Fraud Litigation and FHA Mortgage Lending

Abstract

We study the impact of recent increases in mortgage lenders’ litigation risk on borrowers. In the last decade, the U.S. Department of Justice brought suits against many of the largest lenders in the FHA mortgage market, alleging fraud under the False Claims Act. These suits led to over $5.4 billion in settlements and caused targeted banks and their peers to precipitously exit the FHA market. A combination of difference-in-differences and triple differences tests exploiting geographic variation in exposure to exiting banks show a 19% reduction in aggregate FHA lending in heavily affected areas. Smaller non-bank lenders with higher historical misconduct rates partially filled the void in the FHA market, highlighting potential unintended consequences of aggressive consumer financial protection litigation.