| Of Interest

The Department of Justice’s Criminal Division began June 2020 by issuing revisions to its Evaluation of Corporate Compliance Programs guidance. First published in 2017, and later updated in April 2019, the guidance provides insight into how the Criminal Division assesses a company’s compliance program. Further, it allows companies to proactively implement and strengthen compliance programs to align closely with the DOJ’s considerations and focuses.

The substance and tenor of the guidance remains largely unchanged from its prior versions, but the revisions continue to reflect an ongoing commitment by the DOJ to provide transparency into its compliance program policies and priorities. For example:

The revisions demonstrate the importance of a dynamic and evolving compliance program that emphasizes well-documented internal processes and continually incorporates lessons learned and solutions to issues as they are identified.
While the prior version included language about individual determinations in each case, the update now specifies the factors the DOJ will consider in this determination.
The revisions focus on the need to create a culture throughout all levels of the business, not just at the top.

Notwithstanding the many disruptions the coronavirus (COVID-19) pandemic has caused to businesses, it’s clear that legal compliance and corporate accountability remain a focus within the Criminal Division.

Key Updates

While the overall tone of the guidance remains the same, the update provides additional guidance in several key areas. The following are some notable revisions or additions to the April 2019 guidance:

Individualized assessment – the DOJ articulated some of the specific factors it will consider in making each company’s individualized compliance program assessment, including the company’s size, industry, geographic footprint, and regulatory landscape.
Resourced and empowered program – emphasis on ensuring a company’s compliance program is adequately resourced and empowered to effectively function.
Access to data – emphasis on ensuring that compliance and control personnel have sufficient direct or indirect access to the relevant sources of data to ensure timely and effective monitoring and testing of the company’s compliance policies and controls.
Lessons learned – emphasis on companies having a process for tracking and continually incorporating lessons learned from the company’s own prior issues or those of other companies operating in the same industry or region.
Reporting and training – companies should ensure employees have a forum to ask questions during training and continue to test the company’s hotline and other resources.
Culture of compliance – companies should demonstrate a commitment to compliance at all levels of the company, not just the top, and perform due diligence of third-party partners at onboarding and throughout the duration of the relationship.

Takeaways

Without significant change, the revisions continue to provide additional insight into the DOJ’s considerations for robust compliance programs. The DOJ’s decision to expressly require compliance functions to be adequately resourced is somewhat surprising, given the financial difficulties that many companies face during the coronavirus pandemic. And what is absent is any recognition of the current challenges that have come with the pandemic and companies’ inability to spend as much as they would otherwise want to on compliance functions while struggling to stay alive. However, the evolution of the guide over the past three years demonstrates the DOJ’s willingness to listen to the business community and provide more guidance based on feedback.

As the pandemic continues, we would hope that the DOJ will provide additional guidance that further expands on how compliance should or could change based on the crisis. Nevertheless, what is clear is that the DOJ remains focused on requiring companies to “show their work” and to be able to document compliance efforts through data. The DOJ’s decision to update this guidance now emphasizes that companies should continue to prioritize compliance programs even while dealing with the ramifications of the global pandemic.

A&B Abstract: In an effort to incent large depository institutions to return to FHA lending, the U.S. Department of Housing and Urban Development (“HUD”) and the U.S. Department of Justice (“DOJ”) entered into a Memorandum of Understanding (“MOU”), on October 28, 2019, that delineates HUD’s process for determining whether violations of FHA guidelines should be referred to the DOJ for prosecution under the False Claims Act (“FCA”). In recent years, HUD and the DOJ have used the FCA to obtain approximately $7 billion in recoveries from FHA lenders, driving depository lenders away from FHA lending.[1] Since 2010, the percentage of FHA-insured mortgages made by these institutions has dropped from approximately 45% to below 14%.[2] The result of the MOU, according to HUD Secretary Carson, is that “[t]he monster [of the FCA] has been slayed.”[3]

An Overview of the Memorandum of Understanding

The MOU describes “HUD’s process for determining whether certain conduct by FHA-approved mortgagees should be enforced through administrative proceedings or other remedies directly available to HUD or referred to DOJ to pursue under the FCA.”[4] To do so, it details a five-step process for how FCA enforcement will be handled going forward. This process will apply to origination and servicing activities in connection with all single-family mortgage insurance programs, including forward and reverse FHA-insured mortgage loans. The MOU does not address referral of criminal activity, which is out of scope.

The Five-step Process

(1) Preference for Administrative Action – HUD will review FHA violations to determine whether they are best addressed by administrative action. “HUD expects that violations will be enforced primarily through HUD’s administrative proceedings, except when action beyond HUD’s administrative capabilities is warranted.”[5] This would potentially result in administrative fines, though any such fines would be drastically smaller than the civil liability imposed by the FCA.

