Dan Gilbert isn’t giving an inch.
A long-running Department of Justice lawsuit against Gilbert’s Quicken Loans Inc. comes up for a hearing Thursday afternoon before U.S. District Judge Mark Goldsmith in federal court in Detroit.
Goldsmith will hear arguments on a Quicken motion to throw out some of the evidence cited by the Justice Department, which alleges that Quicken’s mortgage lenders fraudulently approved borrowers for mortgages insured by the Federal Housing Administration, loans that went bad and cost the government millions in insurance payouts.
No ruling on the motion is expected Thursday, and a trial on the merits of the case won’t begin until mid-2019 at the earliest. But the hearing Thursday will give a rare public glimpse of a case now several years in the making and that Gilbert, the founder and chairman of Quicken, vows he will never settle.
“We have this word. You’ve heard of gangsters. This is govsters,” he said in an interview at his headquarters in downtown Detroit this week. “This is a holdup.”
Gilbert and his attorneys contend that the Justice Department, stung by bad publicity from the collapse of the subprime mortgage market that contributed to the Great Recession of a decade ago, has been suing the nation’s biggest mortgage lenders in hopes of extracting huge settlements.
Many big mortgage lenders have, in fact, settled and paid big penalties rather than contest the government’s accusations. In contrast, Quicken has decided to fight.
“The problem in this country is, if you’re going to treat the bad guys the same as the good guys, you’re not going to have a lot of good guys left,” Gilbert said. “This is more than the money. It’s also our reputation. We didn’t work for 32 years, stay clean, not participate in the subprime business, have the lowest default rates with the highest volume” to give in to what Gilbert believes are unfair charges.
A Justice Department spokesman did not respond to a request for comment. But the government’s legal papers filed with the court use language about Quicken almost as sharp as Gilbert’s.
The case, a recent Justice Department filing asserted, is that Quicken “created a fraudulent scheme of knowingly representing to (the government) certain FHA-insured mortgages had been underwritten with due diligence and were eligible for FHA insurance when, in fact, they did not.”
“This fraudulent scheme,” the government said, “was wide-ranging, spanned five years, and involved the knowing participation of the highest levels of Quicken’s management.”
The FHA’s insurance program provides an incentive to lenders such as Quicken to make loans to higher risk borrowers to encourage homeownership. Some defaults are inevitable, Gilbert said this week, given that the people getting FHA-backed loans come with more risk than usual.
Gilbert said Quicken is willing to work with FHA to resolve individual problem loans. What it won’t do it admit to pervasive wrongdoing.
The
Justice Department began investigating Quicken’s FHA-insured loans as early as 2012 in the wake of the subprime mortgage collapse. During the period in question, Quicken made about 100,000 FHA-insured mortgage loans. Some 4,600 of those defaulted and were covered by FHA insurance.
The government has selected 487 of those failed loans as examples of what it says Quicken did wrong. Among the practices cited in Justice Department documents filed in the case:
- That Quicken’s mortgage lenders frequently overstated a borrower’s income so they could qualify for an FHA-insured mortgage. Typical practices included counting overtime pay and bonuses as regular income or using out-of-date pay stubs to justify income calculations, the government says. DOJ said that the problems “demonstrate that Quicken’s management was fully aware of its pervasive miscalculation … of income, and chose not to fix the problem.”
- Quicken’s lenders allegedly often ignored debts incurred by borrowers so that the debt-to-income ratio would look more acceptable.
- Quicken often asked appraisers to redo an appraisal and come back with a higher value for the property so that it could qualify for an FHA-backed loan, the Justice Department said in its legal filings.
In a motion filed in September that will be argued Thursday, Quicken contends that many of the 487 loans cited by the government as examples of fraudulent activity do not, in fact, back up what Judge Goldsmith has said are the main issues in the case.
Those main issues include whether Quicken’s mortgage lenders routinely overstated borrowers’ income to qualify them for FHA-insured loans; whether Quicken routinely asked appraisers to increase their estimates of a home’s value to qualify borrowers for a mortgage; or whether management ignored other “red flags” that indicated a loan was likely to go bad.
The hearing Thursday is likely to focus on technical points of law regarding rules of what evidence may be presented.
If Goldsmith eventually rules in favor of Quicken’s motion, striking many of the example loans, that could weaken the government’s case. If Goldsmith denies the motion, the government’s case may be strengthened, but Quicken says that will require even more pretrial preparation and a postponement of the actual trial beyond mid-2019.
Either way, Gilbert isn’t giving an inch.
“We’ll go to a jury trial if we have to on this,” he said this week.
The hearing Thursday won’t be the ultimate showdown. But it promises to be interesting.
