FIRREA Whistleblowers

The Financial Institutions Anti-Fraud Enforcement Act (FIAFEA) provides significant financial incentives for whistleblowers who come forward with proof of banking fraud.

The Attorney General can file a civil lawsuit for fraud involving a federally insured financial institution under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Despite the fact that the law was enacted in reaction to the 1980s savings and loan crisis, FIRREA has proven to be an important tool in the government's arsenal for pursuing mortgage fraud in the aftermath of the 2008 financial crisis. The Department of Justice (DOJ) makes use of several key provisions of the statute to aid in the prosecution of financial institution malfeasance. FIRREA has a lower bar of proof than many other statutes that are used to prosecute fraud. FIRREA also contains a ten-year statute of limitations, which is significantly longer than the three to five-year timeframe that most civil claims have.

Our FIAFEA/FIRREA whistleblower attorneys can help you evaluate if these laws have been broken, guide you through the process of blowing the whistle in a way that protects your career, and fight for your rights if your employer retaliates.

What Type of Offenses Can FIRREA Action Be Filed For?

  • Violations of anti-money laundering legislation.
  • Violations in loan underwriting and servicing.
  • Fraudulent mail.
  • Fraud committed over the internet.
  • Providing incorrect information or making fraudulent entries in books and records.
  • Receiving payments in the form of commissions or gifts in exchange for obtaining loans.
  • A bank officer or employee embezzles or misappropriates monies.
  • Making misleading statements on loan applications is a big no-no.
  • Taking advantage of a bank or attempting to take advantage of a bank.
  • False assertions and stock overvaluation.
  • presenting the government with a fraudulent claim.
  • Asset concealment from a bank's government conservator, receiver, or liquidator.

The History of FIRREA and FIAFEA

In 1989, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) which created the Office of Thrift Supervision (OTS). This office was charged with overseeing all federally insured thrifts. It did so by creating a new regulatory framework called the “Volcker Rule,” which prohibited banks from engaging in proprietary trading and required them to hold capital against potential losses.

FIRREA was passed in 1989 to restore public confidence in lending institutions following the savings and loan crisis in the 1980s. It created a regulatory and enforcement structure that established higher minimum capital requirements and set stricter operating standards for all savings institutions. The Resolution Trust Corporation was established as part of FIRREA to liquidate the assets of savings and loan associations declared insolvent during the 1980s.

FIRREA also strengthened the civil enforcement powers of federal regulatory agencies against those perpetrating fraud that involves federally-insured financial institutions. FIRREA contains a list of fourteen criminal statutes which serve as predicate offenses. A violation of any one of these offenses can result in significant civil monetary penalties. 

As adjusted for inflation, the statute imposes penalties up to $ 2,048,915 per violation and up to $ 10,244,577 for a continuing violation. 12 U.S.C. § 1833a(b)(1)-(2). In cases where a violation results in a financial gain or a monetary loss to someone other than the violator, the civil penalty can exceed the statutory amount and reach as high as the amount of gain or loss. 12 U.S.C. § 1833a(b)(3).

In prosecuting FIRREA violations, the government needs only prove its case by a “preponderance of the evidence” rather than the higher “beyond a reasonable doubt” standard applicable in criminal cases. The law also grants the government broad pre-trial investigation powers, allowing the DOJ to issue administrative subpoenas for documents and depose key witnesses without judicial approval.

In a separate piece of legislation enacted shortly after FIRREA, the government is authorized to provide payment for information about violations of FIRREA. FIAFEA allows rewards to eligible individuals who submit a declaration to the Attorney General of the United States involving a violation of any offense enumerated in 12 U.S.C. § 1833a, including:

  • Receipt of commissions or gifts for procuring loans, 18 U.S.C. §215);
  • Theft, embezzlement, or misapplication by bank officer or employee, 18 U.S.C. §656;
  • Lending, credit and insurance institutions; 18 U.S.C. §657);

Public Support for Strengthening FIRREA

The public supports strengthening the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) to protect consumers against banks and credit unions fraud. A strong law is needed because banks and credit unions continue to engage in risky practices that harm consumers and taxpayers.

Corporate whistleblowers enjoy broad public support. A Whistleblower News Network poll released in October 2020 shows that the American public considers corporate fraud a national priority and wants to help whistleblowers who expose it.

