Opinion ID: 4517629
Heading Depth: 2
Heading Rank: 1

Heading: HUD’s Direct Endorsement Lenders Program

Text: The Federal Housing Administration (“FHA”), an agency within HUD, insures approved lenders against defaults on certain mortgage loans for singlefamily homes. 12 U.S.C. § 1708. The FHA insures loans only for individuals who fit its risk profile. Previously, HUD oversaw the “very staff-intensive and time-consuming” process of ensuring that the FHA insured lower-risk loans, which involved confirming that the borrowers insured by the FHA had sufficient credit. Delegation of Insuring Authority to Direct Endorsement Mortgages, 62 Fed. Reg. 30222-01, 30222 (June 2, 1997). To alleviate HUD of this burden, Congress authorized HUD to delegate the task of insuring mortgages using a Direct Endorsement Program (“DE Program”). Id.; 12 U.S.C. § 1715z-21; Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act, 1997, Pub. L. No. 104-204, § 427, 110 Stat. 2874 (1996). Under the DE Program, Direct 1 The parties refer to the Illinois Union Insurance Company policy as the “Chubb” policy because that is the name of the insurer’s parent company. 2 Case: 19-30190 Document: 00515350430 Page: 3 Date Filed: 03/18/2020 No. 19-30190 Endorsement Lenders (“DE Lenders”) agree to use HUD’s mortgage underwriting standards when approving borrowers for home loans. DE Lenders analyze the credit risk of each borrower using HUD’s guidelines, and then certify to HUD that approved borrowers meet HUD’s underwriting standards. The FHA then insures the DE Lender in the event the insured borrower defaults. DE Lenders submit a formal certification to the FHA declaring that the mortgage complies with all HUD underwriting requirements. IberiaBank is a DE Lender. As a DE Lender, IberiaBank collects its customary fees from borrowers as compensation for originating the loans. B. The Allegations Against IberiaBank and Settlement with the DOJ In 2015, a former IberiaBank employee and a then-current IberiaBank employee (“the Relators”) brought a whistleblower qui tam action on behalf of the United States against IberiaBank, alleging that IberiaBank violated the FCA during its participation in the DE Program. 2 The Relators alleged that IberiaBank was non-compliant with HUD’s underwriting requirements. Specifically, the Relators alleged that IberiaBank (1) improperly paid commissions to underwriters; (2) provided false loan certifications to HUD; (3) improperly certified compliance with HUD regulations; and (4) failed to report defective or fraudulent loans. As a result of this conduct, the Relators alleged that IberiaBank caused the FHA to pay insurance claims that it would not have paid if IberiaBank had conducted appropriate underwriting due diligence. The whistleblower qui tam action alerted the DOJ to potential wrongdoing by IberiaBank and, in April 2017, the DOJ informed IberiaBank of potential liabilities under the FCA. 2 One Relator also brought employment-related claims against IberiaBank. These claims were excluded from the DOJ Settlement and IberiaBank does not seek coverage for those claims in this action. 3 Case: 19-30190 Document: 00515350430 Page: 4 Date Filed: 03/18/2020 No. 19-30190 The DOJ and IberiaBank entered into a Settlement Agreement on December 12, 2017, under which IberiaBank agreed to pay $11,692,149. In the Settlement Agreement, IberiaBank acknowledged that it certified certain mortgages to HUD that were ineligible for FHA insurance under HUD’s guidelines. IberiaBank also acknowledged that it paid “incentive payments to underwriters and others who performed underwriting activities.” Further, IberiaBank acknowledged that it did not disclose the existence of these incentive payments to HUD, despite certifying that it had ceased paying incentives to underwriters as of 2010. Finally, IberiaBank acknowledged that it failed to comply with HUD’s self-reporting requirements when it became aware of loans that involved possible fraud or serious underwriting violations. However, IberiaBank did not acknowledge liability and “reserve[d] the right to contest the use or application of [the Settlement Agreement] in any future litigation.” As a result of the DOJ Settlement, the FCA counts in the qui tam