NEW YORK (Legal Newsline) - The U.S. Attorney for the Southern District of New York on Tuesday filed a lawsuit against Wells Fargo Bank.
The lawsuit, announced by U.S. Attorney Preet Bharara, alleges more that a decade of misconduct by the bank as part of its participation in the Federal Housing Administration's Direct Endorsement Lender Program.
It also alleges that false certifications by Wells Faro led to FHA paying hundreds of millions of dollars in insurance claims on thousands of mortgages that defaulted.
"As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," Bharara said.
"As also alleged, Wells Fargo's bonus incentive plan - rewarding employees based on the sheer number of loans approved - was an accelerant to a fire already burning, as quality repeatedly took a back seat to quantity. What's more, even after concerns were raised internally at the bank, Wells Fargo began self-reporting bad loans in a significant way, as required, only after this Office issued a subpoena last year. Now a jury will have to weigh the facts to determine the bank's liability and the scope of the damages it must pay."
As a direct endorsement lender, Wells Fargo holds the authority to originate, underwrite and certify mortgages for FHA insurance. If such a loan defaults, the loan's holder can then submit an insurance claim to HUD for costs associated with the defaulted loan that HUD must then pay, Bhahara said.
Loans endorsed for FHA insurance are not reviewed by FHA or the Department of Housing and Urban Development. Direct endorsement lenders, therefore, must follow program rules to ensure proper underwriting and certification, Bharara said.
The lawsuit alleges that Wells Fargo, from May 2001 through October 2005, engaged in the regular practice of reckless origination and underwriting of its retail FHA loans, certifying more than 100,000 retail FHA loans. Wells Fargo allegedly knew that as many as half of the loans per month were not properly underwritten, contained unacceptable risks or did not meet HUD's requirement.
The company's underwriters allegedly routinely failed to perform basic due diligence, failed to verify loan file information about ability to make payments by the borrower and certified loans that contained serious defects and departures from HUD's underwriting standards.
Wells Faro aggravated its violations by hiring temporary staff to approve more FHA loans without providing proper training, paying improper bonuses to approve as many loans as possible and applying pressure to originate more loans, Bharara claims.
Wells Fargo failed to report even one loan with material underwriting violations or fraud until after a 2005 HUD lender revie, but internal reviews, however, showed that the company identified 6,558 seriously deficient loans from Jan. 1, 2002, through Dec. 31, 2010, Bharara claims.
As a result of Wells Fargo's actions, HUD paid $190 million in FHA benefits for claims on defaulted loans that should never have been certified for FHA insurance, Bharara claims.
The lawsuit seeks treble damages and penalties, as well as FIRREA penalties and compensatory damages for the hundreds of millions of dollars n insurance claims.