Wells Fargo Bank, N.A. (NYSE: WFC) has agreed to pay $1.2 billion to settle civil mortgage fraud claims stemming from the company’s participation in a Federal Housing Administration (FHA) lending program, the Department of Justice announced Friday afternoon.
Under the settlement, the fourth-largest bank in the U.S. accepted responsibility for certifying to the Department of Housing and Urban Development (HUD) that certain residential home mortgage loans were eligible for FHA insurance, when in fact they were not. As a result, the government was left to pay FHA insurance claims when some of the loans in question defaulted.
The settlement, which was approved Friday by U.S. District Judge Jesse M. Furman for the Southern District of New York, resolves the government’s civil claims regarding Wells Fargo’s FHA origination and underwriting practices.
Furman’s decision also resolves claims related to a lawsuit and investigation conducted by the U.S. Attorney’s Office for the Northern District of California into whether American Mortgage Network, LLC, a mortgage lender acquired by Wells Fargo in 2009, falsely certified and submitted ineligible residential mortgage loans for FHA insurance.
“This settlement is another step in the Department of Justice’s continuing efforts to hold accountable FHA approved lenders that unlawfully submit false claims at the expense of American homeowners and taxpayers,” said Principal Deputy Assistant Attorney General Benjamic C. Mizer, head of the Justice Department’s Civil Division, in a written statement.
According to the second amended complaint filed in Manhattan federal court, the government had alleged that Wells Fargo failed to comply with basic requirements for participation in FHA’s Direct Endorsement Lender program.
As a Direct Endorsement Lender, Wells Fargo has the authority to originate, underwrite and certify mortgages for FHA insurance. If a Direct Endorsement Lender approves a mortgage loan for FHA insurance and the loan later defaults, the holder or servicer of the loan may submit an insurance claim to HUD for the outstanding balance on the defaulted loan, along with any associated costs, which HUD must then pay.
Between May 2001 and October 2005, the government alleged Wells Fargo, the largest HUD-approved residential mortgage lender, engaged in a “regular practice of reckless origination and underwriting” of its FHA retail loans, “all the while knowing that it would not be responsible when the defective loans went into default.”
To maximize its loan volume and profits, the government alleged that Wells hired temporary staff to “churn out and approve an “ever increasing quantity of FHA loans, but neglected to provide this inexperienced staff with proper training.”
The DOJ stated that Wells Fargo imposed short turnaround times for deciding whether to approve the loans, employed “lax” underwriting standards and controls, and paid bonuses to underwriters and other staff based on the number of loans approved.
“Predictably, as a result, Wells Fargo’s loan volume and profits soared, but the quality of its loans declined significantly,” the DOJ stated in a release. “Yet, when Wells Fargo’s senior management was repeatedly advised by its own quality assurance reviews of serious problems with the quality of the retail FHA loans that the Bank was originating, management disregarded the findings and failed to implement proper and effective corrective measures, leaving HUD to pay hundreds of millions of dollars in claims for defaulted loans.”
Under the settlement, the government also alleged Wells Fargo failed to self-report to HUD the bad loans it was originating.
During the period 2002 through 2010, HUD required Direct Endorsement Lenders to perform post-closing reviews of the loans they originated. The company was also required to report to HUD, in writing, loans that contained fraud or other serious deficiencies.
It was during this nine-year period that the Bank, through its post-closing reviews, internally identified “thousands of defective FHA loans” that is was required to report to HUD, including a “substantial number” of loans that had gone into “early payment default,” according to the DOJ.
Instead of reporting these loans to HUD as required, the DOJ stated that Wells Fargo “engaged in virtually no self-reporting during the four-year period from 2002 through 2005 and only minimal self-reporting after 2005.”
During this period, Wells identified, through its internal quality assurance reviews, approximately 3,000 FHA loans with “material findings.”
“A ‘material’ finding was defined by Wells Fargo generally as a loan file that did not conform to internal parameters and/or specific FHA parameters, contained significant risk factors affecting the underwriting decision and/or evidenced misrepresentation,” the DOJ stated.
Further, during the period between October 2005 and December 2010, the DOJ noted that Wells only self-reported approximately 300 loans to HUD, although during this period the company’s internal reviews identified more than 2,900 additional FHA loans containing “material findings” that the Bank did not self-report to HUD.
The government was required to pay FHA insurance claims when a number of these loans defaulted.
As part of the settlement, Wells Fargo has accepted responsibility for having submitted to HUD certifications stating that certain loans were eligible for FHA insurance, when in fact they were not, during the period of May 2001 through December 31, 2008.
The $1.2 billion settlement is the largest recovery for loan origination violations in FHA’s history, according to HUD Secretary Julián Castro.
“This Administration remain committed to holding lenders accountable for their lending practices,” Secretary Castro said in a prepared statement. “Yet, this monetary figure can never truly make up for the countless families that lost homes as a result of poor lending practices.”
Written by Jason Oliva