The U.S. attorney in Manhattan announced Tuesday that the government has sued Wells Fargo, alleging that the bank failed to follow underwriting rules on thousands of government-insured loans.
The reckless lending led to hundreds of millions of dollars in payouts by the Federal Housing Administration after thousands of the loans defaulted, the U.S. attorneys office said in a news release.
Wells Fargo also allegedly hired inexperienced temporary workers to boost production, and paid out bonuses to employees based strictly on the volume of FHA loans approved, without regard for their quality.
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.
Wells Fargo denies the claims and says the bank has acted responsibly and in good faith. Wells said its FHA loan delinquency rates have been half the industry average.
The bank will present facts to vigorously defend itself against this action, Wells said in a statement. Wells Fargo is proud of its long involvement in the FHA program, which has helped so many people obtain affordable mortgages and become homeowners.
Through the FHA program, the government agrees to insure certain loans, paying the note holder should the borrower default. The FHA does not review the loan, instead relying on the originating bank to follow specific creditworthiness standards.
Wells Fargo is the countrys largest mortgage originator. It has been a part of the FHA program since 1986.
Banks taking part are also required to have a quality control program, fully review loans that quickly go into default, and report to the U.S. Department of Housing and Urban Development any evidence of fraud.
Instead, the lawsuit alleges, Wells Fargo underwrote more than 100,000 loans it said were eligible for the government insurance between 2001 and 2005, when it knew that a very substantial percentage of the loans were ineligible or risky.
Unfortunately, as alleged in the governments 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, HUD general counsel Helen Kanovsky said in a statement.
Then, from 2005 to 2011, Wells Fargo attempted to cover up its misdeeds by telling the government it had been reporting faulty loans, the U.S. attorney said. The suit states that Wells reported only a tiny fraction.
This is the fifth such suit the government has brought against banks. In February, the U.S. settled with Citigroup for $158.3 million and Flagstar Bank for $132.8 million. The government settled with Deutsche Bank and its subsidiary MortgageIT for $202.3 million in May. A suit against Allied Home Mortgage Corp. is ongoing.
Bank of America settled similar claims earlier this year in a side deal accompanying the $25 billion mortgage servicing settlement with state attorneys general and federal agencies. The Charlotte bank agreed to pay $500 million upfront, with the possibility of paying $500 million more if principal forgiveness benchmarks werent met.
The Wells Fargo lawsuit was announced shortly before the New York Stock Exchange closed. The banks stock closed down 2 percent, at $35.10.