United States District Court, S.D. California
KEVIN G. DOUGHERTY, Plaintiff,
GUILD MORTGAGE COMPANY, Defendant, UNITED STATES OF AMERICA, Intervenor.
ORDER DENYING DEFENDANT'S MOTION TO DISMISS (DOC.
NO. 110) INTERVENOR'S AMENDED COMPLAINT
A. HOUSTON UNITED STATES DISTRICT JUDGE
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
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.
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.
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
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.
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.
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.
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.
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.