Today Wells Fargo became the latest bank to be sued by the U.S. government for alleged fraud leading to the housing bust and financial meltdown. Manhattan U.S. Attorney Preet Bharara, in conjunction with the U.S. Department of Housing and Urban Development, filed a civil suit against the San Francisco-based company—the nation’s fourth largest bank—accusing it of fraudulently certifying mortgages for Federal Housing Administration insurance in order to increase profits and underwriter bonuses.
“Wells Fargo’s bonus incentive plan—rewarding employees based on the sheer number of loans approved—was an accelerant to a fire already burning, as quality repeatedly took a back seat to quantity,” Bharara said.
Wells Fargo is one of the nation’s largest issuers of FHA mortgages. FHA insurance enables lenders to approve loans for moderate- to low-income borrowers who otherwise may not meet stringent lending criteria for a mortgage. Lenders permitted to certify mortgages with the FHA are guaranteed reimbursement for incurred charges should the loan fail. Applicants must still meet basic criteria, however, and it is up to the lender to review and certify requirements for an FHA loan are met; neither FHA nor HUD reviews loans once an approved lender has certified them.
“As the complaint alleges, yet another major bank has engaged in a long standing and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance,” Bharara said in a statement.
The suit alleges from Jan. 1, 2002, until Dec. 31, 2010, Wells Fargo determined a total of 6,320 loans were deficient in meeting FHA standards, yet intentionally concealed the discoveries from the FHA. In fact, even after an internal risk audit, which uncovered what one employee called “a dirty underbelly of bad loan officers,” the bank failed to report the issues, claims the lawsuit. The government claims Wells Fargo’s fraudulent representation of FHA loans cost it $190 million in invalid claims when the loans ultimately failed.
“Even after concerns were raised internally at the bank, Wells Fargo began self-reporting bad loans in a significant way, as required, only after this office issued a subpoena last year,” Bharara said. “Now a jury will have to weigh the facts to determine the bank’s liability and the scope of the damages it must pay.”
In the suit, the government is seeking hundreds of millions of dollars in compensatory damages for insurance claims, as well as penalties under the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
Wells Fargo, however, fiercely denied the accusations in a company-issued statement, saying it “believes it acted in good faith and in compliance,” with FHA and HUD guidelines.
“Many of the issues in the lawsuit had been previously addressed with HUD,” the company said in the statement, referring to a previous discussion of the probe in a Securities and Exchange Commission quarterly filing. “Wells Fargo is the leading FHA lender and has acted as a prudent and responsible lender with FHA delinquency rates that have been as low as half the industry average. The bank will present facts to vigorously defend itself against this action. Wells Fargo is proud of its long involvement in the FHA program, which has helped so many people obtain affordable mortgages and become homeowners.”
Shares in Wells Fargo fell by 2 percent following the lawsuits announcement, closing at a 1.6-percent drop to $35.22 in New York trading. The case is U.S. v. Wells Fargo Bank N.A., 12-cv-7527, U.S. District Court, Southern District of New York (Manhattan).
