US files civil suit against Wells Fargo over mortgage fraud

By Peter Schroeder - 10/09/12 04:06 PM ET

The United States has filed a civil suit against Wells Fargo, alleging the bank for more than a decade wrongfully certified risky mortgages that ended up costing the government hundreds of millions of dollars.

The suit, filed in a New York federal court Tuesday, charges the bank deemed risky mortgages as high quality and worthy of being guaranteed by the Federal Housing Administration (FHA). When those loans defaulted, the U.S. government was left footing the bill, according to the complaint.

U.S. Attorney Preet Bharara said the bank engaged in a "reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance."

The suit seeks damages and penalties, and alleges the bank knew that a high amount of the roughly 100,000 retail mortgages it authorized for FHA backing — as much as half in some months — were too risky or were ineligible for FHA insurance.

Bharara contended that Wells Fargo incentivized employees to crank out as many loans as possible rather than high-quality ones, and only began reporting bad loans after U.S. attorneys issued subpoenas on the matter.

"Wells Fargo has been a valued participant in the FHA-mortgage lending program, " said Helen Kanovsky, general counsel for the Department of Housing and Urban Development (HUD). "Unfortunately, as alleged in the government's complaint, there was a time when Wells Fargo placed profits over people."

Wells Fargo has denied the allegations and said it acted in "good faith" with government regulations, according to a bank spokesman.

"Wells Fargo is the leading FHA lender and has acted as a prudent and responsible lender with FHA delinquency rates that have been as low as half the industry average. The bank will present facts to vigorously defend itself against this action," the bank said in a statement.

The suit comes less than a week after New York Attorney General Eric Schneiderman filed a suit against JPMorgan Chase, charging it with widespread fraud in the marketing and selling of risky mortgage-backed securities in the lead-up to the financial crisis that caused billions of dollars in losses for investors. Schneiderman is also the head of President Obama's task force charged with sniffing out mortgage fraud. JPMorgan has vowed to fight the charges.