YOU MAY not be familiar with the legal term "qui tam," but a Clinton administration Cabinet member wants it to symbolize a new era in consumer protection for homebuyers and mortgage applicants.
Qui tam -- Latin for "who, as well" -- is a long-standing legal concept meaning essentially, "he who sues on the government's behalf as well as for himself." It has little or no current connection with buying a home or getting a loan.
But Andrew M. Cuomo, secretary of housing and urban development, plans to use the concept in a drive to toughen protections for borrowers using Federal Housing Administration (FHA) mortgages. And he hopes the rest of the mortgage market follows suit.
In a telephone interview, Cuomo disclosed plans to transform the much-maligned FHA home mortgage program into a model of consumer advocacy and enforcement. The FHA, which insures about 800,000 mortgages annually, specializes in low down-payment financing for first-time and moderate-income borrowers.
Under guidelines being drafted by HUD, individual FHA homebuyers and mortgage applicants will be "empowered," according to Cuomo, "to bring qui tam actions against [real estate] appraisers who intentionally file false valuations of FHA-insured homes."
HUD will ask homeowners to forward copies of qui-tam civil complaints to the agency's new national "enforcement center" in Washington. The agency will then have 60 days to decide whether to take over the case using Justice Department lawyers. The new enforcement center is headed by an FBI agent, and includes assistant U.S. attorneys on assignment from the Justice Department, in addition to HUD investigators.
The individual homeowner qui-tam suits will be filed under the Federal False Claims Act. That law carries heavy fines and triple-damage penalties for individuals or companies who submit false information to the government. Cuomo believes that giving homebuyers the right to file suit on the federal government's behalf -- and to split potentially large financial settlements or judgments with the government -- will "send a loud message" to anybody trying to rip off FHA borrowers.
Lawyers familiar with qui-tam litigation say that, by encouraging borrowers to flag fraud or willful misrepresentations in connection with FHA loans, HUD's ability to identify and attack abusers would be greatly increased.
Jack Cobetto, a litigator with the Pittsburgh law firm of Reed Smith Shaw & McClay, said the federal false-claims statute allows those who file qui-tam complaints to collect as much as 25 percent of the financial settlement or judgment awarded to the government. Although more typical uses of the statute have been suits by whistle-blowers against defense contractors, "there is no bar" to its being used by homeowners, as Cuomo plans, Cobetto added.
How would it work in practice? Say you bought a house with an FHA-insured loan of $125,000. An appraiser, working at the behest of a lender, had ignored numerous and obvious health and safety violations in the house, and assigned it a market value of $140,000 -- not coincidentally your sales contract price. In reality, though, the place wasn't worth more than $90,000, and needed thousands of dollars in repairs just to bring it up to code standards.
If you can show that the appraiser intentionally overvalued the house to obtain FHA insurance, you might be able to file a qui-tam action under the false claims statute. The FHA would then have two months to decide whether to take the case off your shoulders, and litigate it with federal attorneys. You'd be entitled to claim as much as 25 percent of the government's financial award, an amount which could be substantial, given the triple-damages penalty.
Mortgage and appraisal industry lawyers aren't quite sure yet what to make of Cuomo's plans, since he hasn't formally announced them. Phillip L. Schulman, a Washington attorney with Kirkpatrick & Lockhart, said that he "would welcome any effort to provide strong enforcement" of the FHA loan process, "and if qui tam is one way to do that, then fine."
But Schulman questioned whether many individual homeowners will want to go to the expense of filing a lawsuit, especially since there'd be a chance the government wouldn't litigate the case.
Cuomo says the qui-tam initiative is "just the first step" in a major drive to increase protections for FHA home buyers.
"We want to bring FHA back to its original mission, to be seen as an innovator" and as a source of good, competitive financial products.
If the FHA does that, and homebuyers begin to equate FHA with a high level of consumer protections, "then the private market is going to have to clean up its own problems in these areas, and respond," Cuomo said.
Pub Date: 6/21/98