General Electric will pay a fine of $1.5 billion as part of a settlement with the Department of Justice over the pre-crisis lending activities of GE’s shuttered subprime lending unit, WMC Mortgage.
GE got into the subprime lending business at the height of the boom, buying WMC in 2004. WMC originated more than $65 billion in mortgages between 2005 and 2007.
GE got out of the subprime business in 2007, selling off WMC after the bubble burst.
But before selling WMC, the lender allegedly misrepresented the quality of the “majority” of its loans, which were sold to investors as part of residential mortgage-backed securities.
According to the DOJ, GE and WMC allegedly encouraged its employees to approve mortgages in order to meet volume targets, despite numerous instances where the loan applications did not meet the criteria outlined in WMC’s underwriting guidelines. WMC employees also allegedly received additional compensation based on the number of mortgages they approved.
The DOJ claimed that a majority of the mortgages WMC originated and sold for inclusion in RMBS between 2005 and 2007 “did not comply with WMC’s representations about the loans and that certain of WMC’s representations were reviewed by, approved by, or made with the knowledge of personnel from GE.”
And while WMC was growing its subprime lending business, the company’s quality control department was understaffed, ill-equipped, and ineffective.
From the DOJ:
In 2005, a WMC quality control manager described his department as a “toothless tiger” with inadequate resources and no authority to prevent the approval or sale of loans his department had determined were fraudulent or otherwise defective. By late third quarter 2006, managers responsible for quality control and risk management at WMC and GECC had expressed concerns that WMC’s quality and fraud controls were so lax that WMC received more mortgage applications containing fraud or other defects than its competitors. As a member of GE’s Corporate Audit Staff (CAS) involved in audits of WMC observed in April 2007, WMC “jacked up volume without controls.”
According to the DOJ, at some point, the investment banks that were buying WMC loans began to decline certain loans after finding defects or suspected fraud in the loan file.
WMC then allegedly attempted to sell those loans to other investors, withholding both the fact that the loan had been previously rejected and the previous investors’ reasons for rejecting the loan.
By late 2005 into early 2006, investment banks were rejecting more and more of WMC’s loans, and investors in mortgage bonds backed by earlier WMC loans were voicing concerns about the quality of WMC’ loans because borrowers were failing to repay their loans at “unexpectedly high rates,” the DOJ said.
According to the DOJ, in March 2006, WMC reviewed a sample of the 1,276 loans it repurchased in 2005 and found that a whopping 78% of the loan files reviewed had at least one piece of false information in them.
At that point, GE and GE Capital Corp. took more control over WMC’s business, but the lender allegedly continued selling its loans and making false representations about their qualities and attributes.
GE sold WMC in 2007, but according to the DOJ, investors, including some federally insured financial institutions, suffered “billions of dollars in losses as a result of WMC’s fraudulent origination and sale of loans for inclusion in RMBS.”
Under the terms of the settlement with the DOJ, GE will pay a civil penalty of $1.5 billion under the Financial Institutions Reform, Recovery, and Enforcement Act.
“The financial system counts on originators, which are in the best position to know the true condition of their mortgage loans, to make accurate and complete representations about their products. The failure to disclose material deficiencies in those loans contributed to the financial crisis,” said Assistant Attorney General Jody Hunt. “As today’s resolution demonstrates, the Department of Justice will continue to employ FIRREA as a powerful tool for protecting our financial markets against fraud.”
The amount of the fine shouldn’t come as a surprise though, as last year, GE booked a reserve of $1.5 billion to pay an expected settlement amount with the DOJ. And earlier this year, the company said that it had reached a tentative $1.5 billion settlement with the DOJ over the matter.
And nearly a year later, that’s just what the company will be paying for its entry into subprime lending.