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Dougherty v. Guild Mortgage Co.

United States District Court, S.D. California

September 11, 2019





         Pending before the Court is Defendant Guild Mortgage Company's (“Guild”) motion to dismiss Intervenor United States' (“United States”) first amended complaint (“FAC”) (Doc. No. 107) pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Doc. No. 110. The United States filed a response in opposition. The motion is fully briefed. After careful review of the pleadings, and for the reasons set forth below, Guild's motion to dismiss the United States' FAC is DENIED.


         The Federal Housing Administration (“FHA”) is an entity within the United States Department of Housing and Urban Development (“HUD”) that promotes American homeownership through insuring home loans. Doc. No. 20 at pg. 5. Authorized by the National Housing Act of 1934, the FHA agrees to protect mortgage lenders against the risk of loss caused by borrowers' default and non-payment. 12 U.S.C. § 1701. In order to underwrite FHA insured mortgages on HUD's behalf, a lender must first apply to become a Direct Endorsement Lender (“DE Lender”). Id. at pg. 13. The FHA's Direct Endorsement program (“DE program”) handles these applications, and all applicants must be approved by HUD. Id. Certain DE Lenders participate in the Lender Insurance (“LI”) program where DE Lenders personally endorse mortgages for FHA insurance and retain all documents. Id. at pgs. 13-14. Once a loan is endorsed by HUD or a DE Lender, the loan is insured by the FHA. Thus, if a homeowner defaults on an FHA-insured mortgage, HUD will reimburse the lender for both the outstanding balance on the loan and other costs associated with the default. Id. at pgs. 12-13. This “no-loss-guarantee” incentivizes lenders to grant loans to worthy applicants with low to moderate incomes and serves as an alternative to conventional financing. Id.

         There are two ways that a DE Lender can underwrite an FHA-insured loan. One, a DE Lender can “manually underwrite” a loan, in accordance with HUD underwriting rules, and make a decision on extending credit to the borrower. Two, a DE Lender can use a HUD-approved Automated Underwriting System (“AUD”), a software system that makes credit recommendations. Id. at pg. 19. Beginning in July 2008, HUD took away the ability to make this choice and began requiring DE Lenders to electronically process eligible loan requests through an AUD. Id. at pg. 20. The AUD connects to a proprietary HUD algorithm known as Technology Open to Approved Lenders (“TOTAL”). Id. Using data that the lender puts in an AUS, the TOTAL algorithm makes a credit determination and either approves, subject to certain conditions, or refers the loan. Id. Approved loans are only eligible for FHA's insurance endorsement if the data entered into the AUS is true, complete, and accurate. Id. When the TOTAL algorithm refers a loan, the loan goes back to the lender for manual underwriting. Id.

         For each individual mortgage loan approved for FHA insurance, the lender must make a “loan-level” certification that the individual mortgage “complies with HUD rules and is ‘eligible for HUD mortgage insurance under the DE program.'” Id. at pg. 26 (quoting Form HUD-92900-A). The certification differs depending on whether the loan was manually underwritten or the lender used an AUS. Id. For each loan that was underwritten using AUS, HUD requires the lender to certify to the “integrity of the data supplied by the lender used to determine the quality of the loan.” Id. For a loan that required manual underwriting, the lender must certify that the underwriter “personally reviewed the appraisal report (if applicable), credit application, and all associated documents and has used due diligence in underwriting the mortgage.” Id.

         Guild is a California corporation that originates and underwrites residential mortgage loans for properties throughout the United States. Id. at pg. 9. Guild has been participating in the DE Lender program since 1984 and in the LI program since 2007. As of May 2016, HUD paid claims totaling almost $300 million on at least 1, 691 mortgages endorsed by Guild. Id. at pg. 29.

         Plaintiff Kevin Dougherty (“Dougherty”) began working for Guild as its Quality Assurance (“QA”) manager in 2010. Doc. No. 27 at pg. 2. Dougherty learned that between 2006 and 2012, Guild had failed to report loans to HUD that presented material risk and “[f]indings of fraud or other serious violations” discovered during the “normal course of business and by quality control staff during reviews/audits of FHA loans.” Id. at pgs. 3-4. Such reporting is required by HUD guidelines within 60 days of discovery. Id. (quoting HUD Handbook 4060.1, REV-2, ch. 7-3.J, 7-4.D; HUD Handbook 4060.1, REV-2, ch. 2-23). Dougherty brought these defective loans to the attention of senior management at a bi-monthly Audit Committee meeting and was specifically told not to report any defective loans to HUD without senior management approval. Id. at pg. 4. Dougherty became increasingly concerned about Guild's failure to report defective loans to HUD and management's refusal to change Guild's faulty loan origination and underwriting practices. Id. at pgs. 4-5.

         On December 3, 2013, Dougherty filed a complaint against Guild. Id. After filing this initial complaint, the Department of Justice, along with HUD and its Office of Inspector General, commenced an investigation into Guild's origination and underwriting of single family residential mortgages insured by the FHA. Doc. 40 at pg. 11. In January 2014, Guild received a subpoena from the United States Department of Justice. Doc. No. 27 at pg. 5. Lisa Klika (“Klika”), Guild's Senior Vice President of Compliance and Quality Assurance, made comments that led Dougherty to believe that Klika suspected Dougherty was responsible for the subpoena. Id. at pg. 5. Following Klika's comments, Dougherty received decreased marks on his performance review despite Dougherty's steady, unchanging performance. Id. at pgs. 5-6. On April 9, 2014, Dougherty filed a first amended complaint See Doc. No. 5.

         In August 2014, Dougherty was given a project relating to Guild's response to the government investigation. Id. at pgs. 6-7. Shortly after the project was completed, Klika determined the project was done incorrectly, and another employee, McIntosh, took responsibility for the mistake. Id. A few days later, on August 19, 2014, Klika terminated Dougherty, effective immediately. Id. at pg. 7. Klika justified Dougherty's termination by asserting that the mistake in the project and Dougherty's purported lack of responsibility had led to an erosion of confidence in Dougherty's management abilities. Id. Dougherty asserts he was terminated because he engaged in protected activity under 31 U.S.C. § 3730 (h)(1) and not because his performance. Id. On September 8, 2014, Dougherty filed a second amended complaint. See Doc. No. 8.

         On May 18, 2016, the United States filed a complaint in intervention against Guild. See Doc. No. 20. On May 26, 2016, Dougherty filed his third amended complaint (TAC) alleging retaliation in violation of the FCA. Doc. No. 27 at pgs. 7-8. On November 29, 2016, Guild's motion to transfer venue (Doc. No. 32) was granted, and the case was transferred to the Southern District of California. On June 8, 2017, this Court took the pending Motion to Dismiss under submission pursuant to Civil Local Rule 7.1.d.1. See Doc. No. 89. On March 4, 2019, the United States filed a first amended complaint (FAC). See Doc. No. 107. Guild filed a motion to dismiss the United States' FAC on March 22, 2019. See Doc. No. 110. On April 12, 2019 the United States filed a response in opposition to Guild's motion. See Doc. No. 113. Guild filed a reply to the United States' response on April 24, 2019. See Doc. No. 116.


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