How the False Claims Act Helps Fight Fraud in Federal Housing Programs

How the False Claims Act Helps Fight Fraud in Federal Housing Programs

The False Claims Act (FCA) is an important tool for fighting fraud against the government, including fraud in federal housing programs like Section 8. The FCA allows private citizens to file lawsuits on behalf of the government against companies or people that commit fraud. If the lawsuit is successful, the private citizen (called a “relator”) can receive part of the money that the government recovers. This encourages more fraud cases to be brought forward.

What is the False Claims Act?

The FCA imposes liability on any person who knowingly submits false claims to the government to obtain federal funds. This includes submitting claims for work that was not performed, making false statements to get claims paid, or using false records to get claims paid, among other things. Damages under the FCA can be up to three times the amount that the government lost due to the false claim, plus civil penalties of $5,500 to $11,000 per false claim.

How Can the FCA Be Used to Fight Fraud in Federal Housing Programs?

There are a few common ways that unscrupulous landlords, property managers, and developers try to defraud federal housing programs:

• Charging tenants “side payments” to secure or keep their Section 8 rental units
• Billing for maintenance or repairs that were never performed
• Billing for unnecessary or excessive maintenance/repairs
• Accepting Section 8 payments for vacant units
• Failing to properly credit Section 8 payments

Each of these fraudulent schemes involves knowingly submitting false claims to the government for federal housing funds. This makes them prime targets for FCA lawsuits by relators.

Example of a Successful FCA Housing Fraud Case

In one recent case, a property management company that operated over 1,300 units paid $3 million to settle a FCA lawsuit alleging it charged improper fees to Section 8 tenants. The company allegedly charged monthly $25 “administrative fees” and other fees not permitted under the Section 8 program. By resolving the FCA claims, the company avoided paying up to triple damages plus penalties [1].

Benefits of Using the FCA Against Housing Fraud

The FCA is an effective tool to combat fraud in federal housing programs because:

• The potential for triple damages and penalties creates a strong deterrent effect
• Relators can bring fraud cases that governments lack resources to pursue
• Quick settlements allow governments to efficiently recover losses
• Publicity from FCA cases puts industry on notice and may prevent future fraud

Criticisms and Downsides of Using the FCA

However, there are some downsides and criticisms when using the FCA to address housing fraud, including:

• Risk of over-deterrence that scares lenders/landlords from participating in federal housing programs
• “Parasitic” FCA lawsuits brought by relators seeking a cut of the award
• Punishing technical record-keeping violations as severely as intentional fraud
• Forcing settlements for claims that could be reasonably disputed

Recent Changes to Limit Use of FCA Against Minor Housing Violations

In part due to the above concerns, HUD and DOJ recently signed an agreement to limit pursuing FCA cases over minor FHA lending program violations. The new guidance lays out factors to consider before bringing an FCA case over small errors like:

• Whether violations were disclosed to HUD
• Whether appropriate payments have been made
• Whether errors were corrected prospectively

HUD seems to be signaling that it will rely less on FCA lawsuits for minor violations. However, serious and intentional fraud will likely still result in FCA liability [2].

Role of Relators and Whistleblowers

Most FCA housing fraud cases originate from whistleblower complaints filed under seal by relators. Relators are often current or former property managers, contractors, or other housing program insiders. Under the FCA, relators can receive 15-30% of the government’s recovery as a reward for bringing the fraud to light.

For example, a property manager for a low-income housing project received a $1.5 million reward for an FCA lawsuit reporting her employer was billing HUD for vacant units. Thanks to her whistleblowing, the government recovered over $5 million [3].

Unique Role of State False Claims Acts

Many states have their own false claims acts that mirror the federal FCA. State FCAs have been instrumental in prosecuting housing fraud by allowing cases based on fraud against joint federal-state programs like Section 8. Even if federal interest declines, states still recover losses to state coffers. For example, a California case recovered $15 million from a Section 8 fraud scheme over bogus vacancy payments [4].

The Future of FCA Enforcement Against Housing Fraud

Given its record of success, the False Claims Act will likely continue serving as the government’s primary civil tool for combatting fraud in federal housing programs. However, recent signals from HUD and DOJ suggest stricter standards over what types of cases justify severe FCA liability. Minor first-time violations are less likely to trigger FCA lawsuits post-settlement. But prosecutors will continue aggressively pursuing systematic and egregious housing fraud under the FCA regime.

Going forward, housing industry players can expect:

• Ongoing FCA scrutiny of intentional fraud in federal housing programs
• Increased audits and oversight from HUD and housing authorities
• More whistleblower tips and relator-driven FCA lawsuits
• High-dollar FCA settlements used to deter other program participants

Ultimately, the FCA’s power to impose substantial financial penalties fills a vital role in keeping housing programs free from unscrupulous actors. This helps ensure affordable housing resources flow to vulnerable individuals and families that truly need assistance.