Federal
prosecutors filed a mortgage fraud lawsuit today against Wells Fargo Bank
alleging that, as a result of Wells Fargo’s false certifications, the Federal
Housing Administration has paid hundreds of millions of dollars in insurance
claims on thousands of mortgages that defaulted.
The charges
The
government’s lawsuit seeks hundreds of millions of dollars in damages and civil
penalties for more than 10 years of misconduct in connection with Wells Fargo’s
participation in the FHA Direct Endorsement Lender Program.
“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,” Manhattan U.S. Attorney Preet Bharara said in a statement.
“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. Now a jury will have to weigh the facts to
determine the bank’s liability and the scope of the damages it must pay.”
More than 100,000 loans certified as eligible for insurance
Wells
Fargo, the largest originator of home mortgages in the United States, has been
a participant in the Direct Endorsement Lender program since 1986.
As
a participant in the program, Wells Fargo has the authority to originate,
underwrite, and certify mortgages for FHA insurance. If a DEL approves a
mortgage loan for FHA insurance and the loan later defaults, the holder of the
loan may submit an insurance claim to the Department of Housing and Urban Development for the costs associated with the
defaulted loan, which HUD must pay.
Under
the DEL program, neither the FHA nor HUD reviews a loan before it’s endorsed
for FHA insurance. DELs are required to follow program rules designed to ensure
that they’re properly underwriting and certifying mortgages for FHA insurance,
and maintaining a quality control program that can prevent and correct any
deficiencies in their underwriting.
Between
May 2001 and October 2005, Wells Fargo engaged in a regular practice of
reckless origination and underwriting of its retail FHA loans, the lawsuit
alleges. Wells Fargo certified that more than 100,000 retail FHA loans met HUD’s
requirements and were eligible for FHA insurance. However, the lawsuit alleges
that the bank knew that a very substantial percentage of those loans – nearly
half in certain months – hadn’t been properly underwritten, contained
unacceptable risk, didn’t meet HUD’s requirements, and were ineligible for FHA
insurance.
In
addition, the lawsuit alleges that Wells Fargo failed to conduct adequate
quality control and comply with its self-reporting requirements to HUD.
Other mortgage fraud lawsuits
Brought
by the Civil Frauds Unit of the Justice Department, the unit has filed five civil fraud lawsuits
against major lenders. Three of the five cases have settled:
- CitiMortgage
Inc. for $158.3 million.
- Flagstar
Bank for $132.8 million.
- Deutsche
Bank and MortgageIT for $202.3 million.
The
government’s lawsuit against Allied Home Mortgage Corp. and two of its officers
is pending.
The
unit works in coordination with President Obama’s Financial Fraud Enforcement
Task Force.
