Former reverse mortgage lender James B. Nutter & Co., aka Nutter Home Loans, recently scored what an attorney has characterized as a win in a case brought against it by the U.S. Department of Justice (DOJ).
The DOJ initially sued Nutter in September 2020 in a federal court in Missouri under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 and the False Claims Act (FCA). It accused the lender of ”forging certifications and using unqualified underwriters to approve Federal Housing Administration (FHA) insured Home Equity Conversion Mortgages (HECM),” according to the original announcement.
Win for Nutter
The law firm Alston & Bird, who is defending Nutter in the case, secured a partial summary judgment in favor of the company. It serves to deny the DOJ from “recovering damages, including treble damages, under the [FCA],” according to an announcement issued by the firm.
“The Court’s decision is significant because contrary to the DOJ’s arguments, the court concluded that proximate cause is required to establish damages under the False Claims Act,” the announcement read.
“Proximate cause” is a way to determine the most direct cause of harm or violation of law. For instance, if a car swerves to avoid a jaywalking pedestrian and hits a parked car, despite the pedestrian’s actions, the proximate cause of the parked car being struck is the swerve performed by the driver.
The DOJ failed to establish any evidence tying proximate causation to the underlying issues of the case, defense attorneys said.
“DOJ had alleged in a civil complaint that from 2008-2010, Nutter failed to comply with U.S. Department of Housing and Urban Development (HUD) underwriting requirements in connection with the underwriting of approximately 1,500 [HECMs],” they explained. “Further, DOJ alleged that Nutter’s conduct caused HUD to insure these loans when they were not eligible for insurance by [FHA].”
But by failing to develop causation evidence, the DOJ is now limited to seeking only civil penalties against Nutter.
Significance of the development
Edward Kang, the lead defense attorney in the case, spoke with HousingWire’s Reverse Mortgage Daily (RMD) about this development and the next steps. While the partial judgment is not a full dismissal of the case — which is currently set to go to trial on Sept. 9 — the defense is encouraged by this development.
“The main takeaway from our side is that the court significantly narrowed the scope of damages and penalties that the government can seek in this case,” Kang told RMD.
The court, Kang said, held the government cannot recover any damages under the FCA, so treble damages sought by DOJ are off the table.
“The court concluded that the government had presented no evidence to show that, even if the alleged misconduct happened (which the court didn’t weigh in on), the government failed to prove if there was any harm or losses caused to HUD,” he said. “This is significant because the financial hammer in any case brought under the False Claims Act is the treble damages provision, which is now off the table.”
This part of the outcome is viewed favorably by the Nutter defense team. “Getting that damages portion of the case knocked out was a real big win for us,“ Kang said.
Trial set to begin
The case will proceed to trial for civil penalties under the FCA, but the court also narrowed the number of loans for which the DOJ can seek penalties, reducing it from 1,571 to 569.
While there are likely to be a number of other motions between now and the impending trial date in September, Kang said much of the focus now is on attempting to vindicate the company once the trial commences.
“The allegations are significant, and we look forward to going to trial and demonstrating that the company did not engage in the conduct alleged in the complaint,” he said. “We aim to show that the allegations are completely false and entirely inconsistent with the way the company has conducted business for over 70 years. The company truly had a culture of compliance throughout its history, and the allegations in the complaint are completely inconsistent with that culture.”
As for the position of the government, the ruling found certain signatures on HUD forms related to the attainment of FHA insurance to be inauthentic, which the court considers “actionable false statements.” Nutter also sought to throw out the testimony of a handwriting expert brought by the government, but this was overruled by the presiding judge.
Reverse mortgage pioneer
In late 2022 amid the ongoing lawsuit, Nutter closed its doors while maintaining its innocence. The lender ceased its mortgage origination activity in October of that year, according to local media reporting at the time.
Nutter Home Loans is considered a pioneer in the reverse mortgage industry due to its quick adoption of the HECM program, which began following the passage of the Housing and Community Development Act of 1987. In 1989, the first FHA-insured HECM was issued to Marjorie Mason of Fairway, Kansas, by the James B. Nutter Co.
In its heyday, Nutter serviced about $7 billion a year in mortgages, but that figure had declined to just over $100 million in 2022 up until its closure. By then, just a small percentage of the firm’s originations were for reverse mortgages.
