The U.S. government filed a civil mortgage fraud lawsuit last month against Wells Fargo & Co. This is the latest in a series of lawsuits against big banks for their highly questionable lending practices during the housing boom. The complaint, brought by the U.S. Attorney in Manhattan, seeks damages and civil penalties from Wells Fargo for more than ten years of alleged misconduct related to government-insured Federal Housing Administration loans. The lawsuit alleges the FHA paid hundreds of millions of dollars on insurance claims on thousands of defaulted mortgages as a result of false certifications by Wells Fargo. Manhattan U.S. Attorney Preet Bharara had this to say:
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.
In a regulatory filing in August, Wells Fargo said it was being investigated for possible violations of laws and regulations relating to mortgage origination practices, including FHA loans. The U.S. Attorney’s office in Manhattan has brought similar cases in the past few years, including one against Citigroup Inc. unit CitiMortgage Inc., which settled the case for $158.3 million in February, and against Deutsche Bank, which paid $202.3 million in May to resolve its case. The U.S. Attorney’s office in Brooklyn brought the largest such case, against Bank of America Corp’s Countrywide unit, which agreed in February to pay $1 billion to resolve the allegations.
The Wells Fargo case is brought under the False Claims Act, which provides penalties for fraud against the government, and under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). It should be noted that FIRREA requires a lower burden of proof than criminal charges. It also has a statute of limitations that is longer than other financial laws and has the potential to result in big fines. A civil fraud unit, created by U.S. Attorney Bharara in March 2010, filed its first lawsuit under FIRREA in December of that year.
At issue in the lawsuit are loans Wells Fargo made through a program that allows banks to originate, underwrite and certify mortgages for FHA insurance. Under the so-called Direct Endorsement Lender program, neither the FHA nor HUD reviews a loan before it is approved for FHA insurance, but lenders are supposed to follow program rules. Between May 2001 and October 2005, it’s alleged in the complaint that Wells Fargo certified more than 100,000 loans for FHA insurance, even though the bank knew its underwriters had failed to verify information that was directly related to the borrower’s ability to make payments. It’s alleged further that:
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,” the complaint said. The bank also failed to properly train its staff, hired temporary workers and paid improper bonuses to its underwriters to encourage them to approve as many loans as possible. During a 7-month stretch in 2002, at least 42% of the bank’s FHA loans failed to actual qualify for the insurance they were submitted for, even though the bank’s internal benchmark for such violations was set at 5%.
Wells Fargo also kept its defective loans secret from HUD. From January 2002 to December 2010, the bank internally identified more than 6,000 “materially deficient” loans, including 3,000 that had defaulted in the first six months, but did not comply with its self-reporting obligations. Prior to October 2005, the bank did not self-report a single bad loan, and the inadequate reporting continued even after a HUD inquiry that year. All told, from 2002 through 2010 the bank self-reported only 238 loans. Some of the mortgages Wells Fargo suspected of fraud but declined to report to HUD include loans it separately reported as suspicious activity to the U.S. Treasury Department.
The complaint seeks treble damages and penalties for hundreds of millions of dollars in insurance claims already paid to Wells Fargo, as well as penalties on claims HUD may pay in the future. Citi, in its settlement, paid $158 million to resolve allegations that a “substantial percentage” of around $200 million in insurance claims failed to meet FHA requirements. The Wells Fargo complaint also includes specific allegations that the lender failed to report another $190 million in loans it should have flagged as potentially problematic to HUD, which potentially adds to any eventual payout from the bank.
The lawsuit adds to the growing number of civil cases the government has filed targeting conduct that allegedly contributed to the financial crisis. It should be noted that the Justice Department has indicted few individuals and institutions on criminal charges for roles in the collapse. Officials have said prosecutors determined much of the conduct amounted to greed, but did not rise to the level of crimes. A joint federal-state task force set up earlier this year to continue to probe conduct tied to the 2007-2009 crisis has also acknowledged the bulk of its inquiries are under civil law. I would have thought that there would have been some violations of criminal law, but apparently that wasn’t the case. That makes a good case, however, for the need for a strong civil court system.
Source: Insurance Journal
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