Federal prosecutors filed a lawsuit back in 2012 against Wells Fargo for allegations of “reckless” origination and underwriting for Federal Housing Administration (FHA) loans dating from May 2001 to October 2005. The case could go to trial this summer. The basis of the charges claim Wells originated up to 50,000 FHA loans that did not meet HUD’s guidelines, but failed to report the defects to the government. And as a result, HUD paid the insurance claims on thousands of defaulted loans with material defects. To prove that a bank violated the False Claims Act, which permits the collection of triple damages for fraud, the government only needs to show that the bank knew the truth but deliberately ignored it. To prove that Wells had knowledge of the bad loans that were not reported to HUD, the prosecutors have turned to the bank’s quality control reports that detected the deficiencies. And in this case, the prosecutors went a step further and have included Kurt Lofrano, former head of quality control at Wells Fargo, as a defendant. Lofrano was in charge of reporting the defective loans, and the lawsuit claims that he purposefully concealed the defects from HUD. The lawsuit also states that Wells found 6,558 bad loans through the quality control reports, but only self-reported 238. Settlement talks between Wells and the government have proved unsuccessful thus far and so trial seems inevitable. Settlements between other large institutions and HUD for similar claims have been large: $1.8 billion for Bank of America, $418 million for SunTrust, and $202 million for Deutsche Bank’s MortgageIT unit. If this case goes to trial, it could prove to be interesting precedent for the lending industry.
You can find the full article here.