Wells Fargo Bank—a subsidiary of Wells Fargo & Company—has reached a settlement with the United States, as represented by the Department of Justice (DOJ), to the total of $2.09 billion for allegations that the bank originated and sold residential mortgage loans that it knew did not meet the standard the bank represented. This allegedly caused investors, including federally insured financial institutions, billions in losses due to investing in these RMBSs which contained loans originated by Wells Fargo, according to a statement by the DOJ.
The allegations were brought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), predicated on violations of mail fraud, wire fraud, false statements to financial institutions, and financial institutions fraud, according to the settlement agreement document.
The conduct being brought against Wells Fargo included a withholding of information obtained in the process of originating, selling, underwriting, or securitizing residential mortgage loans included in RMBS filings. Such actions were taken alongside practices such as a campaign called “Courageous Underwriting,” a philosophy enacted from 2005 - 2007 that “encouraged Wells Fargo’s underwriters to take more chances and be more aggressive in approving loans that were outside of the bank’s underwriting guidelines. Additionally, in 2005, Wells Fargo changed its compensation for certain credit risk professionals, adding new categories of compensation such as “Market Growth” and “ Competitive Positioning to Drive Volume.”
These practices, in tandem with a loosening of requirements such as less money down, lower credit scores, blemished credit histories, higher debt-to-income ratios, and lower asset and reserve requirements, were listed as some of the more specified reasonings behind these allegations.
According to the settlement agreement, section 2(n), Wells Fargo sold at least 73,529 stated income loans in RMBS during the relevant period (2007 -2007), nearly half of which have defaulted.
The official settlement agreement states that Wells Fargo and the DOJ reached this settlement “to avoid the delay, uncertainty, inconvenience, and expense of protracted litigation,” though it does not claim to indicate or administer facts or liability or wrongdoing on behalf of the bank, nor does it agree to a concession on behalf of the United States that its claims were not “well founded.”
However, Acting Associate Attorney General Jesse Panuccio stated that “This settlement holds Wells Fargo accountable for actions that contributed to the financial crisis. It sends a strong message that the Department is committed to protecting the nation’s economy and financial markets against fraud.”
Acting U.S. Attorney for the Northern District of California, Alex G. Tse, added: “Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans. Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted. Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.”