Mortgage fraud by banks

At the beginning of this month, the U.S. government, through the U.S. attorney in Manhattan, filed a civil mortgage fraud lawsuit against Wells Fargo. The suit is seeking restitution and civil penalties from the bank for more than a decade of alleged misconduct related to government-insured Federal Housing Administration (FHA) loans.

This case is being brought under the False Claims Act, which provides penalties for fraud against the government and it is also being brought under the Financial Institutions Reform, Recovery and Enforcement Act. The law requires a lower burden of proof than criminal charges, has a longer statute of limitations than other financial laws and can result in very costly fines.

In the lawsuit, the United States alleges the FHA paid hundreds of millions of dollars on insurance claims on thousands of defaulted mortgages as a result of false certifications by Wells Fargo. It also claims the bank provided inadequate training to its employees and was deficient in its underwriting and disclosure of problem loans while having the backing of government insurance.

The bank is also accused of failing to train its employees and temporary help and paying bonuses to underwriters based on the volume of loans approved. Wells Fargo between May 2001 and October 2005 allegedly certified more than 100,000 loans for FHA insurance despite knowing its underwriters failed to verify information directly related to the borrower’s ability to make mortgage payments. Wells Fargo between January 2002 and December 2010 internally identified in excess of 6,000 “materially deficient” loans of which 50% had defaulted in the first six months, but failed to disclose these defective loans to HUD.

It’s important to remember that charges do not constitute guilt and that Wells Fargo countered these allegations by stating it acted in good faith and was in compliance with FHA and U.S. Department of Housing and Urban Development rules. Further, the bank contends that it has previously addressed these allegations with HUD and that its FHA delinquency rates are half the industry average.

The Wells Fargo complaint also includes allegations that it failed to report another $190 million in loans it should have identified as potentially problematic to HUD, which could add to any eventual payout from the bank as restitution.

The bank submitted a regulatory filing in August that stated it was being investigated for possible violations of laws and regulations relating to mortgage origination practices, including FHA loans. Wells Fargo has said it plans on aggressively fighting this suit.

The U.S. attorney’s office in Manhattan has handled similar cases against banks in the past few years. Citigroup Inc.’s unit CitiMortgage Inc. settled its case for $158.3 million in February, and Deutsche Bank paid $202.3 million in May to resolve its case. The largest case involving Bank of America Corp.’s Countrywide unit resulted in the bank paying $1 billion in February to resolve the allegations. Most would agree that Wells Fargo should weigh these developments and their legal costs in fighting the lawsuit and consider whether resources would better be applied to putting in place a better process for making loans.


Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Ave. in Greenwich. Questions or comments may be emailed to [email protected] or she may be reached directly at 203-249-2244.

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