Wells Fargo fails to end U.S. mortgage fraud lawsuit

Reuters
A Wells Fargo sign is seen outside a banking branch in New York
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A Wells Fargo sign is seen outside a banking branch in New York July 13, 2012. REUTERS/Shannon Stapleton

By Jonathan Stempel and Aruna Viswanatha

NEW YORK/WASHINGTON (Reuters) - A federal judge has rejected Wells Fargo & Co's bid to dismiss a U.S. government lawsuit accusing the nation's largest mortgage lender of fraud, a victory for federal investigators pursuing cases tied to the recent housing and financial crises.

U.S. District Judge Jesse Furman in Manhattan said on Tuesday that the government may pursue its key federal claims that Wells Fargo lied about the quality of mortgages it submitted to a government insurance program, costing hundreds of millions of dollars over roughly a decade.

In particular, Furman sided with the U.S. Department of Justice's interpretation of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a law adopted after the 1980s savings-and-loan crisis that lets the government sue for fraud affecting a federally-insured financial institution.

Wells Fargo said the FIRREA claim should be tossed because the only institution affected by its conduct was itself.

But Furman concluded otherwise, following the lead of two colleagues on the Manhattan federal court, Jed Rakoff and Lewis Kaplan, in cases against Bank of America Corp and Bank of New York Mellon Corp, respectively

"The question considered by the courts in these cases was whether a financial institution, through its own misconduct, can affect itself within the meaning of FIRREA," Furman wrote in a 60-page decision. "Courts have repeatedly held that it can. There is no reason to deviate from that interpretation here."

Furman also dismissed some claims against San Francisco-based Wells Fargo, which is also the fourth-largest U.S. bank, including claims of negligence and unjust enrichment. He said this was because the government brought them too late, or had been aware of Wells Fargo's misconduct at the time they arose.

The October 2012 lawsuit accused Wells Fargo of misleading the U.S. Department of Housing and Urban Development into believing its loans qualified for insurance from HUD's Federal Housing Administration.

As in many of the government's major financial crisis-era cases, no individuals were named as defendants. The Justice Department is also seeking civil penalties as well as damages.

"We are disappointed with the court's ruling, but we look forward to presenting facts to vigorously defend against this action," Wells Fargo spokesman Ancel Martinez said. "Wells Fargo denies the allegations and believes it acted in good faith and in compliance with Federal Housing Administration and Department of Housing and Urban Development rules."

In afternoon trading, the bank's shares were down 51 cents at $41.80 on the New York Stock Exchange.

LONG STATUTE OF LIMITATIONS

The lawsuit is one of several filed by the government seeking to hold financial companies liable under FIRREA, the federal False Claims Act, or both for shoddy mortgage loans that helped fuel the U.S. housing and financial crises.

FIRREA has become a favorite tool to address alleged mortgage fraud because of its 10-year statute of limitations, twice the length than allowed under other federal securities laws.

The lawsuit against Wells Fargo alleges that the FHA paid hundreds of millions of dollars on insurance claims on thousands of defaulted mortgages as a result of false certifications by Wells Fargo. The bank was sued under both FIRREA and the False Claims Act.

According to the government, Wells certified more than 100,000 loans for FHA insurance despite knowing that borrowers' ability to make payments had not been properly vetted.

The government also said that from 2002 to 2010, Wells Fargo identified 6,558 loans as having materially violated HUD requirements, but reported only 238 of them.

U.S. Attorney Preet Bharara in Manhattan, at the time he brought the case, faulted Wells Fargo's alleged "longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance."

Furman rejected Wells Fargo's argument that it need not face the lawsuit because it had joined a $25 billion federal settlement in April 2012 with several banks over alleged foreclosure abuses. The judge supervising that accord, U.S. District Judge Rosemary Collyer in Washington, D.C., in February rejected a similar claim by the bank.

Trial began on Tuesday in the Bank of America case before Judge Rakoff. There, the government accuses the second-largest U.S. bank of violating FIRREA through the fraudulent sale of risky loans to Fannie Mae and Freddie Mac.

In 2012, the government settled False Claims Act mortgage cases for $1 billion with Bank of America, $202.3 million with Deutsche Bank AG, $158.3 million with Citigroup Inc and $132.8 million with Flagstar Bancorp Inc.

The case is U.S. v. Wells Fargo Bank NA, U.S. District Court, Southern District of New York, No. 12-07527.

(Editing by Lisa Von Ahn and Carol Bishopric)

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