Wells Fargo wants to settle out of court in a case brought against the mega-bank by the U.S. Department of Justice in October of 2012.
Wells Fargo allegedly gave out a bundle of reckless home mortgage loans between 2001 and 2010, then misled the Federal Housing Administration (FHA) about the likelihood of those loans being repaid. The loans were federally insured, so when they failed, the FHA was burdened with the responsibility of covering the cost. Apparently about half of the FHA-insured loans were never repaid.
“Longstanding and reckless” deficiencies
The prosecution for the case argues that Wells Fargo is operating with a “longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure,” and that their only back up plan for these irresponsible loans was to rely on “the convenient backstop of government insurance.”
They say that Wells Fargo never should have approved the loans, many of which did not meet the required standards for certification of government-insured loans.
$1.2 billion settlement
Wells Fargo, on the other hand, argues that is has “acted as a prudent and responsible lender with FHA delinquency rates that have been as low as half the industry average.”
Nonetheless, an agreement filed with the Securities and Exchange Commission on February 1 shows Wells Fargo agreeing to pay $1.2 billion to settle with the Department of Justice, the Attorney’s offices for the Southern District of New York and the Northern District of California, and the U.S. Department of Housing and Urban Development.
Bad news for Wells Fargo
Whether or not all parties will agree to the settlement remains to be seen. The Department of Justice has already reached settlements with Bank of America, Citibank, and Deutsche Bank in similar cases.
The settlement will reduce Wells Fargo’s yearly earnings by $134 million, leaving them with a total net income of $22.9 billion for 2015. Shares of Wells Fargo also fell 3.2 percent.
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