Mortgage fraud, discount interest point fraud, down-payment assistance fraud, fraud against HUD, and accounting fraud were all on the list of criminal acts for which Beazer Homes USA accepted responsibility under a settlement agreement between the home builder and several federal agencies Wednesday, July 1.

The government has agreed to not prosecute the company on the charges if the company pays up to $50 million in fines over the next 60 months and fulfills several other promises. Still, federal prosecutors filed a “bill of information” detailing their case against Beazer with the agreement.

The document offers the first detailed picture of what the company was accused. In short, they are divided into two categories, fraud related to mortgages and that related to accounting.

The U.S. Attorney of the Western District of North Carolina said that between 2000 and 2007, Beazer Mortgage, a since-disbanded entity of Beazer Homes, and “certain co-conspirators” designed a scheme to increase the mortgage entity’s profits and to sell more homes.

Discount Point Fraud
One part of that scheme was to charge home buyers fees in return for a better interest rate on loans and then pocket some of those fees to increase profit margins. In other cases, the price of the home was increased to offset the amount paid for the “illusory" discount points.

In other cases, when discount points were charged and kept, Beazer Mortgage gave its employees and “overage” incentive bonus of a few hundred dollars for exceeding the mortgage subsidiary’s profit margin on that loan.

Down-Payment Assistance Fraud
In North Carolina and some other markets, Beazer used a standard program to help provide low-income buyers with the then-required 3% down payment by paying a charity the required down payment funds plus an additional $300 “donation fee” which the charity would then “gift” to the home buyer at closing.

Under HUD rules, the down payment must be a true gift and the price of the house may not be increased to make up for the cost of the down-payment assistance. Nevertheless, the bill of information says that “Beazer and Beazer Mortgage on certain occasions fraudulently increased the prices of homes sold to down-payment assistance beneficiaries in order to offset the cost of the down-payment assistance, thereby fraudulently increasing the loan amount to be repaid by the home buyer.”

HUD Licensing Fraud
When the default rate on Beazer’s HUD loans started to trigger HUD’s watchdog programs, the company’s employees devised ways to thwart detection.

When HUD’s credit watch program noted that a branch’s default was approaching 200% of its peers, Beazer Mortgage would instruct loan originators at the at-risk branch to use the HUD license number from another branch that was not at risk to escape detection.

It also would terminate branch identification numbers for at-risk branches and then apply for a new HUD license number for the originators at that branch.

To keep the scheme from being detected, some Beazer Mortgage company employees lied to HUD, according to the government.

Stated Income Fraud
When issuing stated income loans, since dubbed “liar loans”, some division employees were warned the dangers of “knowing too much about a buyer.” In one division, for instance, the bill of information says that mortgage loan counselors were provided a script for talking with customers. For example, instead of asking buyers “How much do you make?," it was suggested that they should say: “It is going to take $X,XXX a month in household income to qualify for this home. Can you state that you have that much household income?”

As evidence of the mortgage fraud allegations, the bill of information offers a number of e-mails.

Accounting Fraud
The accounting fraud scheme of which Beazer is accused is said to have lasted between 2000 and 2007. During the company’s high-profit years, between about 2000 and 2006, the company downplayed the profit by squirreling away money in a variety of “reserve” accounts including the company’s legal and warranty reserves, land inventory accounts, and cost-to complete accounts. The diversion of profits into these reserve accounts occurred after earnings exceeded key executive bonus triggers and analyst expectations. As the markets turned and it appeared bonuses would decrease in 2006, the excesses were pulled out of the reserve accounts, and the company even began not recognizing certain period expenses in order to increase income.

According to the government, “the ‘cookie jar accounting’ materially misstated Beazer’s true financial results, net income, and earnings-per-share in filings with the Securities and Exchange Commission and other investor disclosures.”

The SEC already reached a settlement with the SEC for those accounting charges. In a separate announcement Wednesday, the SEC filed a civil lawsuit against Michael T. Rand, Beazer’s chief accounting officer until he was fired in June 2007. Rand could also be prosecuted criminally for fraud.

Teresa Burney is a senior editor at BIG BUILDER and BUILDER magazines.

Learn more about markets featured in this article: Atlanta, GA, Charlotte, NC.