the scrutiny of audits. Quicken is not a political target, it is a petulant business playing a game without following the rules.