A federal judge recently rejected motions to dismiss in a suit in which the U.S. government alleged that two mortgage originators and their officers defrauded the Department of Housing and Urban Development (HUD) into insuring risky mortgage loans.

In its complaint, the government alleged that the defendants set up a fraudulent scheme based on false statements, poor quality control, and "shadow branches" not approved by HUD. This caused HUD to believe that certain loans qualified for insurance, according to the complaint.

The government sought civil penalties and treble damages under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The defendants moved to dismiss on several grounds, but the court held that the complaint's allegations supported an inference of fraud by the defendants.

The case joins a growing list of suits brought by the United States under the False Claims Act and FIRREA against mortgage originators and their officers for alleged losses to the government. The government appears to be pursuing claims under FIRREA because it has a longer statute of limitations and lower burden of proof than many other laws targeting financial fraud.