Wells Fargo has agreed to pay $1.2 billion to settle civil mortgage fraud claims against the bank and Wells Fargo executive Kurt Lofrano, according to an announcement from the Department of Justice on Friday.
According to the announcement, Wells Fargo agreed to pay $1.2 billion and admitted, acknowledged, and accepted responsibility for certifying that certain residential home mortgage loans were eligible for FHA insurance when they were not. As a result, according to the announcement, when some of those loans defaulted, the government had to pay the FHA insurance claims.
“This Administration remains committed to holding lenders accountable for their lending practices,” HUD Secretary Julián Castro said. “The $1.2 billion settlement with Wells Fargo is the largest recovery for loan origination violations in FHA’s history. Yet, this monetary figure can never truly make up for the countless families that lost homes as a result of poor lending practices.”
The settlement stems from Wells Fargo’s participation in the Direct Endorsement Lender program, a federal program administered by the Federal Housing Administration. Wells Fargo has the authority to originate, underwrite, and certify mortgages for FHA insurance based on the bank’s status as a Direct Endorsement Lender. If a loan that has been approved for FHA insurance later defaults, the mortgagee may submit an insurance claim to HUD for the balance of the loan, which HUD must pay.
The DOJ said that between May 2001 and October 2005, Wells Fargo—the largest HUD-approved residential mortgage lender— engaged in a “regular practice of reckless origination and underwriting of its FHA retail loans, all the while knowing that it would not be responsible when the defective loans went into default.” The DOJ said that the bank hired temporary staff that was not properly trained in order to increase the volume of these loans and also applied pressure on its underwriters to approve more FHA loans.
“Predictably, as a result, Wells Fargo’s loan volume and profits soared, but the quality of its loans declined significantly,” the DOJ said.
“Wells Fargo has helped millions of people buy homes and we will continue to meet the financing needs of the customers and communities the FHA program is intended to serve.”
Franklin Codel, Wells Fargo
According to the DOJ, Wells Fargo then failed to self-report to HUD the bad loans that it was originating. The DOJ said that Lofrano, in his capacity as VP of Credit Risk-Quality Assurance, executed annual certifications required by HUD for the bank’s participation in the Direct Endorsement Lender program on Wells Fargo’s behalf for the years in question.
“Today, Wells Fargo, one of the biggest mortgage lenders in the world, has been held responsible for years of reckless underwriting, while relying on government insurance to deal with the damage,” said U.S. Attorney Preet Bharara for the Southern District of New York. “Wells Fargo has long taken advantage of the FHA mortgage insurance program, designed to help millions of Americans realize the dream of home ownership, to write thousands and thousands of faulty loans. Driven to maximize profits, Wells Fargo employed shoddy underwriting practices to drive up loan volume, at the expense of loan quality. Even though Wells Fargo identified through internal quality assurance reviews thousands of problematic loans, the bank decided not to report them to HUD. As a result, while Wells Fargo enjoyed huge profits from its FHA loan business, the government was left holding the bag when the bad loans went bust. With today’s settlement, Wells Fargo has finally resolved the years-long litigation, adding to the list of large financial institutions against which this office has successfully pursued civil fraud prosecutions.”
In a press release, President of Wells Fargo Home Lending Franklin Codel said, “Today’s court filing details a previously announced agreement in principle that resolves not only the pending lawsuit filed by the U.S. Attorney for the Southern District of New York, but also a number of other potential claims going back as far as 15 years in some cases. It allows us to put the legal process behind us, and to focus our resources and energy on what we do best—serving the needs of the nation’s homeowners.”
Codel continued, “We are dedicated to providing access to credit to a broad range of customers through offerings that exist today as well as new products and programs on the horizon. Wells Fargo has helped millions of people buy homes and we will continue to meet the financing needs of the customers and communities the FHA program is intended to serve.”