A lawsuit filed against Wells Fargo & Co.’s banking unit seeks hundreds of millions of dollars for alleged reckless underwriting and fraudulent loan certification on thousands of defaulted government-insured loans originated through its retail loan originators.
The complaint was filed in U.S. District Court for the Southern District of New York against Wells Fargo Bank, N.A.
Wells Fargo is accused maintaining a decade-long practice of non-compliance with quality control requirements in connection with the Federal Housing Administration’s direct endorsement lender program. FHA reportedly paid out hundreds of millions of dollars in insurance claims on thousands of mortgages underwritten by the lender.
The bank, which originally became a direct endorsed lender in 1986, failed to conduct a full review of all FHA loans that defaulted on any of the first six payments, according to the government. It also failed to take prompt and adequate corrective action when it learned of fraud or serious underwriting problems, while it neglected to disclose to HUD within 60 days of first discovering evidence of fraud or other serious underwriting problems.
But Wells Fargo’s own internal reviews identified 6,558 seriously deficient loans between 2002 and 2010.
“Wells Fargo failed to report to HUD even a single loan with material underwriting violations or fraud until after a HUD lender review in 2005,” the statement said. “When HUD inquired about Wells Fargo’s self-reporting practices in 2005, Wells Fargo attempted to cover up its misdeeds by falsely suggesting to HUD that the bank actually had been reporting bad loans.”
In order to avoid indemnification claims from HUD, Wells Fargo allegedly continued to present inadequate reporting to HUD. The government said that the bank only reported around 300 of its seriously deficient loans to HUD from October 2005 until it was subpoenaed in June 2011 in connection with this case. It allegedly concealed 6,320 improperly certified loans from HUD — avoiding $192 million in indemnifications in the process.
From May 2001 until October 2005, Wells Fargo is accused of certifying 100,000 FHA-insured loans originated through its retail channel even though as many as half the loans in some months were not properly underwritten, contained unacceptable risk, did not meet HUD’s requirements and were ineligible for FHA insurance.
“In fact, Wells Fargo knew that its underwriters routinely failed to perform basic due diligence, failed to verify information in the loan file that bore directly on the borrower’s ability to make payments on the mortgage, and repeatedly certified mortgage loans that contained serious defects and departures from HUD’s underwriting standards,” the Justice Department said. “The extremely poor quality of Wells Fargo’s loans was a function of management’s nearly singular focus on increasing the volume of FHA originations — and the bank’s profits — rather than on the quality of the loans being originated.”
Senior management at Wells Fargo is accused of repeatedly ignoring the company’s own quality assurance department’s attempt to correct the faulty practices. The executives also failed to report the faulty loans to HUD.
The situation was exacerbated by the lender’s utilization of temporary staff to process and approve an increasing volume of FHA mortgages, according to the government. Inadequate training and improperly designed incentives added to the problems.
Damages and civil penalties are sought under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
A Wells Fargo spokeswoman didn’t immediately respond to a request for a statement.
“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 stated in the announcement. “As also alleged, 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.
“What’s more, 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.”
Calling Wells Fargo “a valued participant in the FHA-mortgage lending program,” Helen Kanovsky, general counsel at the Department of Housing and Urban Development, said that the litigation against Wells Fargo and other similar actions are necessary to deter similar acts in the future and recover damages suffered by FHA.
“Unfortunately, as alleged in the government’s complaint, there was a time when Wells Fargo placed profits over people, corporate results over corporate integrity, and did not consider the effect its actions would have on the FHA program as well as the overall economy,” Kanovsky said.
