I mentioned in passing yesterday this federal civil lawsuit against Wells Fargo for its conduct on some FHA loans. “Mentioned in passing” is all that the suit deserved, but I see that the PR shop at DoJ tried to turn this into a big deal, with the media playing along. So maybe I should put together a short and sweet FAQ on this lawsuit, to place it in the proper context.
Is this another suit from the financial fraud task force? Yes and no. It does spring from the task force, but not the one consecrated in January by President Obama, with New York Attorney General Eric Schneiderman as its co-chair. This comes from the INITIAL financial fraud enforcement task force, which has been around for three years. Prett Bharara, the US Attorney for the Southern District of New York (SDNY), brought the lawsuit.
What does it allege? The same thing that it has alleged against five other lenders: violations of the False Claims Act over Wells Fargo’s participation in a particular Federal Housing Administration enterprise known as the Direct Endorsement Lender Program. It states that Wells Fargo made false certifications in the mortgage origination and underwriting process, which led the FHA to falsely pay out insurance claims when the mortgages defaulted. The DEL is a self-reporting process, where FHA grants the insurance on the loan based on the lender making certifications as to its quality. Wells lied about the quality, so the insurance should never have been granted, the government alleges.
Anything new in the suit to differentiate from the others you mentioned? The government has also brought the case under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), I assume because the statute of limitations would have otherwise run out. FIRREA allows a 10-year statute of limitations for most of its violations. But that’s basically it.
How many mortgages are we talking about? The government says that they falsely paid “hundreds of millions of dollars in insurance claims on thousands of mortgages.” The full number is 6,320 loans, and $190 million in payouts.
Is that millions with an “M”? Yes.
Is this a joke? No. The government does make some incendiary allegations: that Wells Fargo made deficient loans that benefited from a government backstop, and that Wells gave bonuses to employees based on the number of loans sold, which ramped up the lending machine and downplayed the rules of quality underwriting. It even says that Wells hid the poor quality of the loans for years until the SDNY office stepped in and issued a subpoena. But it only does this in the context of a very small government program, with hundreds of millions of dollars in business in a market worth several trillions. There’s no question that Wells and all the other major lenders cut corners on practically every loan they originated. But this lawsuit only deals with the one FHA program, making it insignificant.
What happened to those other suits you mentioned? The Civil Frauds Unit inside the SDNY office has filed five cases, and three of them settled out of court. CitiMortgage settled for $158.3 million, Flagstar Bank settled for $132.8 million and Deutsche Bank/Mortgage IT settled for $202.3 million. In a rare move, those banks actually accepted responsibility for their conduct, but these are not numbers that will, pardon the pun, break the bank.
All those suits were filed under the False Claims Act only. This suit against Wells adds FIRREA, and SDNY does seek treble damages under the False Claims Act. But the settlements should offer a decent guide as to where this is going.
So why is this being treated like a major lawsuit? Very good PR specialists at SDNY? It’s also election season, and the proximity of this suit to the lawsuit against JPMorgan Chase filed by that OTHER task force over securities fraud probably played a role as well.
But there’s nothing to see here? Sounds about right. It’ll be settled for what amounts to pocket change for Wells Fargo.