The Department of Justice (DOJ) announced actions on Tuesday charging civil action against Wells Fargo Bank for allegedly filing fraudulent insurance claims against the Federal Housing Administration (FHA). The suit charges the company defrauded the Federal Housing Administration (FHA) by submitting improper claims for reimbursement on government insured loans. The suit, filed by Manhattan U.S. Attorney Prett Bharara, seeks damages and civil penalties, claiming that the bank has collected millions of dollars through fraudulent claims.
"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.
Wells, the largest U.S. mortgage lender and fourth largest bank by assets, denied the allegations, saying its FHA delinquency rates were lower than the industry average and that many of the complaints had been previously addressed with the Department of Housing and Urban Development (HUD). Wells said in a statement it believes it acted in good faith and in compliance with FHA and U.S. Department of Housing and Urban Development rules. The bank said its FHA delinquency rates have been as low as half the industry average.
The charges were filed under the False Claims Act, which provides penalties for fraud against the government, and under the Financial Institutions Reform, Recovery, and Enforcement Act, or FIRREA, a law that was originally passed in the wake of the savings and loan crises in the late 1980s but has been recently used in several civil suits.
According to a story filed by Reuters, DOJ claims that Wells Fargo, an FHA approved lender, certified more than 100,000 loans for FHA insurance between May 2001 and October 2005. Neither FHA nor HUD reviews a loan before approving it for FHA insurance, relying on their lenders to insure compliance with program rules. During a seven-month period in 2002, at least 42 percent of these FHA backed loans would not have qualified had the program guidelines been followed. FHA guidelines allow for a 5 percent variance.
Reuters said that Wells Fargo kept the defective loans secret from FHA even as it internally identified more than 6,000 loans as materially deficient over a nine year period. Half of these loans had defaulted within the first six months. Prior to 2005 the bank did not self-report a single bad loan and over the entire period from 2002 to 2010 it reported only 238 loans although it had separately filed suspicious activities reports with the FBI on some it suspected were fraudulent.
The complaint also charges that the bank failed to properly train its staff, used temporary workers, and improperly encouraged underwriters through bonuses to approve as many loans as possible.
The complaint seeks treble damages and penalties for hundreds of millions of dollars in insurance claims already paid to Wells Fargo, as well as penalties on claims HUD may pay in the future. The complaint also includes specific allegations that the lender failed to report another $190 million in loans it should have flagged as potentially problematic to HUD. This could increase the eventual payout from the bank.
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