Home >> Daily Dose >> Why Wells Fargo Agreed to Pay a $2B Penalty
Print This Post Print This Post

Why Wells Fargo Agreed to Pay a $2B Penalty

Wells Fargo Bank—a subsidiary of Wells Fargo & Company—has reached a settlement with the United States, as represented by the Department of Justice (DOJ), to the total of $2.09 billion for allegations that it originated and sold residential mortgage loans that it knew did not meet the standard the bank represented. This allegedly caused investors, including federally insured financial institutions, billions in losses due to investing in these RMBSs which contained loans originated by Wells Fargo, according to a statement by the DOJ.

The allegations were brought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), predicated on violations of mail fraud, wire fraud, false statements to financial institutions, and financial institutions fraud, according to the settlement agreement document.

The conduct being brought against Wells Fargo included a withholding of information obtained in the process of originating, selling, underwriting, or securitizing residential mortgage loans included in RMBS filings. Such actions were taken alongside practices such as a campaign called “Courageous Underwriting,” a philosophy enacted from 2005 - 2007 that “encouraged Wells Fargo’s underwriters to take more chances and be more aggressive in approving loans that were outside of the bank’s underwriting guidelines. Additionally, in 2005, Wells Fargo changed its compensation for certain credit risk professionals, adding new categories of compensation such as “Market Growth” and “ Competitive Positioning to Drive Volume.”

These practices, in tandem with a loosening of requirements such as less money down, lower credit scores, blemished credit histories, higher debt-to-income ratios, and lower asset and reserve requirements, were listed as some of the more specified reasonings behind these allegations.

According to the settlement agreement, section 2(n), Wells Fargo sold at least 73,529 stated income loans in RMBS during the relevant period (2007 -2007), nearly half of which have defaulted.

The official settlement agreement states that Wells Fargo and the DOJ reached this settlement “to avoid the delay, uncertainty, inconvenience, and expense of protracted litigation,” though it does not claim to indicate or administer facts or liability or wrongdoing on behalf of the bank, nor does it agree to a concession on behalf of the United States that its claims were not “well founded.”

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

Acting U.S. Attorney for the Northern District of California, Alex G. Tse, added: “Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans. Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted. Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.”

About Author: Kristina Brewer

Kristina Brewer is the Editorial Assistant of Publications for the Five Star Institute, including DS News and MReport magazine. She is a graduate of the University of North Texas (UNT), where she received her Bachelor of Arts in English with a concentration in rhetoric and writing and a minor in global marketing. During this time, she served as Director of Philanthropy in the national women’s fraternity Zeta Tau Alpha, of which she is an alumna. Her passion for philanthropy continued after university when she was an intern at Keep Denton Beautiful, a local partner of Keep America Beautiful, where she drove membership, organized events, and led social media campaigns. Brewer honed her writing at the North Texas Daily, UNT’s student-run newspaper where she wrote about faculty, mentorship, and student life. Brewer also previously worked at Optimus Business Plans where she helped start-ups create funding proposals, risk assessments, and management plans.

Check Also

Single-Family Rental Roundtable Explores the State of SFR Markets

Five Star’s annual Single-Family Rental & Investment Roundtable on Tuesday united investors, service providers, and experts to discuss how volatile factors such as inflation, escalating interest rates, and affordability concerns impact the ongoing growth and investment opportunities within the single-family rental market.