U.S. prosecutors have filed a lawsuit alleging that mortgage originator Wells Fargo & Co. fraudulently submitted more than 6,000 problematic mortgages to a federal mortgage insurance program, which the bank knew were at extreme risk of default. The government alleges that Wells Fargo pocketed hundreds of millions of dollars in insurance payments from the Federal Housing Administration’s (FHA) Direct Endorsement Lender Program following the default on these mortgages and despite the bank’s awareness of the problem loans.  

The FHA program allowed Wells Fargo and other originators to determine whether mortgages were eligible for the agency’s mortgage insurance program. Under the program, originators are required to report mortgage deficiencies or problems to the agency. The government contends that Wells Fargo, during the height of the housing bubble from 2001 to 2005, certified more than 100,000 mortgages. However, more than half of these mortgages were deficient. The Department of Justice (DOJ) and the U.S. Department of Housing allege that Wells Fargo’s staff churned out thousands of deficient mortgages without adequate underwriting training and provided bonuses for issuing such mortgages. Wells Fargo only began to self-report problem mortgages after the government found issues with the bank’s practices. Even still, Wells Fargo only reported approximately 238 as being problematic through 2010.

The DOJ is asserting claims under the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act. Bank of America settled similar claims in February 2012 for $1 billion following a suit by the DOJ. ("US Hits Wells Fargo With FHA Mortgage Insurance Fraud Claims,” Law360, October 9, 2012).