Lender Risks of False Claims Act Liability After Sup. Court's Escobar Ruling Upholding Implied Certification Doctrine

The “implied certification” theory of FCA liability has been utilized by the DOJ in high profile lawsuits and settlements against lenders alleging that the lenders failed to comply with FHA rules and regulations governing FHA-insured home loans. On June 16, the U.S. Supreme Court affirmed the validity of the implied certification theory of knowingly fraudulent representations, and also rejecting the rubric that several courts had adopted, which distinguished between implied certifications as to “conditions of participation” and “conditions of payment.” While the Court did recognize the potential viability of “implied certification” FCA claims, it simultaneously limited the likely impact of that holding by significantly strengthening the materiality requirement of FCA claims.

The risk for lenders of implied certification claims is complicated by another trend in FCA litigation—attempts to use statistical sampling and extrapolation by the government (or private relators) to prove regulatory violations. Statistical sampling is being challenged by Quicken Loans in its dispute with DOJ and HUD over the agencies’ findings of minor violations in specific loans, and extrapolating those findings across their entire loan portfolio.

The U.S. Court of Appeals for the Fourth Circuit has recently permitted an interlocutory appeal concerning the viability of statistical extrapolation in FCA cases, in Michaels v. Agape Senior Community. The Supreme Court’s announcement in Escobar of a more robust materiality analysis has important implications for the use of statistical sampling to establish liability, regardless of how Michaels comes out.

Listen as our authoritative panel of financial services law practitioners discusses trends in FCA litigation against lenders regarding the use of the implied certification theory and statistical sampling to expand FCA liability, as well as the strengthened materiality standard. The panel will discuss the impact of the Supreme Court’s Escobar ruling upholding implied certification and the Fourth Circuit’s Michaels appeal regarding statistical sampling. The panel will also address the Second Circuit’s recent decision in Bishop v. Wells Fargo & Co., concerning the scope of FCA liability arising from broadly worded certifications, both express and implied.

1. Implied certification doctrine
   1. Trends in the use of the doctrine
   2. Court treatment—circuit split
   3. U.S. Supreme Court’s ruling in Universal Health Services v. Escobar
2. Use of statistical sampling and extrapolation in FCA litigation against lenders
   1. Recent DOJ and HUD litigation
   2. Arguments against statistical sampling
   3. Fourth Circuit appeal in Michaels v. Agape Senior Community Inc.
   4. Potential impact of Escobar on statistical sampling
3. Escobar’s strengthened materiality inquiry
4. Best practices in defending FCA litigation against FHA lenders

The panel will review these and other key issues:

• How will the Supreme Court’s Escobar ruling impact FCA litigation against lenders regarding the use of the implied certification theory of liability?
• How will the Supreme Court’s Escobar ruling impact FCA litigation against lenders based on an express certification theory?
• How are the courts treating statistical sampling and extrapolation in FCA cases?
• How have the DOJ and HUD utilize statistical sampling and extrapolation to assess lender compliance with the HUD-administered FHA-lending regulations?