Earlier this week, the United States Attorney’s Office for the Southern District of New York filed a lawsuit in federal court against Wells Fargo.  The complaint argues that Wells Fargo engaged in misconduct while participating in the Federal Housing Administration (“FHA”) Direct Endorsement Lender Program and seeks recovery under the False Claims Act and Financial Institutions Reform, Recovery, and Enforcement Act.

According to a press release issued by the United States Attorney’s Office, the complaint alleges the following:

First, between May 2001 and October 2005, Wells Fargo engaged in a regular practice of reckless origination and underwriting of its retail FHA loans. Nonetheless, Wells Fargo certified that over 100,000 retail FHA loans met the Department of Housing and Urban Development’s (“HUD”) requirements and therefore were eligible for FHA insurance. During this period, although Wells Fargo certified to HUD that its retail FHA loans met HUD’s requirements for proper origination and underwriting, and were therefore eligible for FHA insurance, the bank knew that a very substantial percentage of those loans – nearly half in certain months – had not been properly underwritten, contained unacceptable risk, did not meet HUD’s requirements, and were ineligible for FHA insurance. In fact, Wells Fargo knew that its underwriters routinely failed to perform basic due diligence, failed to verify information in the loan file that bore directly on the borrower’s ability to make payments on the mortgage, and repeatedly certified mortgage loans that contained serious defects and departures from HUD’s underwriting standards. The extremely poor quality of Wells Fargo’s loans was a function of management’s nearly singular focus on increasing the volume of FHA originations – and the bank’s profits – rather than on the quality of the loans being originated.

Wells Fargo aggravated its widespread underwriting violations by: hiring temporary staff to churn out and approve an ever-increasing quantity of FHA loans; failing to provide its inexperienced staff with proper training; paying improper bonuses to its underwriters to incentivize them to approve as many FHA loans as possible; and applying pressure on loan officers and underwriters to originate and approve more and more FHA loans as quickly as possible. In addition, Wells Fargo senior management repeatedly ignored its own Quality Assurance department’s efforts to have management correct the practices leading to the material violations it found in a significant portion of Wells Fargo’s retail home loans, and failed to report loans to HUD that it knew were rife with serious violations or fraud. By certifying tens of thousands of ineligible mortgages and falsely certifying its compliance with HUD rules, Wells Fargo wrongfully obtained endorsement of these seriously deficient mortgages for FHA insurance, thereby putting billions of FHA dollars at risk. As a result, HUD has paid hundreds of millions of dollars in FHA benefits on claims for defaulted loans that Wells Fargo never should have certified for FHA insurance in the first place.

Second, Wells Fargo failed to conduct adequate quality control and comply with its self-reporting requirements to HUD. In particular, Wells Fargo failed to report to HUD even a single loan with material underwriting violations or fraud until after a HUD lender review in 2005. When HUD inquired about Wells Fargo’s self-reporting practices in 2005, Wells Fargo attempted to cover up its misdeeds by falsely suggesting to HUD that the bank actually had been reporting bad loans.

For more information, see U.S. Sues Wells Fargo, Accusing It of Lying About Mortgages and Government Sues Wells Fargo for Reckless Lending Practices.

For more information about the False Claims Act, visit our colleagues’ blog, FCA Alert.