Wells Fargo will pay a $2.09 billion fine to settle claims that it knowingly misstated borrower information on tens of thousands of mortgage loans that were originated, bundled into securities and sold to investors during the run-up to the financial crisis, the U.S. Department of Justice announced Wednesday.
The loans in question were originated from 2005 to 2007 and included subprime and other riskier products, which were common at the time.
According to the DoJ, in 2005, Wells Fargo started to evaluate the integrity of its increasing volume of “stated income” loans by subjecting a sample of those loans to “4506-T testing,” which allowed the bank to compare the income stated by the borrower with what was on file at the IRS.
After testing two of its programs, the DoJ says, the bank discovered that more than 70% of the loans 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%.
The bank then conducted further internal testing, performed by quality assurance analysts, to determine if “plausible” explanations existed for the “unacceptable” variances.
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.
Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in residential mortgage-backed securities containing loans originated by Wells Fargo, the DOJ says.
“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” says Alex G. Tse, Acting U.S. Attorney for the Northern District of California, in a statement. “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.”
In a separate statement, Tim Sloan, CEO of wells Fargo, says, “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.”
The settlement amount was fully accrued as of June 30, the bank says.
Wells Fargo points out that there were no claims that individual customers were harmed as a result of the alleged conduct.
It further notes that the DoJ has previously reached agreements with a number of other banks to resolve similar issues involving residential mortgage backed securities sold during the years leading up to the crisis.
As of February, U.S. banks had been fined a collective $243 billion for various regulatory violations since the financial crisis, according to a tally released by Keefe, Bruyette and Woods.