Sterling Capital Mortgage: The FHA Lender That Certified Loans as Eligible When Its Own Reviews Had Found Defects

Sterling Capital Mortgage Company, an approved Federal Housing Administration lender, agreed to pay $14 million to resolve False Claims Act allegations that it certified mortgage loans as meeting FHA eligibility requirements and submitted them for government mortgage insurance while its own internal quality control reviews had identified defects in the underwriting of those loans — defects that materially affected the loans' eligibility for FHA insurance and that, when those loans later defaulted, caused the FHA to pay insurance claims it should not have been required to pay.DOCUMENTED

The FHA mortgage insurance program allows approved lenders to originate home purchase and refinance loans to borrowers who meet FHA eligibility criteria, with the government providing an insurance guarantee that protects the lender against loss if the borrower defaults. In exchange for this insurance, lenders certify that each loan they submit for FHA insurance meets the applicable underwriting standards — an obligation that forms the basis of the False Claims Act theory in cases where a lender certifies loans it knows or should know are defective.REVIEWED

The Quality Control Process and Its Role

FHA-approved lenders are required to maintain a quality control program that reviews a sample of originated loans for compliance with FHA underwriting standards before and after the loans close. The purpose of QC review is to identify defects and to trigger a remediation process — including potential indemnification of FHA for loans that would not have been insurable had the defects been identified earlier. QC findings are supposed to inform the lender's underwriting practices, to prevent similar defects from recurring, and where serious defects are identified, to prompt reporting to HUD and potential buyback or indemnification of affected loans.REVIEWED

The complaint allegations describe a Sterling QC process that identified defects — missing income documentation, inflated property valuations, borrower eligibility issues — but that did not consistently trigger the remediation steps the process was supposed to require. Loans with identified defects continued to be certified as FHA-eligible without the defects being remediated or reported to HUD, and when those loans subsequently defaulted, the defects that the QC process had identified remained uncorrected in the loan file.DOCUMENTED

The Specific Defect Categories

FHA eligibility depends on a set of underwriting criteria that include income and employment verification, creditworthiness assessment, property appraisal at or above the loan amount, and various borrower eligibility requirements including citizenship and occupancy intent. The defects identified in the complaint cluster in a few recurring categories: income documentation that did not support the qualifying income used in the loan approval, property appraisals that were later found to have relied on comparable sales that did not support the appraised value, and borrower eligibility discrepancies where the loan application represented circumstances — primary residence occupancy, employment status — that the QC review identified as inaccurate.DOCUMENTED

Each of these defect categories matters because FHA's insurance is conditioned on the loan meeting specific eligibility standards: a loan that would not have been approvable under correct information is a loan for which the FHA guarantee should not have been issued. When FHA pays an insurance claim on a defaulted loan that was ineligible for insurance, it is covering a loss that the lender created — and for which the lender bears liability under the False Claims Act if it certified the loan knowing of the defect or with reckless disregard for whether the certification was accurate.REVIEWED

Sterling's own QC reports flagged defects in specific loans — and those loans were subsequently submitted to and insured by FHA without the flagged defects being resolved, setting the government up to pay on defaults it had been warned about.

False Certifications and the FCA Theory

The False Claims Act theory in FHA lender cases is based on the certification that lenders submit with each loan — a representation that the loan meets FHA standards. When a lender submits that certification for a loan its QC process has identified as defective, the certification is false in the specific sense the FCA covers: the lender made a false statement to the government in connection with a claim for payment of the government insurance. That the falsity was known internally through the QC finding makes the recklessness or knowing standard of the FCA easier to satisfy than in cases where defects were simply undetected.REVIEWED

The FCA's per-claim penalty structure means that even a relatively small lender with a limited number of defective certified loans can face substantial potential liability, because the statutory penalty range applies to each false certification rather than to the aggregate loss. The $14 million settlement reflects both the actual FHA insurance claim payments on defaulted Sterling loans and a civil penalty component reflecting the statutory per-claim exposure the company faced.DOCUMENTED

Compliance Requirements Going Forward

The settlement includes a compliance agreement requiring Sterling to strengthen the remediation pathway in its QC program — ensuring that loans identified as defective are either corrected before FHA submission, reported to HUD when correction is not possible, or subject to indemnification if they default. HUD will conduct periodic oversight reviews of Sterling's QC program during the compliance period to verify that the remediation process is functioning as required.DOCUMENTED

Homeowners who purchased or refinanced with Sterling Capital Mortgage using an FHA loan and experienced problems with their loan's terms or eligibility may contact HUD's Office of Housing at the housing counseling hotline. Lender employees with knowledge of quality control practices at FHA-approved lenders are encouraged to consult a whistleblower attorney about potential qui tam rights under the False Claims Act.

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