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Wells Fargo Loses Bid to Block FHA Mortgage-Fraud Suit

Wells Fargo & Co. (WFC) failed to convince a federal appeals court that a multibank mortgage settlement in 2012 barred the government from suing over home lending practices it claims led to hundreds of millions of dollars in federal insurance payouts.

The national mortgage settlement outlines rights the government retained to pursue further action against Wells Fargo and the bank’s “effort to escape those contractual limitations fails,” the U.S. Court of Appeals in Washington ruled today.

The ruling, which upholds a lower-court decision, may increase pressure on San Francisco-based Wells Fargo to settle the Federal Housing Administration lawsuit, filed in Manhattan federal court in October 2012, claiming substandard mortgages the bank made led to defaults covered by the agency’s insurance.

“We are disappointed with the appellate court’s ruling,” Ancel Martinez, a Wells Fargo spokesman, said in an e-mail. “We look forward to presenting our case in support of our longstanding record of responsible lending.”

Three other banks that joined the 2012 national settlement subsequently paid a total of almost $2 billion to resolve complaints similar to the one Wells Fargo decided to fight.

“I don’t think anybody expected Wells to win this case,” said Paul Miller, a banking analyst at FBR Capital Markets Corp. in Arlington, Virginia. While the ruling may increase the likelihood the bank will settle the New York suit, “that doesn’t mean they will,” Miller said. “They always fight.”

N.Y. Ruling

The judge overseeing the Wells Fargo case in New York rejected the bank’s bid for dismissal in September. He said that the lower-court ruling in Washington, clarifying the language of the $25 billion settlement, didn’t bar another FHA suit over what the government contends are different grounds.

The national settlement primarily involved loan servicing practices and foreclosure abuses. FHA’s New York suit focuses on loan origination and underwriting.

Wells Fargo argued that the reckless lending alleged in the New York suit is an extension of corporate-level failures in quality control that are addressed in the national agreement, which the bank paid $5 billion to join.

The U.S. argued that the settlement is limited to claims based on the annual declarations made by Wells Fargo to FHA and its Department of Housing and Urban Development overseers. In those certifications, the bank said it had the necessary safeguards in place to make mortgages under an FHA loan-guarantee program.

Bank’s Position

Wells Fargo maintained that the release freed it from liability for any companywide conduct “that allegedly rendered the annual certification false,” according to today’s ruling.

The appeals court found that the release protects the bank only for “the far narrower category of Wells Fargo’s liability for all of individual loans made pursuant to the false annual certification that did not themselves transgress any regulatory directive.”

The decision upholds a ruling by U.S. District Judge Rosemary Collyer in Washington, who is overseeing the national mortgage settlement.

Reckless origination and underwriting of loans cost FHA hundreds of millions of dollars in insurance claims, according to the New York complaint.

Wells Fargo was one of five banks that agreed to the 2012 settlement with the Justice Department and 49 states. The FHA took additional action against four of the banks, including Wells Fargo, for related housing-crisis wrongdoing.

Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. decided to settle those matters.

The case is U.S. v. Bank of America, 13-5112, U.S. Court of Appeals for the District of Columbia (Washington).

To contact the reporter on this story: Andrew Zajac in federal court in Washington at azajac@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net. Joe Schneider, Stephen Farr

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