Just days after having brought its first major action against a Wall Street bank, the federal investigative task force established in 2009 to sue those responsible for the financial crisis struck its second blow, as U.S. attorneys filed an action against Wells Fargo and Co. (NYSE:WFC) alleging widespread fraud in that lender’s mortgage unit.
The complaint filed in Manhattan federal court alleges Wells Fargo “engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance,” U.S. Attorney Preet Bharara said in a statement.
According to the complaint, Wells Fargo’s actions, including a bonus incentive plan that rewarded loan volume “was an accelerant to a fire already burning, as quality repeatedly took a back seat to quantity." The reckless lending led to the default on thousands of government-insured mortgages, the government alleged, costing the Federal Housing Administration millions of dollars as a result.
Bharara said Wells Fargo was also negligent in making the government aware of what was going on, as required by law “even after concerns were raised internally at the bank.”
Wells Fargo, based in San Francisco, denied the allegations. In a statement it said it had "acted in good faith and in compliance” with FHA rules.
“Many of the issues in the lawsuit had been previously addressed with HUD,” the company said. “Wells Fargo is the leading FHA lender and has acted as a prudent and responsible lender with FHA delinquency rates that have been as low as half the industry average.”
Wells Fargo is the largest U.S. mortgage originator and, in comparison to peers like JPMorgan Chase and Co. (NYSE:JPM), Bank of America Corp. (NYSE:BAC) and Citigroup Inc. (NYSE:C), is widely seen by banking analysts as having long held a relatively clean loan book.
Previously, the bank had settled with the government over allegations of racial discrimination in lending.
But the latest accusation put Wells Fargo closer to the kind of malfeasance long discussed at its major bank competitors.
Shares of Wells Fargo and Co., which had been selling for $35.60 when news of the lawsuit broke, saw a massive volume of turnover during the last few minutes of trading on the New York Stock Exchange, and closed the day at $35.10, down 70 cents or about 2 percent.