Brian J. Stretch, the United States Attorney for the Northern District of California, Preet Bharara, United States Attorney for the Southern District of New York, Benjamin C. Mizer, Principal Deputy Assistant Attorney General for the Justice Department’s Civil Division, Julián Castro, Secretary of the U.S. Department of Housing and Urban Development (HUD), and David A. Montoya, Inspector General of HUD (HUD-OIG), announced today that the United States has settled civil mortgage fraud claims against Wells Fargo Bank, N.A. (“Wells Fargo” or the “Bank”), and Wells Fargo executive Kurt Lofrano (Lofrano), stemming from Wells Fargo’s participation in the Federal Housing Administration (FHA) Direct Endorsement Lender Program. In the settlement, Wells Fargo agreed to pay $1.2 billion and admitted, acknowledged, and accepted responsibility for, among other things, certifying to HUD, during the period from May 2001 through December 2008, that certain residential home mortgage loans were eligible for FHA insurance when in fact they were not, resulting in the Government having to pay FHA insurance claims when certain of those loans defaulted. The agreement resolves an investigation conducted by the U.S. Attorney’s Office for the Northern District of California into whether American Mortgage Network, LLC (AMNET), a mortgage lender acquired by Wells Fargo in 2009, falsely certified and submitted ineligible residential mortgage loans for FHA insurance. The agreement also resolves the United States’ civil claims in its lawsuit in the Southern District of New York as well as an investigation conducted by the U.S. Attorney’s Office for the Southern District of New York regarding Wells Fargo’s FHA origination and underwriting practices subsequent to the claims in its lawsuit.
Northern District of California U.S. Attorney Brian Stretch said: “Misconduct in the mortgage industry helped lead to a destructive financial crisis that spanned the globe. American Mortgage Network’s origination of FHA-insured loans that did not comply with Government requirements also caused major losses to the public fisc. Today’s settlement demonstrates the Department of Justice’s resolve to pursue remedies against those who engaged in this type of misconduct.”
Manhattan U.S. Attorney Preet Bharara said: “Today, Wells Fargo, one of the biggest mortgage lenders in the world, has been held responsible for years of reckless underwriting, while relying on government insurance to deal with the damage. Wells Fargo has long taken advantage of the FHA mortgage insurance program, designed to help millions of Americans realize the dream of home ownership, to write thousands and thousands of faulty loans. Driven to maximize profits, Wells Fargo employed shoddy underwriting practices to drive up loan volume, at the expense of loan quality. Even though Wells Fargo identified through internal quality assurance reviews thousands of problematic loans, the Bank decided not to report them to HUD. As a result, while Wells Fargo enjoyed huge profits from its FHA loan business, the government was left holding the bag when the bad loans went bust. With today’s settlement, Wells Fargo has finally resolved the years-long litigation, adding to the list of large financial institutions against which this Office has successfully pursued civil fraud prosecutions.”
HUD Secretary Julián Castro said: “This Administration remains committed to holding lenders accountable for their lending practices. The $1.2 billion settlement with Wells Fargo is the largest recovery for loan origination violations in FHA’s history. Yet, this monetary figure can never truly make up for the countless families that lost homes as a result of poor lending practices.”
Principal Deputy Assistant Attorney General Benjamin C. Mizer said: “This settlement is another step in the Department of Justice’s continuing efforts to hold accountable FHA approved lenders that knowingly submit false claims at the expense of American homeowners and taxpayers. In addition to today's resolution with Wells Fargo, the Department has pursued similar misconduct by many other lenders, returning more than $4 billion to the FHA fund and the U.S. Treasury, and filing suit where appropriate. We remain committed to protecting the public fisc from all who seek to abuse it, whether they do business on Wall Street or Main Street.”
HUD Inspector General David A. Montoya said: “This matter is not just a failure by Wells Fargo to comply with federal requirements in FHA’s Direct Endorsement Lender program – it’s a failure by one of our trusted participants in the FHA program to demonstrate a commitment to integrity and to ordinary Americans who are trying to fulfill their dreams of homeownership.”
According to the Second Amended Complaint filed in Manhattan federal court:
WELLS FARGO has been a participant in the Direct Endorsement Lender program, a federal program administered by FHA. As a Direct Endorsement Lender, WELLS FARGO has the authority to originate, underwrite, and certify mortgages for FHA insurance. If a Direct Endorsement Lender approves a mortgage loan for FHA insurance and the loan later defaults, the holder or servicer of the loan may submit an insurance claim to HUD for the outstanding balance of the defaulted loan, along with any associated costs, which HUD must then pay. Under the Direct Endorsement Lender program, neither FHA nor HUD reviews a loan for compliance with FHA requirements before it is endorsed for FHA insurance. Direct Endorsement Lenders are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance and maintaining a quality control program that can prevent and correct any deficiencies in their underwriting. The quality control program requirements include conducting a full review of all loans that go 60 days into default within the first six payments, known as “early payment defaults”; taking prompt and adequate corrective action upon discovery of fraud or serious underwriting problems; and disclosing to HUD in writing all loans containing evidence of fraud or other serious underwriting deficiencies. WELLS FARGO failed to comply with these basic requirements.
