Judge strikes blow to Quicken Loans' lawsuit against DOJ

A federal judge has struck down mortgage lender Quicken Loans’ lawsuit against the U.S. Department of Justice (DOJ), but the company vows to continue fighting the claims that it mishandled government-backed mortgages.

The Detroit-based lender filed suit against the DOJ on April 17, 2015, alleging that the federal government was trying to “strong-arm” it into agreeing to a hefty settlement over its handling of Federal Housing Administration (FHA) backed mortgages.

3-year investigation

CEO of Quicken Loans Bill Emerson

The DOJ had been investigating Quicken for nearly three years as part of an ongoing probe of other top mortgage lenders for allegedly originating defective loans in the run-up to the financial crisis.

According to the DOJ, from 2007 to 2011 Quicken knowingly submitted claims for hundreds of improperly underwritten FHA-insured loans, encouraged employees to disregard FHA rules and requested inflated property appraisals.

But in its complaint, Quicken asserted that it was one of the largest FHA lenders in the country with the lowest loan default rate, and that the government “cherry-picked” a small sample of 55 mortgages from the nearly 250,000 FHA loans it closed since 2007 to make its claims.

About a week later, on April 23, the DOJ struck back with a lawsuit of its own, alleging that Quicken violated the False Claims Act by improperly originating and underwriting mortgages insured by the FHA. The DOJ also asked the court to either dismiss Quicken’s lawsuit or transfer it to the U.S. District Court for the District of Columbia.

Motion to dismiss granted

On Dec. 31, Judge Mark A. Goldsmith of the U.S. District Court for the Eastern District of Michigan, Southern Division, granted the DOJ’s motion to dismiss after finding that Quicken failed to state a claim either under the Administrative Procedures Act (APA) or the U.S. Constitution.

Quicken had contended that the DOJ violated the APA, which governs the conduct of federal administrative agencies, in several ways, namely by using statistical sampling and concluding that a substantial number of its loans were “defective.”

Goldsmith countered in his decision, saying, “Quicken’s complaint is replete with broad and conclusory characterizations of agency activities, but short on specificity.”

Quicken issued a statement on the decision to express disappointment in the dismissal of its “well-reasoned” claims. The company added that it will explore other options to continue pursuing its claims against the government while fighting the DOJ’s lawsuit.

“This temporary procedural setback does not deter Quicken Loans from exposing the truth about the DOJ’s egregious attempts to coerce unjust ‘settlements’ from its victims including Quicken Loans by using the guise of the heavy hand and power of the federal government in doing so,” said Quicken CEO Bill Emerson.

Uncertain regulatory climate

Quicken also bemoaned an uncertain regulatory climate for FHA lending. Quicken Chairman Dan Gilbert told Reuters last month that the company is “looking at bowing out” of offering FHA loans to borrowers and “considering cutting the risk it takes in the program.”

In October, Quicken announced the expansion of its partnership with Freddie Mac to offer low-downpayment Home Possible and Home Possible Advantage mortgages to underserved borrowers.

“Quicken Loans and other lenders no longer operate with any certainty as to the rules and standards for FHA lending, which is a significant and important segment of financing for the country’s housing market consisting of middle-class Americans and first-time homebuyers. This is the reason why there has been a stampede out of the FHA program by numerous large banks over the past two years,” the company said in its statement.

The DOJ has not responded to the latest court developments.

Email Amy Swinderman.