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The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General (OIG) assisted the U.S. Department of Justice, Washington, DC, and the U.S. Attorney’s Office, Northern District of Georgia, in conducting a review of First Tennessee has its principal place of business in Memphis, TN and is a wholly owned subsidiary of First Horizon Financial Corporation.  First Tennessee became an FHA-approved direct endorsement lender in 1984.  As a direct endorsement lender, First Tennessee was authorized by HUD to originate and underwrite mortgage loans on HUD’s behalf, including determining a borrower’s creditworthiness and whether the proposed loan met all applicable requirements.  When a borrower defaults on an FHA-insured loan underwritten and endorsed by a direct endorsement lender, such as First Tennessee, the lender (or its representative) has the option of submitting a claim to HUD to compensate the lender for any loss sustained as a result of the default.  Therefore, once a mortgage loan is endorsed for FHA insurance, HUD insures the risk of the borrower’s defaulting on that mortgage, which is realized if an insurance claim is submitted.

On June 1, 2015, First Tennessee entered into a settlement agreement with the Federal Government to pay $212.5 million to avoid the delay, uncertainty, inconvenience, and expense of lengthy litigation of certain civil claims the Government contended that it had against First Tennessee.  The settlement agreement was neither an admission of liability by First Tennessee nor a concession by the United States that its claims were not well founded.  As part of the settlement, First Tennessee agreed that it engaged in certain conduct in connection with its origination, underwriting, and quality control of certain single-family residential mortgage loans insured by FHA.  As a result of First Tennessee’s conduct, HUD insured hundreds of loans approved by First Tennessee that were not eligible for FHA mortgage insurance under the direct endorsement program and that HUD would not otherwise have insured.  HUD incurred substantial losses when it paid insurance claims on the loans covered by the settlement agreement.  Of the total settlement, FHA received $142 million in July 2015, and other Federal entities were to receive the remaining $70.5 million.