A fundamental way to do so would be to strengthen FIRREA, a fact highlighted by government officials and whistleblower advocates.

In 2014, Attorney General Eric Holder, on behalf of the DOJ, called for FIRREA's whistleblower reward provision to be reformed. He argued that lifting the caps on whistleblower rewards “could significantly improve the Justice Department's ability to gather evidence of wrongdoing while complex financial crimes are still in progress – making it easier to complete investigations and to stop misconduct before it becomes so widespread. That it foments the next crisis.” Stephen M. Kohn, NWC's Board Chairman, has joined in these calls for reform, stating that “FIRREA is an older law that contains one of the worst federal whistleblower reward statutes.

Additionally, experience demonstrates that the public is opposed to whistleblower reward caps. This can be seen from solid public opposition to an SEC proposal in 2018 to cap SEC whistleblower rewards.

In 2018, the SEC proposed amendments that created a reward cap and established an unrealistic reporting procedure. Of the more than 3,500 comments posted on the SEC's public comment page, 99% spoke out against these changes, with many of them highlighting the damage a cap would do for incentivizing high-impact whistleblowers. 

The National Whistleblower Center also filed a historic petition opposing the two changes, including 102,595 signatures, breaking the record for comments on an SEC whistleblower program change.

Expanding whistleblower reward incentives to the banking industry will be crucial for protecting investors, taxpayers, and the public interest. The billions collected in fines from similar programs show what FIRREA could be capable of if whistleblowers were incentivized to report violations in banking and finance. 

By lifting the cap on whistleblower rewards, Congress can meaningfully incentivize whistleblowers, proven to be the most effective source of information on fraud, to work with regulators to deter, detect and prosecute financial fraud.

How FIRREA Compares to the False Claims Act

The False Claims Act allows individuals who discover fraudulent activity by federal contractors to file suit against those contractors. It requires the government contractor to pay back any money it receives through false claims if the individual prevails. In contrast, FIRREA only provides monetary rewards for whistleblowers who provide information leading to successful prosecutions.

Reward laws are crucial for incentivizing whistleblowers to step forward with information about financial fraud. By compensating whistleblowers for their contribution to successful prosecutions, these laws can alleviate risks to whistleblowers' careers and financial stability.

However, they can only be successful if the rewards are meaningful enough to incentivize high-level whistleblowers to take the risk of reporting. The negative impact of FIRREA's low reward provision can be seen by comparing FIRREA to the False Claims Act Under FIAFEA, “[t]he declarant shall be entitled to 20 percent to 30 percent of any recovery up to the first $1,000,000 recovered, 10 percent to 20 percent of the next $4,000,000 recovered, and 5 percent to 10 percent of the next $5,000,000 recovered.” 

In practice, then, if the government recovers $10 million or more, the whistleblower award would range between $850,000 to $1.6 million – potentially only a tiny fraction of what is rescued by the government. Additionally, a whistleblower who is denied a reward or low reward cannot appeal that decision in court.

Meanwhile, under the whistleblower provision of the False Claims Act, whistleblowers whose original information leads to a successful prosecution are entitled to a minimum payment of 15% of the collected proceeds and a maximum payment of 30% of collected proceeds. Within this range, rewards are determined based on the whistleblower's contribution. Additionally, if the government refuses to pay the mandatory compensation, the whistleblower can challenge that denial in court.

FIRREA was enacted several years after the False Claims Act's whistleblower amendment was added in 1986. Yet, while FIRREA has foundered, the False Claims Act has become the most successful anti-fraud act in the United States.

Compared to the six FIRREA settlements since the law was enacted in 1990, the DOJ has recorded at least 13,797 cases in which the government intervened based on whistleblower False Claims Act reports in the same period. 

According to the DOJ, in 2020 alone, the government recovered over $2.2 billion in FCA settlements and judgments. Over $1.6 billion of that can be attributed to whistleblower-initiated cases. As an additional testament to its success, 31 states have established state versions of the False Claims Act, showing that it is widely applicable and necessary across the United States.

