Wells Fargo & Co., the biggest U.S. home lender, asked a federal judge to rule that a false claims case filed by the U.S. violates the conditions of a settlement over foreclosure practices that was approved in April.
Wells Fargo, in a filing today in federal court in Washington, said the U.S. breached the terms of the $5 billion deal by suing in federal court in New York for “hundreds of millions of dollars” based on conduct that the bank is no longer liable for.
“A comparison between the allegations in the N.Y. complaint and the conduct covered by the U.S. release demonstrates without any doubt that the United States is attempting to impose additional liability for the same conduct for which Wells Fargo obtained permanent peace through the very large settlement,” Douglas Baruch, a lawyer for San Francisco-based Wells Fargo, said in court papers.
Wells Fargo’s filing was submitted to U.S. District Judge Rosemary Collyer, who on April 4 approved a $25 billion agreement with five banks to settle U.S. and state probes into abusive foreclosure practices. On Oct. 9, the U.S. sued Wells Fargo in New York, claiming the bank made reckless mortgage loans that caused losses for a federal insurance program when they defaulted.
Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment on the filing.
The government’s New York lawsuit alleges misconduct spanning more than a decade related to the bank’s participation in a Federal Housing Administration program. The lawsuit is part of a larger effort by the U.S. to recoup losses from defaulted mortgages that were insured by the FHA.
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 New York 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. is seeking to recover unspecified 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 False Claims Act damages to be tripled.
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.
In today’s filing in Washington, Wells Fargo says the earlier foreclosure settlement bars the government from bringing claims based on the bank’s FHA program “unless the U.S. can establish that an individual Wells Fargo underwriter ‘knowingly’ certified that a specific mortgage loan met FHA eligibility requirements when, in fact, the particular mortgage loan” didn’t.
The U.S. may only use evidence of Wells Fargo’s quality control and underwriting programs when seeking to hold the bank liable for an FHA violation on “an individual loan-by-loan basis,” according to the filing.
The bank asked Collyer to declare that the U.S. violated the settlement and to block the government from pursuing the New York case.
“Wells Fargo committed billions to the U.S. in settlement of the D.C. action and should be able to rely on the United States to observe and abide by its commitments and representations,” Baruch said in the filing.
Wells Fargo is accused in the New York case of certifying, over four years, that 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.
In May, Deutsche Bank settled with the civil frauds unit in Bharara’s office, agreeing to pay $202.3 million to resolve claims that its MortgageIT unit lied to qualify thousands of risky mortgages. In February, Flagstar Bancorp Inc., a Michigan lender, and Citigroup Inc.’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.
The Washington case is U.S. v. Bank of America Corp., 12-cv-00361, U.S. District Court, District of Columbia (Washington). The New York case is U.S. v. Wells Fargo Bank N.A., 12-cv-7527, U.S. District Court, Southern District of New York (Manhattan).