Fifth Circuit Affirms Admission of Expert Testimony to Prove Mortgage Lender Made False Claims

Written on Thursday, October 31st, 2019 by T.C. Kelly
Filed under: ExpertWitness

A False Claims Act lawsuit against a mortgage lender depended on the expert testimony of a loan underwriter. The government also relied on an expert to select loan files randomly for the underwriter to review. Daubert challenges to those two experts failed in the trial court. The Court of Appeals for the Fifth Circuit affirmed the court’s admission of the expert testimony.

Facts of the Case

The US government sued Jim Hodge and the two mortgage companies he owned for defrauding the government. One of those companies originated loans and the other funded them.

Some of the mortgage loans were insured by the Federal Housing Administration (FHA). Eligibility for insured loans was determined by standards created by the Department of Housing and Urban Development (HUD). The loans were primarily available to first time homebuyers who met HUD’s guidelines.

The company that funded the loans was certified as a “direct endorsement lender.” It was authorized to determine eligibility for the loans on HUD’s behalf. 

A branch manager who worked for the lending company sued Hodge and his companies on behalf of the government, alleging that they fraudulently obtained FHA insurance for loans that later defaulted. The government intervened in the lawsuit.

After a five-week trial, the jury found that the lending company misrepresented its compliance with the FHA lending guidelines. It also found that Hodge and the loan origination company misrepresented that loans were originated by branches that were registered with and approved by HUD.

Applying federal laws that triple damages awarded by the jury, the court entered judgment against Hodge and his loan origination company for about $23 million and against the lending company for about $269 million. On appeal, the defendants challenged the methodologies used by the government’s expert witnesses.

Daubert Challenge to Sampling Methodology.

Katherine Ensor testified as a statistical sampling expert. She generated random samples of loan files that other experts relied upon as representative of the defendants’ lending practices.

The defendants objected to the government’s request for all its loan files and argued that discovery should be limited to a random sample of files. The parties agreed to use a sampling of loan files, including files that did and did not result in insurance claims, but could not agree on the number of files that should be included in the sample.

The defendants complained that Ensor’s methodology was unreliable because she failed to control for loans that defaulted for obvious reasons. The appellate court determined that the defendants waived that objection by advising the trial court that they did not disagree with Ensor’s methodology, but only disagreed with the sample size she proposed. 

The number of files that Ensor chose for sampling was larger than the number proposed by the defendants. Since the defendants could not explain how using a larger sample size made the sampling unreliable, the court rejected the challenge to Ensor’s methodology.

Daubert Challenge to Underwriting Testimony

The government called Richard Payne to testify about FHA loans that were made to borrowers who were not eligible for FHA insurance. Payne reviewed 460 loans that were randomly selected by Ensor. He determined that 240 of the loans were not eligible for FHA insurance because they failed to meet HUD’s underwriting guidelines.

The defendants complained that Payne’s methodology was unreliable because he applied his own standards rather than HUD’s standards. Payne testified, however, that his team applied the standards specified in the HUD Handbooks that were in effect at the time, supplemented with FHA mortgagee letters and an FHA guide to automated underwriting.

Payne created a spreadsheet that identified each of the 240 loans he regarded as noncompliant with HUD guidelines. For each loan, he identified the specific way in which the loan failed to comply and made reference to the specific guideline that the loan failed to meet. Since the defendants failed to identify a single instance in which Payne substituted his own standards for those of HUD and the FHA, the court rejected their challenge to Payne’s methodology.

About T.C. Kelly

Prior to his retirement, T.C. Kelly handled litigation and appeals in state and federal courts across the Midwest. He focused his practice on criminal defense, personal injury, and employment law. He now writes about legal issues for a variety of publications.

About T.C. Kelly

Prior to his retirement, T.C. Kelly handled litigation and appeals in state and federal courts across the Midwest. He focused his practice on criminal defense, personal injury, and employment law. He now writes about legal issues for a variety of publications.

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