Wells Fargo has agreed to a $1.2 billion settlement to resolve a long-running mortgage dispute with the U.S. government, a move that slashes the bank’s 2015 profit by $134 million.
The deal involves civil fraud claims brought in 2012 against the San Francisco-based bank, which the government had accused of “reckless” underwriting practices that led to thousands of federally-insured loans defaulting. The government said Wells Fargo’s false certifications that the loans met requirements for federal insurance resulted in hundreds of millions of dollars in insurance payouts.
Wells Fargo, which had fought unsuccessfully in court to be released from the claims, said it reached an agreement in principle on Monday with the Department of Justice, the Department of Housing and Urban Development and two U.S. attorneys in New York and California.
The settlement is expected to lower Wells Fargo’s 2015 profit to $22.9 billion, or $4.12 per common share. The bank initially reported profit of $23.03 billion, or $4.15 a share, last month. Those results were down slightly from a record $23.06 billion a year ago.
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The bank, which disclosed the accord in a securities filing Wednesday, also noted there’s no assurance that it and government will agree on the settlement’s final terms.
In its lawsuit, the government alleged more than 10 years of misconduct by Wells Fargo related to its participation in the Federal Housing Administration’s direct endorsement lender program.
Under that program, lenders are given authority to certify that mortgages meet requirements for federal insurance. If a federally-backed mortgage defaults, the U.S. Department of Housing and Urban Development must make insurance payouts to the holder of the loan.
The government said Wells Fargo failed to comply with the program’s basic requirements and certified loans even though the bank knew they were not eligible for federal insurance.
Wells Fargo has previously denied the allegations and has said it believes it acted in compliance with federal rules. Wells Fargo has also argued that a landmark $25 billion mortgage settlement in 2012 involving it and other lenders addressed the civil fraud claims the government made the same year.
Wells Fargo said Wednesday the $1.2 billion accord will resolve allegations about conduct that occurred between 2001 and 2010 involving its FHA program, as well as other potential civil claims relating to the bank’s FHA lending activities for other periods.