Skip to main content

Wells Fargo: Department of Justice Not Playing Fair

Robert M. Siegel

Crying Foul

Wells Fargo has recently cried foul, claiming that the Department of Justice’s latest lawsuit against it in the Southern District of New York violates the terms of a settlement agreement Wells had previously reached with the federal government. And not just any settlement; Wells Fargo is referring to the infamous “Robo-signing” “deal” among the US government, state attorneys general, and several of the notable “too big to fail” big banks, including Wells Fargo.

Wells Fargo claims it had previously agreed to pay $5 billion to settle its alleged fraud and other wrongdoing in the mortgage loan markets, but in reality there is wide spread criticism to this day over what many believe to have been a sweetheart deal for the big banks. In no small part that is because the big banks are not paying out anything close to the aggregate $25 billion payout amount that has been widely reported.

In this new suit, filed October 9th, the government seeks hundreds of millions of dollars in damages for alleged mortgage fraud violations under the False Claims Act. Preet Bharara, U.S. Attorney for the Southern District of New York said that Well Fargo, “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.”

The lawsuit encapsulates more than a decade’s worth of alleged misconduct by Wells Fargo’s as a participant in the Federal Housing Administration direct loan program. The DOJ has alleged that the FHA paid hundreds of millions of dollars in insurance claims on thousands of these mortgages that ultimately defaulted.

The Complaint

As alleged in the Complaint, from May 2001 through October 2005, Wells Fargo regularly and recklessly originated and underwrote retail FHA loans under the FHA’s Direct Endorsement Program, thinking it would not be responsible when the loans went into default, because under this program HUD insured the loans that Wells Fargo was originating.

During this period, Wells Fargo certified to HUD that over 100,000 retail FHA loans met HUD’s requirements for proper originating and underwriting, when in fact the complaint alleges that Wells Fargo knew that a very substantial percentage of these loans (as many as nearly half the loans in certain months) had not been properly underwritten, contained unacceptable risk, and were ineligible for FHA insurance.

The Complaint further alleges that the poor quality of these loans was a function of Wells Fargo’s managements’ nearly singular focus on increasing the volume of FHA originations as the expense of underwriting quality, and thereby increasing the bank’s profits. Further, the Complaint alleges that from January 2002 through December 2010, Wells Fargo purposefully violated HUD reporting requirements to avoid disclosing the materially deficient loans it had underwritten.

On November 1st, Wells Fargo denied liability and said it should not have to answer the Complaint because it had previously resolved all such claims with the government. Obviously, by commencing this new action against Wells Fargo, the government disagrees.

We are rooting for the government here, simply because we would like to see Wells Fargo defend itself in this case. We also think that Mortgage loan originators all over the country would be happy to offer suggestions to Wells Fargo as to available defenses.


Financial Services Watch Blog February 04, 2015
2015 is leaving Standard and Poor’s (S&P) quite a bit poorer. Yesterday, the major credit rating agency agreed to pay $1.375 billion to resolve lawsuits brought against it by the U.S. Department of Justice and attorney generals from 19 states and the District of Columbia regarding S&P’...
Financial Services Watch Blog February 21, 2012
Citimortgage Admits Liability On February 15th, 2012, in a clearly pre-negotiated deal between the US Attorney’s Office, on behalf of the Department of Housing and Urban Development and CITIMORTGAGE, INC. (a subsidiary of CITIBANK, N.A., and “CMI”), a complaint was filed against CMI in the US Distri...
New Miami Blog July 25, 2014
TREPP Analytics recently provided the U.S. commercial real estate industry some positive news – both the CMBS delinquency rate and seriously delinquent loans are down. The delinquency rate as of June 2014 is 6.05% (compared to 8.65% a year ago), with seriously delinquent down to 5.92% from 8.3...