Washington, D.C., USA: Wells Fargo Bank, N.A. and several of its affiliates (Wells Fargo) will pay a civil penalty of $2.09 billion under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on the bank’s alleged origination and sale of residential mortgage loans that it knew contained misstated income information and did not meet the quality that Wells Fargo represented, the Justice Department announced on Wednesday.
Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in residential mortgage-backed securities (RMBS) containing loans originated by Wells Fargo.
“This settlement holds Wells Fargo accountable for actions that contributed to the financial crisis,” said Acting Associate Attorney General Jesse Panuccio. “It sends a strong message that the Department is committed to protecting the nation’s economy and financial markets against fraud.”
“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” said Acting U.S. Attorney for the Northern District of California, Alex G. Tse. “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.”
FIRREA authorizes the federal government to seek civil penalties against financial institutions that violate various predicate criminal offenses, including wire and mail fraud. The United States alleged that, in 2005, Wells Fargo began an initiative to double its production of subprime and Alt-A loans. As part of that initative, Wells Fargo loosened its requirements for originating stated income loans – loans where a borrower simply states his or her income without providing any supporting income documentation.
To evaluate the integrity of its increasing volume of stated income loans, Wells Fargo subjected a sample of these loans to “4506-T testing.” A 4506-T form is a government document signed by the borrower during the loan approval process that allows the lender to obtain the borrower’s tax transcripts from the Internal Revenue Service (IRS). 4506-T testing involves comparing the tax transcripts of the borrower with the income stated on the loan application.
Wells Fargo implemented 4506-T testing on two of its programs. This testing revealed that more than 70% of the loans that Wells Fargo sampled had an “unacceptable” variance (greater than 20% discrepancy between the borrower’s stated income and the income information reflected in the borrower’s most recent tax returns filed with the IRS), and the average variance was approximately 65%. After receiving these results, Wells Fargo conducted further internal testing.
This additional testing, performed by quality assurance analysts, was designed to determine if “plausible” explanations existed for the “unacceptable” variances over 20%. This additional step revealed that nearly half of the stated income loans that Wells Fargo tested had both an unacceptable variance and the absence of a plausible explanation for that variance.
The results of Wells Fargo’s 4506-T testing were disclosed in internal monthly reports, which were widely distributed among Wells Fargo employees. One Wells Fargo employee in risk management observed that the “4506-T results are astounding” yet “instead of reacting in a way consistent with what is being reported WF [Wells Fargo] is expanding stated [income loan] programs in all business lines.”
The United States alleged that, despite its knowledge that a substantial portion of its stated income loans contained misstated income, Wells Fargo failed to disclose this information, and instead reported to investors false debt-to-income ratios in connection with the loans it sold. Wells Fargo also allegedly heralded its fraud controls while failing to disclose the income discrepancies its controls had identified.
The United States further alleged that Wells Fargo took steps to insulate itself from the risks of its stated income loans, by screening out many of these loans from its own loan portfolio held for investment and by limiting its liability to third parties for the accuracy of its stated income loans. Wells Fargo sold at least 73,539 stated income loans that were included in RMBS between 2005 to 2007, and nearly half of those loans have defaulted, resulting in billions of dollars in losses to investors.
The settlement was the result of a coordinated effort between the Civil Division’s Commercial Litigation Branch and the U.S. Attorney’s Office for the Northern District of California, with investigative support from the Federal Housing Finance Agency, Office of Inspector General.
The claims resolved by this settlement are allegations only, and there has been no admission of liability.
The long-anticipated penalty is in line with what some analysts had predicted and smaller than sanctions borne by some of the bank’s competitors. But the case offers a new look behind the scenes at decisions made inside one of the nation’s largest home lenders before the crisis — and the evidence executives once saw of mounting trouble.
Investors including federally insured financial institutions ended up suffering billions of dollars in losses on securities that contained home loans from Wells Fargo, the Department of Justice said in a statement announcing the accord. The probe focused on debts in which borrowers were allowed to declare their incomes, without providing proof.
