WFC Wells Fargo and Company

By Chelsey Dulaney 

Wells Fargo & Co. said Wednesday that it has agreed to pay $1.2 billion to settle a long-running suit that accused the company of "reckless" lending and leaving a federal insurance program to pick up the tab.

The U.S. sued Wells Fargo in 2012, accusing the U.S. mortgage lender of engaging in "regular practice of reckless origination and underwriting" of government-backed loans. The action was one of several brought under the Federal False Claims Act against lenders accused of bilking the Federal Housing Administration, which has historically backed loans to first-time buyers and those with low incomes.

The parties have been in settlement talks for a number of years and an earlier settlement deal worth less than $500 million fell apart in 2014, The Wall Street Journal previously reported.

The government's suit claimed Wells Fargo improperly certified certain FHA mortgage loans for U.S. Department of Housing and Urban Development insurance that didn't qualify for the program. The government further argued Wells shouldn't have received insurance proceeds from HUD when some of the loans later defaulted.

The government said the bank may have known that some of the mortgages didn't qualify for the insurance to begin with, and Wells Fargo didn't disclose those deficiencies to HUD before making the insurance claims.

The agreement settles civil charges with the U.S. Justice Department, two U.S. attorneys and the Department of Housing and Urban Development. The government said the loans in question were made under the Federal Housing Administration lending program from 2001 to 2010.

Wells Fargo had previously indicated it would fight the case and denied the allegations when the government brought its case in 2012.

Last February, the bank said the long-running lawsuit would take even longer to resolve after settlement discussions fell apart, leaving the bank "again engaged in discovery," according to a securities filing at the time.

The discussions almost came to a resolution in summer 2014 when Wells Fargo was in negotiations with the U.S. attorney's office on a settlement for under $500 million, people familiar with the matter have said. But the Justice Department asked the bank for additional evidence, effectively delaying the talks, the people added.

As a result of the settlement, Wells Fargo said it has added to its legal accrual for 2015, which it reported results for on Jan. 15. That has reduced its profit for last year by $134 million, or 3 cents a share.

The company's 2015 profit is now $22.9 billion, or $4.12 a share.

Wells Fargo noted that the settlement isn't yet finalized.

Shares, which are off 11% so far this year, edged up 0.8% premarket.

Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com

(END) Dow Jones Newswires

February 03, 2016 09:26 ET (14:26 GMT)

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