United States ex rel. Calderon v. Carrington Mortg. Servs.

70 F.4th 968

UNITED STATES of America EX REL. Michelle CALDERON, Plaintiff-Appellant, v. CARRINGTON MORTGAGE SERVICES, LLC, Defendant-Appellee.

No. 22-1553

United States Court of Appeals, Seventh Circuit

Argued November 30, 2022

Decided June 14, 2023

Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:16-cv-00920-RLY-MJD — Richard L. Young, Judge.

Jennifer L. Blackwell, Orzeske - Blackwell, P.C., Indianapolis, IN, for Plaintiff-Appellant.

Henninger Bullock, Niketa Patel, Attorneys, Mayer Brown LLP, New York, NY, Jeanine Kerridge, Attorney, Barnes & Thornburg LLP, Indianapolis, IN, for Defendant-Appellee.

Jennifer Utrecht, Attorney, Department of Justice, Civil Division, Appellate Staff, Washington, DC, for Amicus Curiae.

Before Wood, Jackson-Akiwumi, and Lee, Circuit Judges.

Wood, Circuit Judge.

Michelle Calderon sued Carrington Mortgage Services on behalf of the United States for alleged violations of the False Claims Act. Calderon is a former employee of Carrington. She alleges that Carrington made false representations to the U.S. Department of Housing and Urban Development (HUD) in the course of certifying residential mortgage loans for insurance coverage from the Federal Housing Administration (FHA).

Carrington moved for summary judgment on the basis that Calderon did not meet her evidentiary burden on two elements of False Claims Act liability. First, it asserted that she could not show that the allegedly false representations were material to HUD's decisions to pay out various claims under the federal mortgage insurance program. Second, it contended that she could not show that the false representations caused HUD to suffer a monetary loss.

The district court sided with Carrington on both elements and granted summary judgment, disposing of Calderon's lawsuit. Though we conclude that Calderon does have sufficient proof of materiality, we agree that she has not met her burden of proof on the element of causation. We therefore affirm the district court's decision.

I

A

Federal 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 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. Carrington has been a Direct Endorsement Lender for many years.

If a potential Direct Endorsement Lender such as Carrington wishes to cover a loan with federal mortgage insurance, it must first submit to an underwriting process during which it assesses the prospective borrower's eligibility for federal insurance. HUD publishes handbooks that provide the underwriting guidelines for lenders and promulgates regulations that govern Direct Endorsement lending.¹ Carrington hires its own Direct Endorsement Underwriters and operates its own quality control system. Its goal is to ensure that it properly evaluates a borrower's financial information, determines the degree of risk involved in issuing the loan, and complies with all federal requirements. 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.

Next, all loans submitted for federal insurance are subject to a pre-endorsement review by HUD. The parties dispute the scope of that review, but HUD's own regulations indicate that the agency is focused on verifying that all necessary documents are present, rather than on assuring the accuracy of the information it finds in the loan file. See HUD, 4155-2, Lender's Guide to the Single Family Mortgage Insurance Process 8.C.1.b (2010). Once a loan passes pre-endorsement review, HUD issues federal insurance to the lender for that loan. If a loan file is missing some of the required documentation, the lender instead receives a notice of return that specifies the deficiencies and corrective action needed before the loan can be federally insured.

HUD may conduct further examination, even after it issues the insurance for the lender. It subjects approximately 5 percent of loans to a post-endorsement technical review in which it evaluates the loan using the federal underwriting requirements and confirms the accuracy of the information in the loan file. When a post-endorsement review reveals material noncompliance with HUD's underwriting guidelines, HUD will require the lender to agree to an indemnification agreement, under which the lender must abstain from filing an insurance claim in the case of default or reimburse HUD if HUD makes a payment on an insurance claim for that mortgage. Federal regulations define which violations may qualify as "serious and material." 24 C.F.R. § 203.255(g)(3).²

B

Calderon worked at Carrington from March 2013 to March 2015 as a Direct Endorsement Underwriter. During that time, HUD classified loans in one of four ways following a post-endorsement review: conforming, deficient, unacceptable, or mitigated. Deficient loans were those with documentation deficiencies or processing errors that presented only low-risk issues. Unacceptable loans contained a high-risk error or omission and did not meet the basic eligibility requirements for federal mortgage insurance. Once a loan was deemed unacceptable, lenders had an opportunity to explain or correct the identified deficiencies. If they were able to rectify the problem, the loan was reclassified as mitigated. If not, HUD issued an indemnification agreement.

Concerned about what she was seeing on the job, including allegedly reckless and inappropriate underwriting practices, Calderon brought this lawsuit against Carrington under the False Claims Act. See 31 U.S.C. § 3729. The Act allows a private party to sue for violations on behalf of the government; successful suits result in a payment to the initiator. Id. § 3730. A plaintiff such as Calderon must plead and ultimately 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). United States v. Molina Healthcare of Ill., Inc., 17 F.4th 732, 739-40 (7th Cir. 2021).

Understanding the process by which federal mortgage insurance is issued clarifies how a company such as Carrington might be held liable under the False Claims Act. The alleged false statements occur if Carrington wrongly certifies that a loan meets federal underwriting requirements. If HUD would have withheld federal insurance or issued an indemnification agreement had it known of the noncompliance, then the false certification of compliance is material to HUD's payment decision. And if the loan defaults and HUD covers the cost of the default, then the false certification of compliance causes the government's loss when the loan's noncompliance is the foreseeable cause of the default.

C

Calderon asserts 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. Essentially, she alleges, if HUD had known of the errors in Carrington's loan files, it would not have endorsed those loans for federal insurance or, in the alternative, if all Carrington's loans had been subjected to a full post-endorsement review, many of them would have been characterized as unacceptable and HUD would have issued indemnification agreements. Further, if Carrington had complied with HUD's underwriting guidelines, fewer of its federally insured loans would have defaulted because only borrowers with appropriate risk levels would have received loans.

To meet her evidentiary burden, Calderon provided a sample "re-underwrite" of 349 federally insured loans that Carrington issued between 2013 and 2015; all of those loans later defaulted. Calderon's analysis identifies several alleged deficiencies in these loan files, to which we refer as the "reviewed loans." The flaws included instances where Carrington overstated the borrower's income or provided insufficient documentation. Calderon also gives examples where the original underwriter improperly omitted borrower debt, failed to assess creditworthiness, permitted excessive debt-to-income ratios, or improperly assessed compensating factors—that is, borrower characteristics that can offset a bad credit score, such as documented cash reserves, no discretionary debt, significant additional income, or residual income.

Calderon also offered herself as an expert and intended to testify about the shortcomings in Carrington's quality control department, as well as about the elements of materiality and causation. But the district court excluded the bulk of her expert opinion. After Calderon was precluded from testifying about certain aspects of materiality and causation, Carrington moved for summary judgment on just those elements, arguing that Calderon could not meet her evidentiary burden on the available record. The district court granted the motion, agreeing with Carrington that as a matter of law Calderon could not prove either materiality or causation. Calderon has appealed.

II

Calderon first challenges the district court's decision under Federal Rule of Evidence 702 to exclude portions of her own proffered expert testimony. Calderon also disputes the district court's decision to admit the testimony of Carrington's expert, Kori Keith. We decide independently whether the district court followed Rule 702's...