Generic Whistleblower Laws Leave Mortgage Workers Underprotected

The patchwork of protections and rewards available to mortgage professionals who identify and disclose mortgage fraud is insufficient. Though an industry-specific whistleblower statute is unlikely to pass with the current Congress, one would fit nicely with the many others protecting employees from the nuclear industry to Wall Street.

In the meantime, additional protections should be extended to whistleblowers working as mortgage professionals. Those employees currently in the vanguard against mortgage fraud need to know how they are protected — and that they may be rewarded — in their disclosures.

The Employment Law Group P.C. advocates for the passage of a whistleblower statute for mortgage professionals patterned on the more than 20 whistleblower statutes administered by the Department of Labor. Such a statute would protect employees, contractors and agents of any employer providing mortgage services from retaliation (in the form of discharge, demotion, suspension, threats, harassment, or post-employment retaliation, including blacklisting) for disclosing information relating to mortgage fraud or the regulations governing mortgages.

Unfortunately, mortgage fraud is all too common, and the amounts involved can be staggering. For example, in fiscal year 2014, $3.1 billion in federal funds were recovered for civil fraud and false claims against federal housing and mortgage programs, according to the Justice Department. Employees on the frontlines play an integral role in rooting out this kind of fraud.

There are myriad types of mortgage fraud, but those most aggressively prosecuted by the federal government include improper practices in underwriting, originating and quality control of mortgages sold to Fannie Mae and Freddie Mac and loans insured by the Federal Housing Administration.

Our representation of mortgage professionals has shown that many of them do not know how they are protected by anti-retaliation statutes or how to benefit from various rewards programs, thanks to the patchwork of protections cobbled together from four main pieces of legislation:

1. False Claims Act: Individuals who act in furtherance of or who engage in any effort to stop a violation of the FCA come under the umbrella of activity safeguarded against retaliation.
2. Sarbanes-Oxley Act: Protecting employees, consultants and contractors of publicly traded companies who provide information regarding conduct that they "reasonably believe" violates security laws and certain fraud statutes, including mail, wire, bank and securities fraud.
3. Dodd-Frank Act: Protecting individuals who disclose securities law violations or fraud or unlawful conduct related to consumer financial products or services.
4. Depository Institution Employee Protections: Protecting employees of depository institutions, federal banking agencies, federal home loan banks, and their agents against retaliation for disclosing violations of law or regulation or gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety by an employing depository institution or its directors, officers or employees.

In addition to protections, mortgage professionals are rewarded for certain information provided to the government that results in successful resolution if the whistleblower goes through one of the following programs:

1. FCA: The FCA contains qui tam provisions that allow whistleblowers (referred to in the FCA context as a "relator") to file the litigation in court themselves without becoming a matter of public record. A relator in a successful action is entitled to a reward of usually 15-25% of the proceeds of an FCA action. For example, in United States v. Countrywide Fin. Corp., the court established the possibility that fraud against Fannie Mae and Freddie Mac may be fraud on government funds with a possible reward in an FCA action. Billions of dollars have been recovered by the DOJ based on this theory.
2. Financial Institutions Anti-Fraud Enforcement Act: This program incentivizes disclosure of various frauds on federally-insured institutions. Any person may file a declaration with the United States Attorney General and is entitled to a percentage of the collected proceeds or civil penalties. The program includes both frauds against banks and, in some cases, by banks against the FDIC.
3. Dodd-Frank: The SEC whistleblower office receives tips and uses its discretion to prosecute violations of laws under its jurisdiction. The SEC will pay a reward to whistleblowers that voluntarily provide original information to the SEC about fraud if it results in monetary sanctions exceeding $1 million or in civil or criminal proceedings.

While insufficient and lacking coordination, Congress has made positive progress in the right direction to protect and reward mortgage professionals. Further protections should be aimed to extend specifically to the mortgage industry so that all types of mortgage fraud can be extinguished. In the meantime, professionals who shine the light on fraud can and should benefit from some of the existing protections and rewards already implemented.
Adam Augustine Carter is principal, and R. Scott Oswald is managing principal, at The Employment Law Group P.C.