Latest Wells Fargo suit fodder for consumer distrust, disdain for mortgage lenders

by Broderick Perkins

(10/17/2012) Wells Fargo is under the gun again, this time for 10 years of alleged "reckless underwriting and fraudulent loan certification," practices that cost the Federal Housing Administration (FHA) "hundreds of millions of dollars" on mortgage default claims.

Preet Bharara, the U.S. Attorney for the Southern District of New York, recently filed the civil mortgage fraud lawsuit against Wells Fargo in the Manhattan U.S. District Court, seeking damages and civilpenalties under the False Claims Act and the Financial Institutions Reform,Recovery, and Enforcement Act of 1989 (FIRREA).

The latest in a series of lawsuits designed to punish banks for lending practices during the housing boom, the suit alleges from 2001 to 2005, Wells certified more than 100,000 mortgages as meeting U.S. Department of Housing and Urban Development underwriting requirements for FHA loans, loans when many of the loans not only failed to meet those requirements, but contained "unacceptable risk."

The ruse cost FHA nearly $200 million in insurance claims when thousands of consumers defaulted on the poorly underwritten mortgages.

But that's not all.

"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," said Bharara.

Wells Fargo denied the charges in prepared statement.

"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 will present facts to vigorously defend itself against this action," according to the statement.

Lies, cover up, denial

The suit alleges Wells' actions were solely bottom line driven - inexperienced, temporary workers and bonus-driven underwriters were put to task to crank out FHA loans as quickly as possible - without regard to HUD guidelines for the loans.

"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," Bharara added.

The suit also charges:

• Ignoring it's own quality control department's efforts to persuade management to correct HUD underwriting violations.

• Failing to report to HUD loans that were laden with serious violations or fraud.

• Falsely certifying compliance with HUD rules, putting billions of FHA dollars at risk.

• A cover up. Wells falsely suggested to HUD it had been reporting bad loans and continued to mislead after a HUD inquiry. From January 1, 2002 through December 31, 2010, the bank's internal operations identified 6,558 seriously deficient loans, but concealed from HUD 6,320 of the loans.

• Wells also failed to conduct reviews of all early payment defaults, as required, and failed to report loans that had been referred to its fraud risk management department. The allegedly hiddenloans, according to a former Wells manager, exposed a "dirty underbelly of bad loan officers."

History of complaints

Wells is innocent until proven guilty, but the suit further raises the ire of mortgage consumers who've been victimized by mortgage lenders' major role in the housing crash.

Wells' denial this time is eerily similar to another denial of wrongdoing offered in a recent settlement.

Earlier this year, Wells Fargo agreed to $175 million in restitutions for ethnic minority borrowers, as well as ethnic minority wholesale and retail lenders.

The U.S. Department of Justice (DOJ) filed the settlement to resolve allegations that Wells Fargo, from 2004 through 2009, engaged in an abusive pattern of improperly steering minority wholesale borrowers into subprime mortgages orforcing them to pay higher fees, compared to white wholesale operations.

Similar to the denial in the most recently filed case, Wells Fargo "denies the claims...and is settling this matter solely for the purpose of avoiding contested litigation with the DOJ, and to instead devote its resources to continuing to provide fair credit services and choices to eligible consumers..." the bank announced in yet another prepared statement.

Wells, along with other lenders, is also the target of a discrimination complaint filed with HUD by the National Fair Housing Alliance (NFHA).

It charges the bank takes great care of foreclosure properties in white neighborhoods while leaving foreclosed properties in minority neighborhoods unkempt and poorly marketed.