The civil mortgage fraud lawsuit, filed in a Manhattan federal court Tuesday, alleges Wells Fargo falsely certified the credit and underwriting quality of FHA loans it originated. According to the complaint, thousands of Wells Fargo’s FHA-insured mortgages defaulted as a result of deficient underwriting, causing the government agency to lose hundreds of millions of dollars.
Preet Bharara, U.S. attorney for the Southern District of New York and lead prosecutor in the case, says Wells Fargo failed to comply with the three basic quality control requirements mandated by FHA’s direct endorsement lender program, which gives approved lenders the authority to originate, underwrite, and certify mortgages for government-backed insurance without having to obtain prior approval from FHA or HUD.
Bharara also alleges that Wells Fargo did not sufficiently train staff on the proper procedures for originating and endorsing FHA loans and instituted a bonus incentive plan that rewarded employees based purely on the number of loans approved regardless of quality, which he contends propagated the practice of reckless underwriting.
Bharara claims that concerns about the quality of FHAloans were raised internally at the bank, but Wells Fargo did not report these concerns or alert authorities about the bad loans until after his office issued a subpoena last year.
According to court documents, between May 2001 and October 2005, Wells Fargo certified that over 100,000FHA loans met HUD’s requirements and were eligible for government insurance. The complaint alleges the bank knew “a very substantial percentage” of these loans–-nearly half in certain months-–had not been properly underwritten, contained unacceptable risk, and were ineligible for FHA insurance.
“Now a jury will have to weigh the facts to determine the bank’s liability and the scope of the damages it must pay,” Bharara said.
According to the lawsuit, Wells Fargo internally identified 6,558 seriously deficient loans that it was required to self-report under the FHA program. Authorities say Wells Fargo concealed 6,320 of these improperly certified loans. Bharara maintains the bank avoided indemnification toHUD on approximately $190 million in FHA-paid claims for defaults on the 6,320 concealed loans.
U.S. prosecutors are seeking damages and penalties for hundreds of millions of dollars in insurance claims thatHUD has paid, and expects to pay in the future, for mortgages that were allegedly wrongfully certified.
Helen Kanovsky, general counsel for HUD, said in a statement that “Wells Fargo has been a valued participant in the FHA-mortgage lending program.”
Kanovsky went on to say, “Unfortunately, as alleged in the government’s 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. Today’s complaint and others like it are necessary, not only to deter future improper acts, but to recover damages on behalf of the FHA mortgage fund and the American taxpayer.”