Previous analysis also shows that even successful whistleblower-assisted FIRREA prosecutions resulted from the False Claims Act's strong incentives. The former Countrywide Vice President Edward O'Donnell initially blew the whistle on widespread fraud at Countrywide by voluntarily providing original information under qui tam provisions of the False Claims Act. While the FCA charges were later removed, the DOJ proceeded on FIRREA charges, and the parties reached a 1.27 billion dollar settlement, with $57 million set aside for the whistleblower reward.

Extended Statute of Limitations 

The statute of limitations for reporting FIRREA violations is five years. If you discover a breach after this period has passed, you may still file a complaint if it was part of a pattern of activity that began within the last five years.

Strengthen FIRREA Whistleblower Protections

The law was amended in 2009 to provide additional protections for whistleblowers who expose fraud against federally insured banks. This includes providing protection from retaliation by employers and offering whistleblower awards ranging from $10,000 to $30,000 per person.

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) could be a powerful tool against banking fraud. Still, a cap on whistleblower rewards prevents it from meaningfully incentivizing high-impact banking whistleblowers.

Following the savings and loan crisis in the 1980s, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) was enacted in 1989 to strengthen banking fraud enforcement. The Act allows the Department of Justice to sue banks for various crimes by lowering the standard of proof and extending the statute of limitations outlined in earlier bank fraud law. Under FIRREA, banks can now be sued for making false statements in books and records or loan applications or overvaluing securities, among other violations.

The following year, Congress enacted the Financial Institutions Anti-Fraud Enforcement Act (FIAFEA), allowing whistleblowers to report violations of FIRREA and qualify for a reward. Unfortunately, rewards for FIRREA whistleblowers are capped at USD 1.6 million, against the best practices of whistleblower law.

This cap prevents the DOJ from providing meaningful incentives to high-level executives to report fraud, dramatically reducing FIRREA's impact compared with other robust whistleblower laws like the False Claims Act Dodd-Frank Act. After the financial crisis in 2008, FIRREA became a powerful anti-fraud tool, facilitating prosecutions that led to significant settlements, including a USD 4 billion Citigroup settlement USD 16.6 billion Bank of America settlement. 

FIRREA has also been used to fight misleading claims about emissions in auto lending and  other types of financing. While these settlements demonstrate FIRREA's potential, the low rate of whistleblower reports reveals that FIRREA has significant room for improvement. In February 2021, the Whistleblower News Network published new data from the DOJ, obtained through a Freedom of Information Act (FOIA) inquiry, showing that the lack of whistleblower cases from FIRREA is “ nothing short of a disaster. Since FIRREA was enacted, the documents reveal that there have been only six settlements in total. These six settlements brought in USD 19.9 billion in fines, but due to the cap on rewards, whistleblowers received only USD 9.3 million.

The National Whistleblower Center (NWC) calls on Congress to reform FIRREA by increasing the upper limit on whistleblower rewards to up to 30% of the sanctions imposed, in line with other successful U.S. whistleblower rewards programs like the False Claims Act.

With a rewards program that genuinely incentivizes whistleblowers to step forward, FIRREA has the potential to bring in billions in sanctions, deter fraud and provide a financial lifeline for banking executives who are considering becoming whistleblowers and fear retaliation and loss of career opportunities.

Significant FIRREA Court Decisions 

The court has held that the government may not require banks to disclose the identity of customers who provide information under the whistleblower program.

Because most FIRREA investigations are resolved before they can be litigated on the merits, any occasion for federal courts to weigh in on FIRREA can be noteworthy. We identified three court decisions of interest in 2019, each summarized below.

United States v. Hodge case is unusual in the affirmative civil fraud enforcement world because the issue that raised both FIRREA and FCA claims went through trial and a jury verdict. Putting aside the unique confluence of events that led to a problem, the resulting $300 million judgment against the defendants serves as a powerful reminder of the financial stakes in many of these cases.

The underlying claims in Hodge arose from the conduct of the defendants, Allied Home Mortgage and its CEO, as loan originators and lenders for federally insured Federal Housing Administration (FHA) home mortgages. The FCA allegations, reaching back ten years and first raised by a qui tam relator in 2011 before the government intervened and filed its complaint, were based on the defendants' use of unregistered branches to originate FHA loans and their so-called “reckless underwriting,” resulting in losses to the FHA fund when those mortgages later defaulted. 

