According to the lawsuit, the Federal Housing Administration was compelled to pay hundreds of millions of dollars in insurance claims on defaulted mortgages upon false certifications by Wells Fargo. Manhattan U.S. Attorney Preet Bharara said, “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.”
Wells Fargo, which is the fourth-biggest U.S. bank by assets, denied the allegations and claimed that it had acted in good faith and in compliance with FHA and the U.S. Department of Housing and Urban Development rules. The bank also maintains that many of the allegations have already been addressed with HUD and that the bank’s FHA delinquency rates are half that of the industry average.
In the past few years, Bharara had successfully brought similar cases against large banks. CitiMortgage Inc, settled one for $158.3 million, and Deutsche Bank paid up $202.3 million in May. The biggest related case was brought by the U.S. Attorney’s office in Brooklyn against Bank of America Corp’s Countrywide, which agreed in February to pay $1 billion for resolving the allegations.
The suit against Wells Fargo has charges under the False Claims Act and under the Financial Institutions Reform, Recovery, and Enforcement Act. The FIRRE requires a lower burden of proof than under criminal statutes and has a longer statute of limitations than other financial laws.
According to the lawsuit, between May 2001 and October 2005, Wells Fargo certified more than 100,000 loans for FHA insurance, with full knowledge that its underwriters had failed to verify information directly related to the borrower’s ability to repay. The complaint mentions, “The extreme poor quality of Wells Fargo’s loans was a function of management’s singular focus on increasing the volume of FHA originations (and the bank’s profits), rather than the quality of the loans being originated.”