October 11, 2012

Government sues Wells Fargo for reckless lending practices

Wells Fargo engaged in a long-standing practice of reckless and fraudulent mortgage lending that cost the government hundreds of millions of dollars in insurance claims when those loans went bad, federal prosecutors alleged Tuesday.

In a civil lawsuit filed in Manhattan federal court, government lawyers accused the San Francisco-based bank of concealing the true nature of at least 6,320 shoddy mortgages that were insured by the Federal Housing Administration. The government is seeking unspecified civil penalties that could reach into the hundreds of millions of dollars.

For nearly a decade, the nation’s largest home mortgage lender routinely ignored warnings from its own employees of loans rife with serious violations or fraud, prosecutors said. Instead, Wells Fargo gave a poorly trained staff incentives to keep churning out bad loans. When struggling homeowners stopped making monthly payments, the loans defaulted in mass, leaving the government on the hook for massive insurance payouts to the bank.

“As the complaint alleges, yet another major bank has engaged in a long-standing and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance,” the U.S. attorney for the Southern District of New York, Preet Bharara, said in a statement.

Wells Fargo adamantly denied the allegations, saying in a statement that “it acted in good faith and in compliance” with FHA and Department of Housing and Urban Development rules. Company officials stressed that many of the issues in the lawsuit had been previously addressed with HUD.

“Wells Fargo. . . has acted as a prudent and responsible lender with FHA delinquency rates that have been as low as half the industry average,” the company said. “The bank will present facts to vigorously defend itself against this action.”

For Wells Fargo, the accusations were yet another blow to its reputation. Despite upholding itself as a model of propriety in the mortgage industry, the bank has been hit with a series of civil actions.

In one of the largest fair-lending payouts in history, Wells Fargo reached a $175 million settlement with the Justice Department in July to resolve accusations that it steered black and Latino borrowers into high-priced subprime loans.

Justice officials said at the time that investigators had discovered that mortgage brokers working on behalf of Wells Fargo had charged minority borrowers higher interest rates and fees than those offered to white borrowers with similar credit scores between 2004 and 2009. Wells Fargo denied the claims but announced that it would cease funding loans through independent mortgage brokers.

A month before that settlement, the bank agreed to pay $6.5 million to settle charges with the Securities and Exchange Commission that it sold troubled mortgage securities without disclosing the risks to customers.

And in February, Wells Fargo was one of five large banks to agree to a $25 billion settlement with state and federal officials over widespread foreclosure abuses, which included filing flawed and falsified court documents to move struggling borrowers out of their homes quickly.

As part of that deal, the bank agreed to pay more than $1 billion in penalties and provide more than $4 billion in relief to homeowners in the form of refinancings, lower loan balances and other aid. It also agreed to overhaul its loan-servicing practices.

The latest charges against Wells Fargo centers on mortgages made between 2001 and 2010. Prosecutors said the bank claimed that over 100,000 home loans met federal guidelines for FHA insurance, even though it knew many of the mortgages did not.

In the 193-page complaint, Wells Fargo is accused of aggravating the widespread underwriting violations by paying bonuses to staff to ramp up loan production and pressuring loan officers to fast-track loans with little quality control.

“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,” HUD General Counsel Helen Kanovsky said in a statement.

To date, the Justice’s civil frauds unit, working with President Obama’s Financial Fraud Enforcement Task Force, has brought five similar lawsuits. Three of the five cases have settled, including one that resulted in CitiMortgage agreeing to pay $158.3 million in February. A lawsuit against Allied Home Mortgage Corp. and two of its officers is still pending.

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