(2) Referral to MRB – HUD identifies violations of FHA requirements under HUD’s Defect Taxonomy, which is the assessment methodology that categorizes violations of FHA requirements into four severity tiers. When a violation meets HUD’s FCA Evaluation Standards, as discussed below, the violation will be referred to the Mortgage Review Board (“MRB”), which is made up of senior HUD personnel, including personnel from HUD’s office of general counsel and office of the inspector general (“OIG”). The MRB will evaluate the matter for potential action under the FCA.[6] The MRB intends to refer FHA mortgagees to DOJ for potential FCA litigation where the following standards are met: (1) Tier 1 (i.e., evidence of fraudulent or materially misrepresented information about which the mortgagee knew or should have known) or equivalent violations exist in at least 15 loans or in loans with unpaid principal balance or claims of at least $2.0 million; and (2) there are aggravating factors warranting pursuit of FCA litigation, such as evidence that the violations are systemic or widespread (collectively, the “FCA Evaluation Standards”).[7]

HUD indicated that it intends to “provide a written referral for FCA litigation to DOJ for any allegations approved by the MRB.”[8] HUD’s position is that it will refer “FCA matters [to] be pursued only where such action is the most appropriate method to protect the interests of FHA’s mortgage insurance programs, would defer fraud against the United States, and would generally serve the best interests of the United States.”[9]

(3) Referred Cases – Where a party other than HUD, such as a qui tam relator (i.e., a private party) or HUD’s OIG, refers a matter to DOJ for potential FCA litigation, or DOJ directly initiates a matter that is based on alleged FHA violations, DOJ will confer with HUD prior to initiating FCA litigation. The purpose of this step is to ensure DOJ confers and works with HUD during the investigative, litigation, and settlement phases of the matter to obtain HUD’s input, such as whether HUD supports or opposes FCA litigation. Ultimately, the MOU contemplates that HUD “will make known to DOJ whether and to what extent any alleged defects or violations regarding the relevant FHA requirements are material or not material to the agency so that DOJ can determine whether the elements of the FCA can be established.”

(4) Relator Cases – Where a case is filed by a qui tam relator, HUD may recommend that DOJ seek dismissal of the case if HUD does not support the FCA litigation. Among other reasons, the MOU contemplates that HUD may recommend dismissal where the:

- Alleged conduct fails to meet the HUD FCA Evaluation Standards;
- Alleged conduct does not represent a material violation of FHA requirements; or
- Litigation threatens to interfere with HUD’s policies or the administration of its FHA lending program and dismissal would avoid these effects.

The MOU makes clear that “[w]hile the decision of whether to seek dismissal remains the exclusive authority of DOJ, DOJ will consult with HUD in making such a decision.”[10]

(5) MRB Action – Where the MRB decides to decline referral or recommends against FCA litigation, the MRB may still exercise its discretion to seek administrative action, indemnification, or civil money penalties for any FHA violations. For example, “HUD may request DOJ approval to file a complaint under the Program Fraud Civil Remedies Act.”[11]

Takeaway:

Given the focus of the MOU, institutions managing regulatory risk and the risk of potential investigations should consider whether alleged FHA violations fall within HUD’s Defect Taxonomy and, if so, whether the violations meet HUD’s FCA Evaluation Standards, as such violations will be referred to the MRB to determine whether FCA litigation is warranted.

Also, the MOU likely provides a new lens for settlement negotiations with HUD and the DOJ. Disproving systemic or widespread FHA violations could potentially take an investigation off the path towards FCA litigation, dramatically decreasing the cost of settlement.

The MOU is a significant development concerning both HUD’s and DOJ’s approach to FCA litigation. It could signal reduced FCA litigation related to violations of FHA requirements in the future. That said, even though the risk of potential FCA prosecution appears to be reduced, it is not eliminated. Accordingly, it has yet to be seen if Secretary Carson is correct in his prediction that the “monster” of the FCA has been slain.[12]

[1] Ben Lane, Housing Wire, HUD, DOJ changing use of False Claims Act in order to bring big banks back to FHA lending (referencing call with reporters by FHA Commissioner Brian Montgomery) (Oct. 28, 2019).
[2] DOJ Press Release, Departments of Justice and Housing and Urban Development Sign Interagency Memorandum on the Application of the False Claims Act (Oct. 28, 2019).
[3] Ben Lane, Housing Wire, Exclusive: HUD’s Carson on False Claims Act – “The monster has been slayed” (Oct. 28, 2019).
[4] MOU at 2.
[5] MOU at 2-3.
[6] MOU at 3.
[7] Id.
[8] Id.
[9] Id.
[10] MOU at 3-4.
[11] MOU at 4. The Program Fraud Civil Remedies Act (“PFCRA”), 31 U.S.C. §§ 3801 et seq., is an administrative remedy designed to reach cases of fraud not selected for False Claims Act cases. The PFCRA imposes civil money penalties and an assessment, of up to twice the claim amount, on “[a]ny person who makes, presents, or submits, or causes to be made, presented, or submitted, a claim that the person knows or has reason to know (A) is false, fictitious, or fraudulent; (B) includes or is supported by any written statement which asserts a material fact which is false, fictitious, or fraudulent; (C) includes or is supported by any written statement that (i) omits a material fact; (ii) is false, fictitious, or fraudulent as a result of such omission; and (iii) is a statement in which the person making, presenting, or submitting such statement has a duty to include such material fact; or (D) is for payment for the provision of property or services which the person has not provided as claimed.” 31 U.S.C. § 3802(a).
[12] See Ben Lane, Housing Wire, Exclusive: HUD’s Carson on False Claims Act – “The monster has been slayed” (Oct. 28, 2019).