The opinion of the court was delivered by: Matthew F. Kennelly, District Judge
MEMORANDUM OPINION AND ORDER
The United States has sued Anchor Mortgage Corporation and John Munson, its former president, under the False Claims Act (FCA), 31 U.S.C. § 3729. The government alleges that Anchor violated the FCA by knowingly providing false information to the Department of Housing and Urban Development (HUD) in connection with applications for home mortgage loans to be insured by the Federal Housing Administration (FHA). The government also alleges that Anchor and Munson violated the FCA by paying an unrelated real estate company fees for referring borrowers to Anchor and falsely certifying in applications for FHA-insured loans that no such fees had been paid.*fn1
The Court previously denied the government's motion for summary judgment. See United States v. Anchor Mortgage Corp., No. 06 C 210, 2010 WL 1882018 (N.D. Ill. May 10, 2010). The same decision describes the procedural history of the case. Id. at *1-3.
The Court conducted a two-day bench trial on July 9 and July 23, 2010. This constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a).
HUD is a federal agency that, through the FHA, provides mortgage insurance to qualified private lenders. HUD/FHA-approved lenders make mortgage loans that are FHA-insured to qualified buyers who are unable to make a large down payment. Some HUD-approved lenders participate in HUD/FHA's direct endorsement program, which allows them to close and underwrite HUD/FHA insured loans before final acceptance by HUD/FHA. Other lenders submit loan applications to HUD/FHA for approval.
John Munson began his career in the mortgage industry in 1989 as a loan officer and branch manager of a company called American Frontiers. In 1992, he started his own mortgage brokerage firm, Anchor, which obtained mortgage loans for customers. Anchor's business expanded to seven offices and approximately seventy-five employees. In the mid-1990's, Anchor became a mortgage bank, meaning that it funded its own mortgage loans. In the ensuing years, Anchor opened more offices and had as many as 150 employees. Anchor's business took a nosedive after this lawsuit was filed, and the company is now defunct.
Anchor submitted applications for FHA-insured loans to HUD for approval. It also participated in HUD/FHA's direct endorsement program. When it acted as a direct endorser, Anchor was required to follow HUD regulations and other laws that govern mortgage lending. Anchor derived its income from processing fees, origination fees, and yield spread premiums that it earned when making or brokering loans, and also by pooling mortgages and selling them to the FHA or secondary market lenders.
After Munson started Anchor, Alfredo Busano, another loan officer who had worked at American Frontiers, came to work for Anchor. Busano became an Anchor loan officer, and from 1994 through 2001, he managed the company's office in Elgin, Illinois. As manager, Busano performed administrative duties and hired and recruited new loan officers, and he also continued working as a loan officer. Anchor paid him a monthly base salary, which was then netted against commissions he made from loans he and others at the Elgin office had originated. From time to time, Busano submitted expense reports to the company's accountant, Jeffrey Stack, for reimbursement. For instance, as office manager, Busano would receive reimbursements for office supplies. In his work as a loan officer, Busano had to pay up front the fee for appraising the home to be purchased but was reimbursed if the loan closed.
A. Customers referred to Anchor by Gordon Nelson
Busano first met Gordon Nelson, a home builder, when Busano and his wife were looking to purchase a new home. At the time, Nelson did business through a company called Lifetime Homes. Later he also did business through companies called Century Homes and Builders Funding, Inc.
After Busano went to work for Anchor, he contacted Nelson to seek customer referrals. At first, the customers that Nelson referred to Anchor were prospective buyers of newly constructed homes. Eventually, Nelson started purchasing and reselling foreclosed homes and would refer prospective buyers of those homes to Anchor as well.
In 1996, in connection with his sale of foreclosed homes in a development called Candlewood Lakes, Nelson asked Busano about the options available to borrowers who lacked sufficient funds for the down payment required for FHA-insured loans. Busano understood at the time that HUD/FHA rules did not permit parties involved in a home sale -- such as realtors, builders, or sellers -- to provide the buyer with any part of the down payment. Busano told Nelson that FHA rules provided only three options. A buyer could do repair work on the home and get a "sweat equity" credit that would apply toward the down payment. A seller could contribute toward the buyer's down payment through a non-profit agency, but this would involve additional costs and more documentation. Busano also told Nelson that FHA guidelines allowed a buyer to receive a gift from a relative that could be used toward the down payment. Nelson requested a copy of HUD/FHA's gift guidelines, and Busano sent them to Nelson's office.
On a number of occasions after this conversation, between 1996 and 1999, buyers purchasing Nelson's foreclosed homes in Candlewood Lakes contacted Anchor Mortgage to obtain financing. Busano testified credibly that buyers told him that they had gotten money for their down payment from Nelson. Busano also testified credibly that he learned from others who worked for Nelson that he had provided down payment funds to buyers of Candlewood Lakes homes. In addition, Nelson and his employees would frequently call Anchor to ask for the exact amount needed for the three percent down payment required under FHA rules, which confirmed Busano's belief that Nelson was providing buyers with down payment funds.
