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Wells Fargo to Pay $2 Billion Penalty for Allegedly Misrepresenting Loan Quality in RMBS

The bank has settled the U.S. Department of Justice’s claims that it contributed to the 2008 financial crisis by originating loans that it knew did not meet the quality it represented.

  • By Christine Idzelis

The U.S. Department of Justice announced Wednesday that Wells Fargo & Co. has agreed to pay $2.09 billion in penalties to settle claims that it misrepresented the quality of residential mortgage loans that the bank originated and sold to investors before the 2008 financial crisis.

Federally insured financial institutions were among the investors that lost billions from residential mortgage-backed securities containing loans originated by Wells Fargo, according the Justice Department’s statement. The DOJ claimed that the bank knew the loans contained “misstated income information” and did not meet the quality it represented. 

In paying the civil penalty, the bank settled the claims without admitting any liability. 

“This settlement holds Wells Fargo accountable for actions that contributed to the financial crisis,” Jesse Panuccio, acting associate attorney general, said in the statement. “It sends a strong message that the department is committed to protecting the nation’s economy and financial markets against fraud.”  

The U.S. government alleged that Wells Fargo in 2005 began an initiative to double its production of subprime and “Alt-A” loans. As part of this goal, the bank loosened its requirements for loans accessible without documentation supporting borrowers’ stated incomes, according to the DOJ. 

Wells Fargo sold at least 73,539 “stated income loans” that were included in RMBS deals between 2005 to 2007, and nearly half of them have defaulted, the DOJ said. The government alleged that Wells Fargo “took steps to insulate itself from the risks of its stated income loans,” keeping many of them out of its own investment portfolio.

“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” Alex Tse, the acting U.S. attorney for the northern district of California, said in the DOJ’s statement. “Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.”

[II Deep Dive: Eleven Years Later, Barclays to Pay $2 Billion Penalty Over Mortgage Bonds]

Under the settlement, the U.S. government has agreed to release Wells Fargo from any potential claims arising under the Program Fraud Civil Remedies Act and the Injunctions against Fraud Act, according to a statement from the bank Wednesday.

“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,” Tim Sloan, Wells Fargo’s chief executive officer, said in the statement. “Wells Fargo remains focused on our important role as one of the nation’s leading providers of mortgage financing and on our commitment to expanding sustainable homeownership opportunities for our customers.”

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