Yesterday (10/9/12), the federal government continued its aggressive assault on financial institutions by filing suit against Wells Fargo, seeking multiple hundreds of millions of dollars in damages and civil penalties under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). The suit, filed in U.S. District Court for the Southern District of New York, claims that for the past 10 years Wells Fargo falsely certified over 6,500 loans to meet the eligibility standards for government insurance. In a press release, U.S. Attorney Preet Bharara claims that his Civil Fraud Unit found, “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.” So much for the concept of being innocent before proven guilty. Wells Fargo has denied these allegations and has promised to “vigorously defend itself against this action.”

In addition to seeking treble damages and penalties under the FCA and FIRREA, the government is also seeking compensatory damages for claims including breach of fiduciary duty, gross negligence and unjust enrichment for the insurance claims that the department has paid and expects to pay for mortgages wrongfully certified by Wells Fargo. The bank has defended its conduct, asserting that it “acted in good faith and in compliance with Federal Housing Administration (FHA) and Department of Housing and Urban Development (HUD) rules.” The bank also remarked that "[m]any of the issues in the lawsuit had been previously addressed with HUD. Wells Fargo is the leading FHA lender and has acted as a prudent and responsible lender with FHA delinquency rates that have been as low as half the industry average."

Mr. Bharara and his  Civil Fraud Unit have been quite active during the last two years. The Wells Fargo suit is the Unit’s fifth civil fraud lawsuit against major lenders in the last two years brought under the FCA, alleging reckless residential mortgage lending. Three of these five cases have settled. In February 2012, the government settled claims with CitiMortgage for $158.3 million and with Flagstar Bank. for $132.8 million. In May 2012, the Government settled its civil fraud suit against Deutsche Bank and MortgageIT for $202.3 million. The Government’s lawsuit against Allied Home Mortgage Corp. and two of its officers is still pending.

Of course, the action against Wells Fargo is not likely to be the Civil Fraud Unit’s last on this topic. In 2011 the HUD’s Inspector General released the reports of an audit claiming that half of the loans originated by fifteen lenders failed to meet FHA standards for verifying borrowers’ income and other underwriting standards. Since 2008, HUD has paid more than $37 billion in claims related to defaulted mortgages. Stay tuned to the CFS-Lawblog for updates and analysis.