A number of the loan files that Anchor submitted to HUD to obtain approval for FHA insurance included a gift letter, on a HUD-approved form, stating that down payment funds had come from a relative of the buyer. Busano testified credibly that in connection with loans to buyers referred by Nelson or his company, he knew these statements were false. Busano also testified credibly that he knew gifts by Nelson to home buyers for their down payments were prohibited by FHA rules.
Bob and Lisa Kaplan were also home buyers whom Nelson referred to Busano to obtain a loan. In 1998, Nelson and the Kaplans called Busano, asking to pre-qualify their loan for FHA approval. Based on the information they provided to him, Busano said the Kaplans would qualify. Busano met with the Kaplans later the same day to complete their loan application. When Busano reviewed the Kaplans' income tax returns at his office, he realized that the return listed Bob Kaplan's gross income from self-employment, not his net income. Busano explained to the Kaplans that FHA approval would depend on his net income. Based on Busano's review of the tax returns, he told the Kaplans that he believed their net income would be insufficient to qualify for an FHA-insured loan. The Kaplans were upset by this, and they called their accountant from Busano's office. Busano heard Bob Kaplan inform his accountant that they had not qualified for a loan, and he heard Kaplan discuss with the accountant the possibility of amending his tax return. Two or three weeks later, the Kaplans returned to Busano with amended tax returns. Based on the new tax returns, the Kaplans qualified for an FHA-insured loan, and Busano submitted their paperwork to HUD.
Busano pled guilty to a charge of mail fraud in connection with his work at Anchor. Nelson also entered a guilty plea to a mail fraud charge. Nelson died prior to trial. The Court admitted into evidence, with some redactions, his plea agreement and the transcript of his guilty plea colloquy before Judge Ruben Castillo.
In the plea agreement, Nelson admitted that between 1996 and 1999, he provided down payments to over twenty home buyers whom he referred to Busano at Anchor and instructed the buyers to conceal the source of the down payments via false gift affidavits. Nelson admitted that he would get information from Busano about the amount each buyer would need to qualify for an FHA-insured mortgage. Nelson also admitted that he was aware that Busano was concealing from HUD the source of the down payments and the falsity of the affidavits. Nelson also admitted that he knew HUD rules did not permit someone like him to be the source of a buyer's down payment for an FHA-insured mortgage. Nelson's plea agreement identified thirteen specific properties on which FHA-insured loans made from 1997 through 1999 based on false gift affidavits or other information he knew was false. They include the Candlewood Lakes properties at issue in this case. About half of the home buyers defaulted. When Nelson appeared before Judge Castillo, he affirmed under oath the veracity of his statements in the plea agreement.
B. Mortgage business referred to Anchor by Casa Linda
Casa Linda Realty, a real estate company, referred home buyers to Anchor to obtain loans. In 1997 or 1998, Monica Holderby, an Anchor loan officer, discussed with Busano the possibility of paying Casa Linda for referrals. Busano told her that he would have to talk to Munson.*fn2 Munson and Busano then had a discussion about paying Casa Linda referral fees. At the time, both Busano and Munson knew that the law prohibited payment of a referral fee to an entity like Casa Linda in connection with an FHA-insured loan. Both men understood that it was legally permissible to pay such fees as part of a "controlled business arrangement" (CBA), a joint venture of sorts, so long as the arrangement was disclosed to borrowers and certain other conditions were met. Munson said he would look into the possibility of setting up a CBA with Casa Linda.
Shortly after this conversation, Munson contacted Anchor's attorney, Kenneth Michaels, to discuss setting up a CBA with Casa Linda. Michaels drafted a proposed agreement. Munson testified credibly that he signed the draft agreement and sent it to Busano so that he could have it executed by Casa Linda. Andy Quiroz, a part owner and the managing broker of Casa Linda, testified credibly that at some point he saw a document that he understood as reflecting that Anchor had found a legal way to pay referral fees to Casa Linda. Quiroz did not know, however, whether the document had ever been finalized, though he testified that he did not think Anchor would "engage in something illegal unless they had found a right way to do it [sic]." July 9, 2010 Tr. 93.
The evidence reflects that sometime in 1998, Anchor began paying Casa Linda referral fees for borrowers it referred to Anchor. The evidence shows that there was no arrangement in place at the time that would have made the payments permissible under HUD/FHA rules. No fully executed version of the draft CBA exists. In addition, the draft CBA contemplated the formation of a new entity, but there is no record that this entity was established. Munson's testimony that he believed a CBA had been set up is uncorroborated and otherwise lacking in credibility.
The referral fees for Casa Linda were paid via Anchor checks, signed by Munson, payable to Busano or Casa Linda. If the check was made payable to Busano, he would cash the check and pay Casa Linda in currency. The total ...