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U.S. sues Wells Fargo over bad mortgages

NEW YORK — Federal prosecutors sued Wells Fargo on Tuesday, accusing it of lying about the quality of the mortgages it handled under a federal housing program. It was the latest in a series of lawsuits related to banks' lending practices during the housing boom.

In a lawsuit filed in U.S. District Court in Manhattan, the prosecutors accuse Wells Fargo, the largest U.S. originator of home loans, of defrauding the government for more than a decade. The bank recklessly issued mortgages and then made false certifications about their condition to the Federal Housing Authority, a government agency that insured them, the complaint said.

The loans were not eligible for the government insurance, according to the lawsuit, and when they defaulted, the FHA was obligated to cover the losses. The Justice Department is seeking hundreds of millions of dollars in damages.

"Yet another major bank has engaged in a long-standing and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," said Preet S. Bharara, the U.S. attorney in Manhattan, whose office filed the lawsuit.

Wells Fargo denied the accusations, saying that it had acted in good faith and in compliance with the FHA program.

"Wells Fargo is the leading FHA lender and has acted as a prudent and responsible lender, with FHA delinquency rates that have been as low as half the industry average," the bank said in a statement. "The bank will present facts to vigorously defend itself against this action."

The action against Wells Fargo comes after a slew of civil lawsuits filed by the government against large banks related to their lending practices. A number of the banks have settled the cases brought against them, including Deutsche Bank, which paid more than $200 million to resolve civil fraud charges; Citigroup's Citimortgage unit, which settled claims for $158 million; and Bank of America, in a settlement connected to its Countrywide Financial business, for $1 billion.

To bring these cases, the government has used an obscure law called the Financial Institutions Reform, Recover, and Enforcement Act. The law, passed after the savings-and-loans scandals in the late 1980s, gives the government broad authority to bring civil claims and seek big financial penalties against federally insured banks.

That law also has a lower standard of proof than criminal business fraud statutes.

The complaint depicts a mortgage factory inside Wells Fargo that was singularly focused on increasing the bank's loan volumes — and profits — while ignoring the quality of the loans.

"Management's actions included hiring temporary staff to churn out and approve an ever-increasing quantity of FHA loans, failing to provide its inexperienced staff with proper training, paying improper bonuses to its underwriters to incentivize them to approve as many FHA loans as possible, and applying pressure on loan officers and underwriters to originate and approve more and more FHA loans as quickly as possible," the lawsuit said.

Wells Fargo knew about the vast number of deficient loans but concealed them from the FHA, according to the government's complaint.

Foreclosure scam suit

filed by FTC in three states

Three federal courts have frozen assets of 19 companies accused of scamming vulnerable homeowners at risk of foreclosure. The Federal Trade Commission filed the requests in Florida, Ohio and California against the companies, accused of promising relief to distressed homeowners and then charging them thousands of dollars for little or no help. The courts granted the government's request for restraining orders. The FTC says the companies participated in three schemes: Prime Legal Plans-Reaching U Network, American Mortgage Consulting Group and Expense Management America.

U.S. sues Wells Fargo over bad mortgages 10/09/12 [Last modified: Tuesday, October 9, 2012 9:13pm]
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