Wells Fargo to pay $2 billion for allegedly lying about subprime mortgages

Accused of misrepresenting the quality of stated income loans in run-up to crisis

Wells Fargo will pay more than $2 billion for allegedly lying about the quality of subprime and Alt-A mortgages that backed residential mortgage-backed securities in the run-up to the housing crisis, the Department of Justice announced Wednesday.

According to the DOJ, Wells Fargo allegedly knew that loans that went into the mortgage bonds in question were based on misstated income information and allowed the loans to be securitized and sold nonetheless.

“Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in residential mortgage-backed securities containing loans originated by Wells Fargo,” the DOJ said in a statement.

According to the DOJ, beginning in 2005, Wells Fargo launched an initiative to double its originations in subprime and Alt-A loans. As part of that push, Wells Fargo allegedly “loosened its requirements” surrounding stated income loans, which are loans where a borrower declares their income without providing documentation to prove it.

The DOJ claims that Wells Fargo was aware that a “substantial” portion of its stated income loans contained misstated incomes from borrowers, but says that the bank failed to disclose this information. Instead, the bank allegedly provided investors with false debt-to-income ratios in connection with the loans it sold. 

According to the DOJ, Wells Fargo allegedly “took steps” to insulate itself from the risks of those stated income loans by not holding most of those loans in its own portfolio, and limiting its liability to third parties for the accuracy of its stated income loans.

The DOJ stated that Wells Fargo sold at least 73,539 stated income loans that were included in RMBS between 2005 to 2007, and nearly half of those loans have since defaulted, resulting in billions of dollars in losses to investors.

According to the DOJ, Wells Fargo implemented “4506-T testing,” wherein the company compared a borrower’s stated income to their tax documents from the Internal Revenue Service.

The DOJ claimed that Wells Fargo’s testing showed that more than 70% of the loans that Wells Fargo sampled had an “unacceptable” variance, i.e. greater than a 20% discrepancy between the borrower’s stated income and the income information reported to the IRS.

Additional testing showed that nearly half of the stated income loans that Wells Fargo tested had both an unacceptable variance and did not have a “plausible” explanation for that variance.

According to the DOJ, those test results were disseminated internally at Wells Fargo on a monthly basis, and despite one risk management employee claiming that the “4506-T results are astounding,” the bank continued to expand the stated income loan program.

As part of the settlement, Wells Fargo will pay a civil penalty of $2.09 billion under the Financial Institutions Reform, Recovery, and Enforcement Act, but the DOJ notes that the claims resolved by the settlement are merely allegations, adding that the bank did not admit liability.

“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” said Acting U.S. Attorney for the Northern District of California, Alex Tse. “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.”

In a statement, Wells Fargo CEO Tim Sloan said that the bank is “pleased” to resolve this “legacy” issue.

“We are pleased to put behind us these legacy issues regarding claims related to residential mortgage-backed securities activities that occurred more than a decade ago,” Sloan said. “Wells Fargo remains focused on our important role as one of the nation’s leading providers of mortgage financing and on our commitment to expanding sustainable homeownership opportunities for our customers.”

The settlement is just the latest in a string of payouts for the bank. Most recently, the bank agreed to pay $480 million to shareholders to settle class action suit over the bank’s fake account scandal.

That settlement stems from actions originally taken in 2016 by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the city and county of Los Angeles to fine the bank $150 million for more than 5,000 of the bank’s former employees opening as many as 2 million fake accounts in order to get sales bonuses.

And in April, the CFPB and the OCC announced a $1 billion fine for the bank over auto insurance and mortgage abuses.

Last year, Wells Fargo revealed that it was preparing to hand out $80 million in remediation for potentially wrongfully force-placing auto insurance on as many as 570,000 customers.

The bank later disclosed that it agreed to pay $108 million to the federal government to settle allegations that the bank overcharged military veterans for refinances.

To read this latest settlement document in full, click here.

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