Wells Fargo & Co. was sued by the U.S. for hundreds of millions of dollars in damages over claims the bank made reckless mortgage loans that caused losses for a federal insurance program when they defaulted.
The complaint filed yesterday in federal court in New York, which alleges misconduct spanning more than a decade related to the bank’s participation in a Federal Housing Administration program, follows similar cases against other lenders, including Citigroup Inc. and Deutsche Bank AG.
“As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance,” U.S. Attorney Preet Bharara said in the statement.
Yesterday’s lawsuit undermines San Francisco-based Wells Fargo’s reputation as a lender that avoided some of the industry’s worst underwriting practices and threatens to compound the bank’s costs as the government completes probes of the housing bubble’s collapse.
The firm, now the largest U.S. home lender, paid $125 million and set up a $50 million assistance fund to settle federal claims in July that it discriminated against minority borrowers. The settlement was the second-largest fair-lending accord reached by the Justice Department at the time.
Wells Fargo originated 33.1 percent of all U.S. mortgages in the first six months of the year, according to Inside Mortgage Finance, an industry publication. JPMorgan, the second-busiest, originated 11.1 percent.
The lawsuit is part of a larger effort by the U.S. government to recoup losses from defaulted mortgages that were insured by the FHA.
In May, Deutsche Bank reached a settlement with the civil frauds unit in Bharara’s office to pay $202.3 million to settle claims that its MortgageIT unit lied to qualify thousands of risky mortgages. In February, Flagstar Bancorp Inc., a Michigan lender, and Citigroup’s CitiMortgage agreed to pay a total of more than $290 million to resolve suits brought by Bharara’s office. A suit against Allied Home Mortgage Corp. is still pending.
Bank of America Corp., the second-largest U.S. lender, in February said it reached an agreement in principle to resolve and limit its exposure for claims relating to the origin of FHA-insured mortgage loans made by Countrywide before and for a period after it was acquired by Bank of America in 2008.
The Department of Housing and Urban Development’s inspector general has been reviewing loan origination practices since January 2010. An audit released in 2011 found that half of loans originated by 15 lenders didn’t meet FHA standards for verifying borrowers’ income and other underwriting standards. The agency has paid more than $37 billion in claims related to defaulted mortgages since 2008.
The FHA has paid hundreds of millions of dollars in insurance claims on thousands of mortgages that defaulted in connection with the FHA’s Direct Endorsement Lender Program as a result of false certifications by Wells Fargo, according to the complaint.
Wells Fargo has participated in the program, which allows HUD to reimburse lenders for defaulted loans that were approved for FHA insurance, since 1986, according to the complaint.
The bank’s internal reviews identified more than 6,500 deficient loans it was required to report from 2002 to 2010, including more than 3,000 that were 60 days into default within the first six months, yet only reported about 300 of them to the department, allowing it to avoid repayment on about $190 million in benefits, according to the complaint.
The U.S. said in a statement that it’s seeking to recover unspecified treble damages and civil penalties under the False Claims Act for hundreds of millions of dollars in insurance claims already paid by HUD, as well as penalties under the 1989 Financial Institutions Reform, Recovery and Enforcement Act.
The U.S. is also seeking compensatory damages for claims including breach of fiduciary duty, gross negligence and unjust enrichment for the insurance claims that the department has paid and expects to pay for mortgages wrongfully certified by Wells Fargo.
Wells Fargo denies the allegations and “believes it acted in good faith and in compliance” with FHA and HUD rules, the company said in a statement.
“Many of the issues in the lawsuit had been previously addressed with HUD,” the company said in the statement. “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.”
The company said the probe that led to the lawsuit was previously disclosed in a quarterly filing to the Securities and Exchange Commission.
Wells Fargo said in the August filing that it was the subject of probes relating to whether the company complied with laws and regulations relating to its mortgage origination practices, including those related to “fair lending and Federal Housing Administration-insured residential home loans.”
Wells Fargo is accused in the complaint filed yesterday of certifying, over four years, more than 100,000 retail loans met HUD requirements and were eligible for FHA insurance while knowing that “a very substantial percentage” weren’t properly underwritten, contained “unacceptable risk” and were ineligible.
The bank hired temporary workers to approve FHA loans and failed to properly train them, paid bonuses to underwriters to approve as many loans as possible and applied pressure on loan officers and underwriters to originate and approve as many FHA loans as possible, the U.S. said in the complaint.
“Wells Fargo, the largest HUD-approved Federal Housing Administration residential mortgage lender, engaged in a regular practice of reckless origination and underwriting of its retail FHA loans over the course of more than four years, from May 2001 through October 2005, all the while knowing that it would not be responsible when the materially deficient loans went into default,” the U.S. said in the complaint.
The case is U.S. v. Wells Fargo Bank N.A., 12-cv-7527, U.S. District Court, Southern District of New York (Manhattan).