WFC Wells Fargo and Company

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)

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