By Matthew Kochen,
Money & Investing Writer
Wells Fargo (NYSE: WFC) the American multinational banking and financial services holding company ended their holdout against accepting liability for reckless lending that played a part in triggering the 2008 Financial Crisis.
In an SEC filing this Wednesday, Wells Fargo disclosed they had agreed in principle to settle the civil case brought by the Department of Justice and the Department of Housing and Urban Development.
Other large mortgage lenders have already reached settlements for similar actions, including Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JP Morgan Chase (NYSE: JPM). The terms of the settlement dictate Wells Fargo pay $1.2 billion.
In their respective lawsuits, Citigroup settled for $7 billion in July 2014, Bank of America for $16.65 billion in August 2014, and JP Morgan Chase for $13 billion in November 2013.
Comparatively, Wells Fargo’s $1.2 billion can be seen as a win of sorts for the company as they were able to delay the payment and ultimately for a lesser sum.
It may be hard to think of $1.2 billion as a small sum, but is when compared to the payments the other banks were forced to make.
Also, the $1.2 billion face value will not be the real financial burden endured by Wells Fargo. The bank will likely be able to derive a significant amount, many millions of dollars, in tax savings through their future payments to cover that $1.2 billion settlement.
The settlement centers around the actions of reckless lending and mortgage fraud Wells Fargo engaged in prior to the crisis.
Wells Fargo, the U.S.’s largest mortgage lender, was accused of improperly classifying loans for federal insurance under a Federal Housing Administration program intended to help lower income buyers and first-time home buyers, when in actuality they did not qualify.
Although they knew of the deficiencies, they chose not inform housing regulators. When the loans turned bad, Wells Fargo reaped the insurance proceeds.
Preet Bharara, the United States attorney for the Southern District of New York who first brought the suit states Wells Fargo engaged in a, “reckless trifecta of poor training, deficit loan underwriting, and poor disclosure in the government-backed loan program.”
The time period the lawsuit focused on was Wells Fargo’s lending between 2001 and 2010.
From 2001 to 2005, the bank issued thousands of FHA loans that did not meet requirements, essentially taking on excessive risk and passing it along to the government through the federal insurance.
From 2002 to 2010 Wells Fargo kept the details of their unqualified futures secret and collected the insurance payouts. Prosecutors found over 6,500 faulty FHA loans issued by the bank of which only 238 were ever reported.
As a result, the FHA paid hundreds of millions in insurance claims to Wells Fargo. This is not the first mortgage related settlement Wells Fargo has had to pay as a result of wrong doing and negligence before the crisis.
In 2012, the bank breached a 2010 legal agreement to provide adjustable-payment mortgages.
They were found to not have properly judged and evaluated borrowers who were seeking adjustments to avoid foreclosure. They settled that case for $5.3 billion.
The settlement is not finalized yet, but the effects are already being felt by Wells Fargo.
They have to increase their expenses by $200 million for the 2015 year and reduce net income by $134 million to $22.9 billion.
On Wednesday when this revelation hit, Wells Fargo stock fell 1.8 percent to $47.60.
A version of this article appeared in the Tuesday, February 9th print edition.
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