The following allegations are based on the Complaint filed today in Manhattan Federal court:
WELLS FARGO, the largest originator of home mortgages in the United States, has been a participant in the Direct Endorsement Lender program – a federal program administered by FHA – since 1986. As a Direct Endorsement Lender (“DEL”), WELLS FARGO has the authority to originate, underwrite, and certify mortgages for FHA insurance. If a DEL approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD for the costs associated with the defaulted loan, which HUD must then pay. Under the DEL program, neither the FHA nor HUD reviews a loan before it is endorsed for FHA insurance. DELs are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance, and maintaining a quality control program that can prevent and correct any deficiencies in their underwriting. The quality control program requirements include conducting a full review of all loans that go into default within the first six payments (“early payment defaults”); taking prompt and adequate corrective action upon discovery of fraud or serious underwriting problems; and disclosing to HUD, within 60 days of initial discovery, all loans containing evidence of fraud or other serious underwriting problems. WELLS FARGO failed to comply with all three of these basic requirements.
First, between May 2001 and October 2005, WELLS FARGO engaged in a regular practice of reckless origination and underwriting of its retail FHA loans. Nonetheless, WELLS FARGO certified that over 100,000 retail FHA loans met HUD’s requirements and therefore were eligible for FHA insurance. During this period, although WELLS FARGO certified to HUD that its retail FHA loans met HUD’s requirements for proper origination and underwriting, and were therefore eligible for FHA insurance, the bank knew that a very substantial percentage of those loans – nearly half in certain months – had not been properly underwritten, contained unacceptable risk, did not meet HUD’s requirements, and were ineligible for FHA insurance. In fact, WELLS FARGO knew that its underwriters routinely failed to perform basic due diligence, failed to verify information in the loan file that bore directly on the borrower’s ability to make payments on the mortgage, and repeatedly certified mortgage loans that contained serious defects and departures from HUD’s underwriting standards. The extremely poor quality of WELLS FARGO’s loans was a function of management’s nearly singular focus on increasing the volume of FHA originations – and the bank’s profits – rather than on the quality of the loans being originated.
WELLS FARGO aggravated its widespread underwriting violations by: hiring temporary staff to churn out and approve an ever-increasing quantity of FHA loans; failing to provide its inexperienced staff with proper training; paying improper bonuses to its underwriters to incentivize them to approve as many FHA loans as possible; and applying pressure on loan officers and underwriters to originate and approve more and more FHA loans as quickly as possible. In addition, WELLS FARGO senior management repeatedly ignored its own Quality Assurance department’s efforts to have management correct the practices leading to the material violations it found in a significant portion of WELLS FARGO’s retail home loans, and failed to report loans to HUD that it knew were rife with serious violations or fraud. By certifying tens of thousands of ineligible mortgages and falsely certifying its compliance with HUD rules, WELLS FARGO wrongfully obtained endorsement of these seriously deficient mortgages for FHA insurance, thereby putting billions of FHA dollars at risk. As a result, HUD has paid hundreds of millions of dollars in FHA benefits on claims for defaulted loans that WELLS FARGO never should have certified for FHA insurance in the first place.
Second, WELLS FARGO failed to conduct adequate quality control and comply with its self-reporting requirements to HUD. In particular, WELLS FARGO failed to report to HUD even a single loan with material underwriting violations or fraud until after a HUD lender review in 2005. When HUD inquired about WELLS FARGO’s self-reporting practices in 2005, WELLS FARGO attempted to cover up its misdeeds by falsely suggesting to HUD that the bank actually had been reporting bad loans. And, in a continued effort to avoid indemnification claims from HUD on these bad loans, WELLS FARGO’s self-reporting even after HUD’s inquiry was woefully and purposefully inadequate. From October 2005 through the time of the subpoena from the U.S. Attorney’s Office for the Southern District of New York in this investigation, in June 2011, WELLS FARGO reported only about 300 of its seriously deficient loans to HUD.