Suspension Justified in Allied Mortgage Case

     HOUSTON (CN) - The suspension of Allied Home Mortgage Corporation and its CEO's right to issue federally-insured home loans was justified, given evidence their mortgage fraud cost taxpayers $834 million, a federal judge ruled.
     Federal prosecutors in New York sued Allied Home Mortgage Corp., its CEO Jim Hodge and executive vice president Jeanne Stell in 2011, alleging Allied's "decade of misconduct has resulted in tens of thousands of defaulted loans, thousands of American homeowners facing eviction, and hundreds of millions of dollars in losses to the United States."
     In a statement announcing the lawsuit the U.S. Attorney's Office said the Federal Housing Administration paid $834 million "for mortgages originated and fraudulently certified by Allied that are now in default."
     The case was filed under seal by former Allied branch manager Peter Belli and made public when the United States intervened in November 2011.
     The proceedings were transferred from Manhattan to the Southern District of Texas in August 2012, as Allied was based in Houston. The company has since changed its name to AllQuest Home Mortgage Corp.
     The suit accused Allied, Hodge and Stell of submitting false loan certifications to the Department of Housing and Urban Development to obtain HUD-backed insurance for the loans.
     HUD mandates the lender obtain approval for each branch from which it intends to originate HUD-insured loans, as a way for the agency to track default rates.
     The lawsuit claimed that, for more than 10 years, Allied originated loans out of hundreds of branches it never disclosed to HUD. The "shadow branches," as the feds called them, often operated in regions where HUD had suspended Allied's power to originate loans, given the areas' high default rates, according to the complaint.
     The government also claimed Hodge directed Allied to falsify quality-control reports needed to maintain HUD-approved lender status.
     The same day the lawsuit went public, HUD gave Hodge and Allied notices of suspension, which immediately barred them from issuing HUD-insured loans.
     Hodge and Allied quickly filed for an injunction under the Administrative Procedure Act, seeking a declaration that the suspensions were arbitrary and should be voided.
     U.S. District Judge Melinda Harmon granted them a preliminary injunction against enforcement of the suspensions, ruling that HUD had based the suspensions on evidence related to Allied Corp.'s predecessor Allied Capital and Hodge's role as Allied Capital's president, and the "improper conflation of the two entities ... is contrary to Texas law."
     HUD pulled the suspensions in response, but reissued notices of suspension in May 2012, bolstered by allegations with greater detail about Allied's and Hodge's misconduct.
     Because HUD rescinded the Nov. 2011 suspensions the court granted the agency's motion to declare the preliminary injunction moot, but refused to toss Hodge and Allied's claim for declaratory judgment that the suspensions should be declared void ab initio, or stricken from the record as if they never existed.
     Hodge and Allied Corp. argued the suspensions were illegal since they were based on the faulty premise that Allied Corp. is liable for the misdeeds of Allied Capital.
     They also claimed the suspensions were based on outdated evidence, inadequate to show an imminent threat to the finances of U.S. taxpayers or HUD.
     With a nod to the evidence presented by federal prosecutors in the lawsuit, including interviews of 27 former Allied employees and the subpoena of 170,000 pages of documents, U.S. District Judge Gray Miller found there was sufficient evidence to uphold the suspensions.
     "The evidence before the decision-makers at HUD was overwhelming against Hodge and documented a pattern and practice of multiple violations, many of which were directly endorsed and encouraged by Hodge. Given the extent of the evidence and continuous nature of the violations by Hodge, the court finds that HUD's decision to immediately suspend Hodge and propose debarment was not arbitrary or capricious," Miller wrote Tuesday.
     Miller said it was a "closer call" to determine if Allied Corp.'s suspension was justified, but found that it too deserved suspension given its relationship with Hodge.
     "The role and involvement of Hodge in the operations of Allied Corp. clearly supported an inference that Allied Corp. would be operated (and was being operated) in the same manner as Allied Capital. The court finds that a rational connection exists between the choice made by HUD and the factual circumstances underlying the suspension of Allied Corp.," Miller added in a 25-page ruling.
     In a related case, U.S. Magistrate Judge George Hanks Jr. refused in September 2013 to dismiss claims filed against Hodge, and former Allied vice president Jeanne Stell, under the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act.
     That case is set for a jury trial on May 11, 2015.