First, between at least May 2001 and October 2005, WELLS FARGO, the largest HUD-approved residential mortgage lender, engaged in a regular practice of reckless origination and underwriting of its FHA retail loans, all the while knowing that it would not be responsible when the defective loans went into default. To maximize its loan volume (and profits), WELLS FARGO elected to hire temporary staff to churn out and approve an ever increasing quantity of FHA loans, but neglected to provide this inexperienced staff with proper training. At the same time, WELLS FARGO’s management applied pressure on its underwriters to approve more and more FHA loans. The Bank also imposed short turnaround times for deciding whether to approve the loans, employed lax underwriting standards and controls, and paid bonuses to underwriters and other staff based on the number of loans approved. Predictably, as a result, WELLS FARGO’s loan volume and profits soared, but the quality of its loans declined significantly. Yet, when WELLS FARGO’s senior management was repeatedly advised by its own quality assurance reviews of serious problems with the quality of the retail FHA loans that the Bank was originating, management disregarded the findings and failed to implement proper and effective corrective measures, leaving HUD to pay hundreds of millions of dollars in claims for defaulted loans.
Second, WELLS FARGO failed to self-report to HUD the bad loans that it was originating, in violation of FHA program reporting requirements. During the period 2002 through 2010, HUD required Direct Endorsement Lenders to perform post-closing reviews of the loans that they originated and to report to HUD in writing loans that contained fraud or other serious deficiencies. This requirement provided HUD with an opportunity to investigate the defective loans and request reimbursement for any claim that HUD had paid or request indemnification for any future claim, as appropriate. During this nine-year period, WELLS FARGO, through its post-closing reviews, internally identified thousands of defective FHA loans that it was required to self-report to HUD, including a substantial number of loans that had gone into “early payment default.” However, instead of reporting these loans to HUD as required, WELLS FARGO engaged in virtually no self-reporting during the four-year period from 2002 through 2005, and only minimal self-reporting after 2005.
In his capacity as Vice President of Credit-Risk – Quality Assurance at WELLS FARGO, LOFRANO executed on WELLS FARGO’s behalf the annual certifications required by HUD for the Bank’s participation in the Direct Endorsement Lender program for certain years. LOFRANO also organized and participated in the working group responsible for creating and implementing WELLS FARGO’s self-reporting policies and procedures. In contravention of HUD’s requirements, that group failed to report to HUD loans that WELLS FARGO had internally identified as containing material underwriting findings. Moreover, LOFRANO received WELLS FARGO quality assurance reports identifying thousands of FHA loans with material findings – very few of which WELLS FARGO reported to HUD.
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As part of the settlement, Wells Fargo has admitted, acknowledged, and accepted responsibility for, among other things, the following conduct: During the period from May 2001 through on or about December 31, 2008, Wells Fargo submitted to HUD certifications stating that certain residential home mortgage loans were eligible for FHA insurance when in fact they were not, resulting in the Government having to pay FHA insurance claims when certain of those loans defaulted. From May 2001 through January 2003, Wells Fargo’s quality assurance group conducted monthly internal reviews of random samples of the retail FHA mortgage loans that the Bank had already originated, underwritten, and closed which identified for most of the months that in excess of 25 percent of the loans, and in several consecutive months, more than 40 percent of the loans, had a material finding. For a number of the months during the period from February 2003 through September 2004, the material finding rate was in excess of 20%. A “material” finding was defined by Wells Fargo generally as a loan file that did not conform to internal parameters and/or specific FHA parameters, contained significant risk factors affecting the underwriting decision, and/or evidenced misrepresentation.
Wells Fargo also admitted, acknowledged, and accepted responsibility for the following additional conduct: Between 2002 and October 2005, Wells Fargo made only one self-report to HUD, involving multiple loans. During that same period, the Bank identified through its internal quality assurance reviews approximately 3,000 FHA loans with material findings. Further, during the period between October 2005 and December 2010, Wells Fargo only self-reported approximately 300 loans to HUD. During that same period, Wells Fargo’s internal quality assurance reviews identified more than 2,900 additional FHA loans containing material findings that the Bank did not self-report to HUD. The Government was required to pay FHA insurance claims when certain of these loans that Wells Fargo identified with material findings defaulted.
Lofrano admitted, acknowledged, accepted responsibility for, among other things, the following matters in which he participated: From January 1, 2002, until December 31, 2010, he held the position of Vice President of Credit Risk – Quality Assurance at Wells Fargo; in that capacity, he supervised the Decision Quality Management group; in 2004, he was asked to organize a working sub-group to address reporting to HUD; in or about October 2005, he organized a working group that drafted Wells Fargo’s new self-reporting policy and procedures; and during the period October 2005 through December 31, 2010, based on application of the Bank’s new self-reporting policy and by committee decision, Wells Fargo did not report to HUD the majority of the FHA loans that the Bank’s internal quality assurance reviews had identified as having material findings.
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Mr. Stretch and Mr. Bharara thanked HUD’s Office of General Counsel, HUD-OIG, and the Commercial Litigation Branch of the U.S. Department of Justice’s Civil Division for their extraordinary assistance with the prosecution and settlement of this case.
This resolution with Wells Fargo is the latest in a string of civil fraud cases pursued by the United States in recent years alleging fraudulent lending practices by residential mortgage lenders.
The American Mortgage Network investigation was handled by Assistant U.S. Attorney Sara Winslow with assistance from Jacqueline Hollar.