Wells Fargo must fork over $2bn for misrepresenting subprime loan quality

by Ryan Smith02 Aug 2018

Wells Fargo will pay more than $2.09 billion for allegedly misrepresented the quality of loans it originated.

The megabank will pay the civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), according to the US Attorney’s Office for the Northern District of California. Authorities claimed that Wells Fargo originated and sold loans that it knew contained misstated income information and did not meet the bank’s own quality standards. Investors, including some federally insured financial institutions, suffered billions of dollars in losses after investing in residential mortgage-backed securities containing Wells Fargo-originated loans.

“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” said Alex G. Tse, acting US attorney for the Northern District of California. “Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted.”

“This settlement holds Wells Fargo responsible for actions that contributed to the financial crisis,” said Acting Associate Attorney General Jesse Panuccio. “It sends a strong message that the department is protecting the nation’s economy and financial markets against fraud.”

Prosecutors alleged that in 2005, Wells Fargo began an initiative to double production of its subprime and Alt-A loans. The bank loosened its requirements for originating stated-income loans. in order to evaluate the strength of these loans, the bank subjected a representative sample of them to “4506-T” testing. The testing involves comparing a borrower’s tax transcripts with the income stated on the borrower’s loan application. The bank implemented the testing on two of its loan programs – and found that more than 70% of the sampled loans had an “unacceptable” variance (greater than a 20% discrepancy between the borrower’s stated income and the income reflected on tax forms). The average variance was about 65%. The bank then conducted further internal testing to determine if plausible explanations could be found for the unacceptable variances. For nearly half of the stated-income loans Wells Fargo tested, no plausible explanation could be found.

The results of the testing were disclosed in reports distributed widely among employees, the US Attorney’s Office said. One Wells Fargo risk management employee called the test results “astounding,” but said that “instead of reacting in a way consistent with what is being reported (Wells Fargo) is expanding (stated-income) programs in all business lines.”

Prosecutors said that despite its knowledge that a “substantial portion” of its stated-income loans contained misrepresentations, Wells Fargo failed to disclose that information. Instead, the bank allegedly reported to investors phony debt-to-income rations in connection with the loans it sold. Authorities also said that Wells Fargo insulated itself from the risks of its stated-income loans by screening out many of the loans from its own portfolio, and by limiting its liability for the accuracy of the loans. The banking giant sold at least 73,529 stated income loans that were included in RMBS between 200 and 2007, and almost half of the loans have since defaulted.

Wells Fargo has not admitted liability in the case.


Related stories:
Wells Fargo appoints home lending servicing head
Wells Fargo refunding tens of millions for unnecessary add-ons