Wells Fargo Urges Judge to Dismiss U.S. Mortgage Loan Fraud Suit

Wells Fargo & Co. urged a judge to dismiss the U.S. government’s lawsuit claiming the bank made reckless mortgage loans that caused losses for a federal insurance program.

The U.S. suit alleges more than a decade of misconduct by Wells Fargo in connection with a Federal Housing Administration program. Wells Fargo argued that the government’s suit, which was filed in October, should be dismissed because it fails to adequately allege facts that would allow the case to go forward.

“The complaint tells a nice story, but they fail to connect the dots,” William Johnson, a lawyer for San Francisco-based Wells Fargo, told U.S. District Judge Jesse Furman in a hearing yesterday in Manhattan federal court.

The U.S. claims the FHA paid hundreds of millions of dollars in insurance claims on defaulted mortgages in connection with the FHA’s Direct Endorsement Lender Program as a result of false certifications by Wells Fargo.

In the hearing yesterday, Wells Fargo argued that the U.S. released claims against it in a settlement last year. The bank also said the government’s claims for conduct before June 25, 2006, were filed too late and that the U.S. failed to allege specific facts showing the bank engaged in fraud.

The bank claimed the government is trying to misapply a 1989 law enacted in the wake of the savings and loan crisis, the Financial Institutions Reform, Recovery and Enforcement Act.

‘No Good’

“Wells Fargo knew these loans were no good, but submitted the claims,” Assistant U.S. Attorney Jeffrey Oestericher argued at the hearing. “And that is fraud.”

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.

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.

“These are extremely complicated and convoluted issues,” Furman told the lawyers. He didn’t say when he will rule on the motion to dismiss.

The case is U.S. v. Wells Fargo Bank N.A., 12-cv-07527, U.S. District Court, Southern District of New York (Manhattan).

Before it's here, it's on the Bloomberg Terminal.