A settlement between Wells Fargo (WFC) and the U.S. Department of Justice over claims that Wells Fargo misled the U.S. Department of Housing and Urban Development into believing its loans qualified for insurance from HUD's Federal Housing Administration has hit another snag.

In the lawsuit, originally filed in October 2012, the DOJ seeks damages and civil penalties under the False Claims Act, which could lead to hundreds of millions of dollars in potential losses for Wells Fargo.

The two sides have been negotiating a settlement, but those talks have slowed and optimism of reaching a settlement is waning, according to Reuters.

From the Reuters report:

Douglas Baruch, a lawyer for Wells Fargo, told a federal judge in Manhattan that while the parties would not rule out a settlement, both sides were prepared to resume litigating after putting the case on hold since July.

"The parties are no longer as optimistic as they once were," he said.

Now, the two parties are preparing to potentially continue the litigation.

At Tuesday's hearing, U.S. District Judge Jesse Furman expressed dismay that Wells Fargo and the government did not ask his approval in July to formally put the case on hold to pursue settlement talks.

While the parties asked for another four months to prepare evidence and expert witnesses, he gave them only two, taking the case into August.

"You took a chance," he said. "You did this at your own peril."