On June 14, 2023, the Seventh Circuit issued a decision in United States ex rel. Michelle Calderon v. Carrington Mortgage Services, LLC, No. 22-1553, 2023 WL 3991013, (7th Cir. June 14, 2023), which clarified the plaintiffs’ burden to establish causation in connection with False Claims Act (“FCA”) claims concerning federally-insured mortgages.
As the Seventh Circuit explained, “[f]ederal mortgage insurance is designed to create a path to homeownership for borrowers who might be considered too risky to qualify for a traditional mortgage because of their lack of savings, poor credit history, or low income. The Direct Endorsement Lender program is one through which [the US Department of Housing and Urban Development (“HUD”)] provides mortgage insurance to approved, private lenders. HUD covers the losses of private lenders in the event of a loan default to encourage the issuance of these higher risk mortgages.” 2023 WL 3991013, at *1.
Carrington Mortgage Services, LLC (“Carrington”) served as “a Direct Endorsement Lender for many years.” Id. Accordingly, if it “wishe[d] to cover a loan with federal mortgage insurance, it [had to] first submit to an underwriting process during which it assesses the prospective borrower’s eligibility for federal insurance. . . . After the lender approves the loan, the lender submits the loan to HUD for review and endorsement. Through this submission, the lender certifies to HUD that the borrower meets the minimum standards of HUD’s underwriting guidelines. HUD relies on these certifications to issue the necessary insurance coverage.” Id.
The Relator, Michelle Calderon (“Relator”), “worked at Carrington from March 2013 to March 2015 as a Direct Endorsement Underwriter.” Id. at 2. “Calderon assert[ed] that during her time at Carrington she observed ‘reckless and inappropriate underwriting practices at Carrington,’ including the false certification of several loans as meeting HUD’s minimum underwriting guidelines”; Calderon brought a lawsuit against Carrington under the FCA based on those allegations. Id. at *2-3.
The False Claims Act
Relator was required to “prove four elements: 1) the defendant made a false statement (falsity); 2) the defendant knew the statement was false (knowledge); 3) the false statement was material to the government's payment decision (materiality); and 4) the false statement caused the government’s loss (causation).” Id. (citing United States v. Molina Healthcare of Ill., Inc., 17 F.4th 732, 739-40 (7th Cir. 2021)). The causation element requires “both actual and proximate cause.” Id. at *8 (citing United States v. Luce, 873 F.3d 999, 1014 (7th Cir. 2017)).
The Seventh Circuit Decision
In Calderon, the Seventh Circuit clarified the causation showing that is necessary with respect to FCA claims concerning federally-insured mortgage loans. Specifically, the Seventh Circuit “recognize[d] that when [it] adopted the proximate-cause standard in Luce, [it] did not explicitly state that proving proximate cause in cases about federal mortgage insurance requires proving the causes of defaults.” Id. at *8. But, in Luce, the Seventh Circuit did “rely heavily on the Fifth Circuit’s reasoning in United States v. Miller, 645 F.2d 473 (5th Cir. 1981), and the Third Circuit’s reasoning in United States v. Hibbs, 568 F.2d 347, 351 (3d Cir. 1977),” both of which “made explicit statements about the need to prove what caused the defaults.” Id. Thus, the Calderon decision bridged that gap, and held that, “[t]o ensure that the false certifications were a substantial factor in bringing about HUD’s losses and that the losses were foreseeable to the defendant, the plaintiff must show that the false certifications played some role in causing or increasing the risk of a subsequent default.” Id. Applying this standard, the Seventh Circuit affirmed the district court’s grant of summary judgment in Carrington’s favor on causation grounds. It agreed with the district court that the Relator had failed to put forth sufficient evidence that “would permit a reasonable factfinder to determine the cause of default” for any loan upon which the Relator had based her claims. Id. at *9.
The Seventh Circuit’s decision will have an important impact on FCA cases against Federal Housing Administration mortgage originators. Among other things, the decision clarifies that FCA relators must develop evidence concerning the reason for default on any loans for which they assert their claims. And critically, to the extent that the reason for default bears little to no nexus to the alleged false certification—if, for example, “a default is caused ‘by a flood or some other uninsured catastrophe,’”—"a defendant’s false certifications cannot be said to have caused the government’s loss,” thus limiting the scope of potential FCA liability. See id. (quoting United States v. Hibbs, 568 F.2d 347, 351 (3d Cir. 1977)).