action were dismissed and the DOJ waived its right to pursue the remaining common law claims. After the DOJ Settlement, IberiaBank submitted a claim under the Chubb policy and, in the event its claim exceeded Chubb’s coverage, submitted a claim under the excess Travelers policy as well. The Insurers denied coverage, giving rise to this lawsuit. C. The Insurance Policies and IberiaBank’s Claim IberiaBank held two banker’s professional liability insurance policies— a primary policy and an excess policy. First, IberiaBank held a primary policy with a limit of $10,000,000 from Chubb. IberiaBank also held an excess policy with a limit of $5,000,000 from Travelers. The excess Travelers policy adopts the relevant language from the primary Chubb policy and, therefore, the analysis applicable to the Chubb policy applies to the Travelers policy. The Insuring Clause of the Policies states: 4 Case: 19-30190 Document: 00515350430 Page: 5 Date Filed: 03/18/2020 No. 19-30190 The Insurer 3 shall pay on behalf of the Insureds 4 Loss 5 which the Insureds become legally obligated to pay by reason of any Claim first made by a third party client of the Company against the Insureds during the Policy Period or any applicable Discovery Period for any Wrongful Acts 6 in rendering or failing to render Professional Services, if such Wrongful Acts take place prior to the end of the Policy Period. The Policies define “Professional Services” as: [S]ervices performed by or on behalf of [IberiaBank] for a policyholder or third party client of [IberiaBank]. The Professional Services must be performed pursuant to a written contract with such policyholder or client for consideration inuring to the benefit of [IberiaBank]. Based on their interpretation of the terms “Professional Services” and “client,” the Insurers interpreted the Policies to exclude IberiaBank’s claim and, therefore, denied it. In response to the Insurers’ denial of IberiaBank’s claim, IberiaBank sued, alleging breach of contract. IberiaBank argued that the DOJ Settlement “fell squarely within the Policies’ broad insuring agreement for professional liability coverage because the Policies covered claims by a client for wrongful acts in rendering ‘Professional Services.’” IberiaBank argued that it provided “Professional Services” to HUD when it underwrote mortgages as a DE Lender, 3 The Insurer is Chubb and, to the extent Chubb’s policy limit is exceeded, Travelers. 4 The Insured is IberiaBank. 5 “Loss” is defined as “the amount which the Insureds become legally obligated to pay on account of each claim and for all Claims in the Policy Period . . . made against them for Wrongful Acts for which coverage applies, including, but not limited to, damages, judgments, any award of pre-judgment and post-judgment interest, settlements and Defense Costs. Loss does not include (1) any amount for which the Insureds are absolved from payment, (2) taxes, fines or penalties imposed by law, (3) the multiple portion of any multiplied damage award, (4) punitive or exemplary damages, or (5) matters uninsurable under the law pursuant to which this Policy is construed.” 6 “Wrongful Act” is defined as “any error, misstatement, misleading statement, act, omission, neglect or breach of duty actually or allegedly committed or attempted by the Insured Persons in their capacity as such or by the Company.” 5 Case: 19-30190 Document: 00515350430 Page: 6 Date Filed: 03/18/2020 No. 19-30190 and that the government (acting as IberiaBank’s “third party client”) claimed IberiaBank committed wrongful acts when rendering those services, bringing the DOJ Settlement within the Policies’ Insuring Clause. The Insurers moved to dismiss, arguing that (1) the DOJ Settlement does not relate to “Professional Services” provided by IberiaBank, and (2) the government is not IberiaBank’s “client.” On February 13, 2019, the district court granted the Insurers’ motions to dismiss for failure to state a claim because (1) the government is not IberiaBank’s “client” under the DE Program and (2) IberiaBank did not provide “Professional Services” to the government in its role as a DE Lender. The district court then entered an order dismissing IberiaBank’s lawsuit against the Insurers. We affirm.