U.S. probes into banks’ lending practices before the crisis continue to roll on. Wells Fargo’s accord may ultimately mark the Justice Department’s last multibillion-dollar penalty against a U.S. company for creating or selling crisis-era mortgages. Still, a number of overseas firms, such as UBS Group AG and HSBC Holdings Plc, have yet to resolve significant probes.
Wells Fargo set aside funds for the settlement before midyear, it said in a statement. Shares of the bank pared earlier gains, but were still up 0.6 percent as of 4 p.m. in New York.
“We are pleased to put behind us these legacy issues regarding claims related to residential mortgage-backed securities activities that occurred more than a decade ago,” Chief Executive Officer Tim Sloan said in the statement.
The San Francisco-based lender has been signaling the settlement’s approach. In January, Chief Financial Officer John Shrewsberry told reporters his firm would likely hash out terms this year. While he declined to discuss the potential cost, the firm took a $3.3 billion litigation charge late in 2017, mainly for mortgage-related issues.
EARLIER: Wells Fargo Pays SEC Fine Over Investment Sales Misconduct
The U.S. Securities and Exchange Commission (SEC) announced today that Wells Fargo Advisors LLC agreed to settle charges of misconduct in the sale of financial products known as market-linked investments, or MLIs, to retail investors.
According to the order, the SEC found that Wells Fargo generated large fees by improperly encouraging retail customers to actively trade the products, which were intended to be held to maturity. As described in the SEC’s order, the trading strategy – which involved selling the MLIs before maturity and investing the proceeds in new MLIs – generated substantial fees for Wells Fargo, which reduced the customers’ investment returns.
The order further found that the Wells Fargo representatives involved did not reasonably investigate or understand the significant costs of the recommendations. The SEC found that Wells Fargo supervisors routinely approved these transactions despite internal policies prohibiting short-term trading or “flipping” of the products.
“It is important that brokers do their homework before they recommend that their retail customers buy or sell complex structured products,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit. “The products sold by Wells Fargo came with high fees and commissions, which Wells Fargo should have taken into account before advising retail customers to sell their investments and reinvest the proceeds in similar products.”
Without admitting or denying the findings in the SEC’s order, Wells Fargo agreed to return $930,377 of ill-gotten gains plus $178,064 of interest and to pay a $4 million penalty. Wells Fargo also agreed to a censure and to cease and desist from committing or causing any violations and any future violations of certain antifraud provisions of the federal securities laws. The order recognizes that Wells Fargo took remedial steps to address the allegedly improper sales practices.
Wells Fargo said in a statement it has made policy and management changes related to the SEC charges, and is committed to helping customers achieve their investment goals.
Wells Fargo has been plagued for nearly two years by scandals over how it treated its customers, including by selling them products they did not need to meet internal sales goals.
It has overhauled management and is trying to regain trust, including through an ad campaign saying that Wells Fargo was established in 1852 and “re-established” in 2018.
Market-linked investments are fixed-maturity products whose interest rate is determined by the performance of a particular asset or market measure, such as equity and commodity indexes.
Today’s SEC fine comes not long after Wells Fargo & Co. paid $185 million to resolve claims by U.S. regulators that the bank’s employees opened deposit and credit-card accounts without customers’ approval to satisfy sales goals and earn financial rewards.
The lender opened more than 2 million accounts that consumers may not have known about, the Consumer Financial Protection Bureau said in a statement. Wells Fargo, which fired 5,300 employees over the improper sales practices, agreed paid a record $100 million fine to the CFPB, $35 million to the Office of the Comptroller of the Currency and $50 million to the Los Angeles city attorney to settle the matter. The San Francisco-based bank also will compensate customers who incurred fees or charges, the agencies said.
“Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses,” CFPB Director Richard Cordray said in his agency’s statement. “Because of the severity of these violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed.”
The bank also agreed to resolve the allegations in that earlier case without admitting or denying the agencies’ accusations, and said in a statement that it had set aside $5 million for customer remediation.
Wells Fargo & Company is a diversified, community-based financial services company with $2.0 trillion in assets. Wells Fargo provides banking, investments, mortgage, and consumer and commercial finance through more than 8,300 locations, 13,000 ATMs, the internet and mobile banking, and has offices in 42 countries and territories. With approximately 263,000 team members, Wells Fargo serves one in three households in the United States.