Wells Fargo to Pay $1.2 Billion to Settle Claims It Made Reckless FHA Loans and Concealed Them

The nation’s largest mortgage lender has agreed in principle to settle a longstanding lawsuit with the United States Department of Justice and the Department of Housing and Urban Development (HUD) over faulty FHA loans the company originated from 2001 until 2010.

In an SEC filing released this week, Wells Fargo said it would pay $1.2 billion to resolve certain civil claims that the Federal Government had lodged against it for making FHA loans that quickly soured.

It also covers “potential civil claims relating to the Company’s FHA lending activities for other periods.”

The bulk of the suit relates to a claim made in late 2012 that Wells took part in a the “reckless trifecta” of deficient training, underwriting, and disclosure, all while exploiting the backstop of government insurance.

Manhattan U.S. Attorney Preet Bharara claimed the bank aimed for quantity over quality, incentivizing volume with bonuses instead of making sure good loans were being originated.

This involved giving “improper bonuses” to underwriters to ensure they approved as many loans as possible, while also hiring temporary staff and failing to properly train them.

And even if the loans turned out to be bad news, Wells Fargo apparently hid that fact to avoid any scrutiny or indemnification.

Wells allegedly certified that some 100,000 FHA loans between May 2001 and October 2005 met HUD’s requirements and were eligible for FHA insurance despite knowing a substantial portion were unacceptably risky.

In fact, during some months nearly half of the FHA loans originated didn’t meet HUD’s requirements because the bank failed to determine if borrower’s could actually pay back the loans.

The suit also alleged that between October 2005 and June 2011, Wells Fargo only reported about 300 loans to HUD as “seriously deficient” despite thousands carrying that distinction.

And before that didn’t report a single loan as having material underwriting violations or fraud until after a HUD-conducted lender review took place in 2005.

Before that the company was self-reporting its FHA loan quality. By their own account, Wells internally identified 6,558 seriously deficient loans, but supposedly hid 6,320 of them from HUD.

That total included a whopping 3,142 loans that contained early payment defaults, or loans that were 60 days late within just six months. In other words, really bad loans that didn’t have a shot and probably shouldn’t have been approved.

"Although the Company and the Federal Government have reached an agreement in principle to resolve these matters, there can be no assurance that the Company and the Federal Government will agree on the final documentation of the settlement," the bank said in the SEC filing.

Catherine B. Pulley, SVP, Consumer Lending Communication at Wells Fargo, told DS News, "Wells Fargo and the United States government have reached an agreement in principle to resolve claims regarding our FHA lending activities, and the company has made an addition to its previously announced reserves to reflect this development. However, we can’t provide any additional details at this time.”

The 8-K filing showed that the settlement will knock $134 million, or $0.03 per share, off the company's 2015 profits, dropping earnings down to $22.9 billion, or $4.12 a share.

The net income numbers for Wells Fargo in Q4 and for the full year of 2015 were little changed year-over-year, according to Wells Fargo’s Q4 2015 earnings statement. Wells Fargo’s Q4 2015 net income of $5.7 billion, price of $1.03 per share, and full year net income of $23 billion were all virtually the same as the year before (the full year net income did slightly decline, from $23.1 billion in 2014 down to $23.0 billion in 2015).