Put this one in the “what you reap is what you sow” file. A few weeks ago, the US Attorney for the Southern District of New York sued Wells Fargo for collecting insurance on FHA loans that were improperly underwritten. This mirrored several other cases out of SDNY, and charged that Wells Fargo gained the relatively paltry sum of $190 million illegally on thousands of loans that should not have been passed to FHA (not that FHA did anything to deter the bad underwriting on its own).
Wells is now contesting the lawsuit on the grounds that the particulars were already covered by the 49-state foreclosure fraud settlement:
Wells settled allegations of mortgage-related abuses in a $5 billion accord with 49-state attorneys general and a host of federal agencies in a settlement approved in April by a federal judge in Washington, D.C. As a result, Wells said the claims alleged in last month’s lawsuit, filed by the U.S. attorney’s office in Manhattan, should be barred and that the U.S. had violated the terms of the April settlement.
“Wells Fargo committed billions to the United States in settlement of the D.C. action and should be able to rely on the United States to observe and abide by its commitments and representations,” the bank said in its filing on Thursday.
Wells claims that the settlement gave them a liability release on FHA claims. Are they right? Well, there’s ample reason to believe that the release in the settlement was botched. However, in this sample agreement (It’s Bank of America, but the language on the Wells settlement is identical), the government identifies some of its origination claims that are generally identical to what SDNY sued over in the Wells case:
(1) Submitting loans for insurance endorsement and claims for insurance
benefits for FHA loans that the COMPANY or any affiliated entity during or prior to such time as it was an affiliated entity endorsed or underwrote as a participant in the FHA’s Direct Endorsement Program that failed to meet any applicable underwriting requirements, including those set forth in the applicable version of the HUD Handbook 4155.1, as supplemented by relevant mortgagee letters, all as of the time of origination.
That paragraph is under “Covered Origination Conduct.” FHA is mentioned a lot in the settlement, and a fair bit of the banks’ conduct relative to FHA is released, at least from this non-lawyer’s eye. I may be confusing the contract’s heavily lawyered language, but it seems to me Wells has a case here. They certainly think so. They said that, if the court strikes down their motion to dismiss based on the ambiguities of the liability release, they would “depose senior Obama administration officials who negotiated that deal in order to define the meaning of settlement’s language.” So they obviously believe they will win this case if they’re willing to haul in the negotiators.
Even if Wells is off base and they are on the hook for FHA violations apart from the settlement, this reflects a consistent trend by the five major banks involved for trying to grow the covered conduct in the releases after the fact. The vagueness of the language contributes to that. And since the same companies in the settlement are the ones ruling the mortgage industry these days, in particular Wells Fargo, the idea that they can be held accountable for their past sins grows even more remote. Sooner or later, they’re going to complain that the consistent legal battles threaten their ability to lend, and by proxy the ability to lend for the entire financial system.
In other words, when the government failed to rein in the financial sector after the crisis, they created these problems for themselves.