The United States government filed a lawsuit against Wells Fargo, claiming the bank “used reckless underwriting” tactics and fraudulently approved thousands of bogus home loans for almost a decade. Due to their careless lending, Wells Fargo ended up costing the Federal Housing Administration (FHA) millions in insurance claims for defaulted loans.
Details of the Mortgage Fraud
According to the government’s allegations, from January 2, 2002 through December 31, 2010, Wells Fargo knowingly and intentionally committed mortgage fraud. The bank concealed major problems with at least 6,320 home loans from the Federal Housing Administration. Wells Fargo knew each of the loans were “seriously deficient,” but allowed the FHA to insure them anyway.
According to official documents, the government contended that the “extremely poor quality of Wells Fargo’s loans was a function of management’s nearly singular focus on increasing the volume of FHA originations — and the bank’s profits — rather than on the quality of the loans.”
By approving thousands of bad mortgage loans, Wells Fargo essentially flooded the market with home loans that were destined to default. The company allegedly claimed over 100,000 FHA loans met federal guidelines when, in reality, more than half of them did not.
Instead of using professional underwriters to review mortgage applications, Wells Fargo hired “temporary staff” to “churn out” more and more loans. Making matters even worse, the bank allegedly rewarded staff members who approved large numbers of loans. This kind of mortgage fraud reward system naturally encouraged fraudulent activity among employees. Wells Fargo still neglected to report problems with the loans, even after their own risk department uncovered “a dirty underbelly of bad loan officers.”
U.S. Attorney Preet Bharara said that Wells Fargo’s “intentional concealment” of bad loan practices ended up costing the federal government $190 million in claims on defaulted home mortgages. This is due to the fact that the FHA insured the mortgage loans originated by Wells Fargo. Once the loans defaulted, the FHA, a division of the United States Department of Housing and Urban Development, was forced to reimburse the loan holder for the charges that were incurred.
Due to this buy-back guarantee, Wells Fargo approved mortgage loans for middle to low-income applicants who would have otherwise never qualified for a home loan. Essentially, Wells Fargo had nothing to lose since the government would be forced to pick up the tab on each defaulted loan insured by the FHA.
“As the complaint alleges, 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 Bharara in a statement. “Quality repeatedly took a back seat to quantity.”
Use of the False Claims Act
This lawsuit, filed in the federal court of Manhattan, is just the latest use of the Federal False Claims Act against a lender. During the latter part of 2009, the FHA recognized an enormous increase in the number of defaulting home loans and monetary losses within the agency. Suspecting mortgage fraud, this led the FHA to begin a massive crack down on lenders and an increase in government oversight.
In the past, the government has used the False Claims Act to go after multiple banks accused of committing fraud against the FHA, who has a long history of insuring loans for both low-income families and first-time home buyers. If their case is proven under the False Claims Act, the government can ask for treble damages.