By Chelsey Dulaney, Emily Glazer and Joe Light
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 San
Francisco-based 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.
Wells Fargo, the biggest bank in the world by market
capitalization, has largely bypassed some of the colossal
settlements paid by other big U.S. banks, including other
mortgage-related fines. But the $1.2 billion announced Wednesday,
if finalized, would be Wells Fargo's third-largest fine, following
$5.3 billion in the 2012 National Mortgage Settlement, alongside
other banks, and $1.95 billion in 2013 over foreclosures. It is one
of the largest fines paid related to FHA, which settled with other
big U.S. banks more than a year ago.
But this most recent fine was drawn out. 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. Wells Fargo executives were
meeting on this settlement late last week, people familiar with the
matter said. Part of the delay was due to several regulators
involved in the settlement, at times without a clear
decision-maker, these people said.
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 Fargo 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 said Wednesday that it can't provide further details
about the settlement at this time. The bank 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.
The FHA program backs mortgages with a down payment of as little
as 3.5% and a credit score of 580, on a scale of 300 to 850, making
it one of the most popular avenues for homeownership for first-time
home buyers and others with little wealth.
Over the past several years, the Justice Department and FHA has
sought major settlements from lenders for errors made on the loans,
using a Civil War-era law that allows the government to collect
treble damages.
In 2014 other U.S. banks announced fines over similar issues:
Atlanta-based SunTrust Banks Inc. paid $968 million, Bank of
America Corp. doled out $800 million as part of a larger settlement
and J.P. Morgan Chase & Co. paid $614 million.
Some bank officials have said the government has pursued them
for huge damages even for minor errors. Partly as a result, over
the past couple years some major banks, such as J.P. Morgan and
Bank of America, have pulled back sharply from the FHA program by
imposing their own more stringent requirements on FHA loans, a move
that makes it much harder for less-creditworthy borrowers to get a
mortgage.
Wells Fargo, which is still one of the most prominent FHA
lenders, last year said it would raise the minimum credit score it
accepts on certain FHA loans to 640 from 600, reversing a 2014
decision to reduce the required score.
Early this year, the government is expected to unveil final
changes to the guarantees lenders must make when writing an FHA
loan, a move that lenders hope will give them greater certainty
that they won't be hit with major penalties for what they describe
as minor errors.
Shares, which are off 13% so far this year, edged down 2.8%.
Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com, Emily
Glazer at emily.glazer@wsj.com and Joe Light at
joe.light@wsj.com
(END) Dow Jones Newswires
February 03, 2016 10:46 ET (15:46 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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