The FIRREA claims, based on the same underlying loan originations, alleged violations of FIRREA predicate offenses for false statements to the US Department of Housing and Urban Development (HUD) and FHA under 18 U.S.C. §§ 1006 and 1014. In total, following the jury verdict, the district court imposed FCA damages and penalties of more than $290 million (approximately $279 million in treble damages and $12.95 million in per-claim penalties). It imposed separate FIRREA penalties of $2.2 million against each defendant.

On appeal, the US Court of Appeals for the Fifth Circuit affirmed in all respects. The appeals court essentially determined that there was sufficient evidence to sustain the jury verdict and rejected various challenges to the government's experts. The court did not address legal obstacles to using FIRREA under these circumstances. The only FIRREA-related issue decided on appeal was the Fifth Circuit's assessment that an individual could be liable for causing false statements to be made and not just for personally making the false statements.

The Fifth Circuit did not comment that the government had pursued and obtained damages and penalties awards under both FIRREA and the FCA for the same underlying loan originations. The district court already had rejected the defendants' argument that awarding both FCA and FIRREA civil penalties would violate the Excessive Fines Clause of the US Constitution by constituting multiple punishments for the same conduct, reasoning that the FCA damages related to the submission of individual FHA insurance claims for defaulted loans while the FIRREA violations associated with the request of annual compliance certifications and other false statements.

By characterizing the underlying conduct as different, the district court sidestepped the question, and the defendants did not raise the issue on appeal. However, this double recovery question likely will arise again in cases with both FCA and FIRREA allegations.

United States v. Luce was Initially filed in 2011, and Luce is long-running litigation against the individual president of an FHA mortgage originator. The government alleged violations of both FIRREA and the FCA arising out of false statements made by Luce during three years dating back to 2006 regarding his company's eligibility to participate in the FHA mortgage program as a loan correspondent. According to the government, Luce's prior indictment for various crimes rendered his company ineligible to originate federally insured loans. 

Initially, the district court had entered summary judgment for the government and imposed more than $10.3 million in FCA treble damages and penalties. Although the government had requested an additional $3.4 million in FIRREA penalties, the court assessed no FIRREA penalty based on the government's analysis that Luce could not pay that penalty. Luce then appealed to the US Court of Appeals for the Seventh Circuit, which remanded the case with instructions that the district court assess FCA damages based on a “proximate causation” standard, rather than a “but for” causation standard.

FIRREA Whistleblower Retaliation Protections

The whistleblower retaliation protections under FIRREA apply only to employees employed by the failed institution at the time of its closure. If you worked for a different entity that acquired the failed institution, you would not qualify for protection under FIRREA.

How to Collect a FIRREA Whistleblower Award

Congress created the whistleblower award program to encourage individuals who know fraudulent activity at federally insured banks to receive monetary rewards.

FIRREA whistleblower rewards are based on a percentage of what the government collects in penalties from wrongdoers.

As currently interpreted, FIRREA whistleblowers are entitled to a percentage of the first $10 million in penalties. At $10 million, whistleblowers can expect an award of approximately $1.6 million.

In 2015, outgoing Attorney General Eric Holder asked Congress to remove the cap on awards, effectively allowing much higher whistleblower awards. That proposal has not yet been acted upon.

The penalties that banks pay under FIRREA are enormous. Each violation is subject to a $1.1 million fine. Continuing violations, however, are subject to the lesser of $1.1 million per day or $5.5 million. However, another provision of the law allows the court to set the penalty commensurate with the loss or gain from the misconduct.

That provision has been used by courts to set penalties over $1 billion. With such high corrections, it doesn't take much to get fines over the $10 million mark meaning whistleblower awards of $1.6 million.

To collect a FIRREA whistleblower reward, one must file a sealed declaration under oath with a designated person within the Justice Department. There are particular procedural rules, including the need to have facts and examples.

While the Justice Department is investigating the case, it must remain confidential. That means the whistleblower is not free to tell others about the subject. The Justice Department will also keep whistleblowers' identities secret for its part.

Do You Have a FIRREA or FIAFEA Whistleblower Case to Report?

The whistleblower program has strict rules regarding what types of fraud qualify for rewards, to find out if yours qualifies, contact The Whistleblower Advocates at (833) 310-3147 for a FREE, confidential consultation.

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