The United States Attorney’s Office for the Southern District of New York has sued Wells Fargo in federal district court in Manhattan under the False Claims Act alleging that the bank “bilked” the Federal Housing Administration by “recklessly” lending money through FHA insured mortgages to low income first time home buyers. No matter how you view the law suit, it alleges a form of mortgage fraud. Three other large banks including Bank of America have been defendants in similar mortgage fraud actions and have agreed to substantial settlements. B of A agreed to a $1 billion settlement.
The complaint dates offending Wells Fargo conduct back as far as 2001 and claims that Wells Fargo lied when it represented that in excess of 100,000 mortgage loans met FHA guidelines when they did not. Wells Fargo claimed no wrongdoing and stated that not only will the bank “vigorously defend” against the allegations, and but it proclaimed their pride in their involvement with federally insured and financed home lending programs. Wells Fargo is one of the largest FHA and Housing and Urban Development (HUD) approved lenders in the country and the leading originator of home loans.
The Wall Street Journal states:
“According to the Department of Housing and Urban Development, Wells originated nearly 214,000 active FHA loans in the two-year period ending in August, accounting for some 9% of FHA-backed loans originated over that period. The company was the biggest FHA lender in the first half of 2012, with more than 11% of the market, according to Inside Mortgage Finance, a trade newsletter. The delinquency rates on those loans are below the industry’s average.”
Wells Fargo denies the claims in the law suit. Nevertheless, the government has brought a treble damages civil mortgage fraud law suit against Wells Fargo as the prognosis appears to be that defaults on FHA mortgage loans will continue to mount, jeopardizing the financial integrity of this federal lending program which permits only a minimal down payment to initiate a home purchase. Why does the Department of Justice initiate civil proceedings against large institutions but at the same time bring criminal actions against mortgage brokers, real estate speculators, closing attorneys, and hard
money lenders? The only distinction between the two types of mortgage fraud cases appears to be a prosecutorial decision that institutional intent was reckless instead of intentional, or simply a decision not to charge a large global company criminally.
Indeed, prosecutors can gather substantial headlines by trumpeting a civil law suit against a large lender and know that in all likelihood, as has repeatedly happened, the institutional defendant will settle for a substantial amount of money. Indeed, Deutsche Bank settled civil fraud charges and paid more than $200 million. Citigroup’s Citimortgage group settled similar claims for $158 million and Bank of America coughed up one billion dollars. But what is striking is that the nature of the claims against these global financial institutions practically mirror criminal charges brought against “low hanging fruit”. Why are civil mortgage fraud cases brought against large institutions while mortgage brokers can face years in prison in criminal mortgage fraud prosecutions?
Perhaps it is because prosecutors know that large institutions will bring substantial legal firepower to bear to a mortgage fraud defense be it civil or criminal. In addition, an indictment of a publicly traded global banking conglomerate for mortgage fraud would directly threaten the integrity of the bank and could threaten on-going viability, despite a vigorous mortgage fraud defense. Indeed, while prosecutors seem to be particularly reluctant to allege that large institutions acted intentionally rather than a lower level of mens rea involving negligence or recklessness, all of the conduct alleged involves the bottom line claim that people were telling lies about material information necessary to determine whether mortgages ought to be approved and funded or not. The government has used an obscure law called
the Financial Institutions Reform, Recover, and Enforcement Act to bring these cases. The law, a product of the saving-and-loans scandals in the late 1980s, gives the government wide latitude to sue civilly and seek significant financial penalties against federally insured banks. That law also has a lower standard of proof than criminal business fraud statutes which are used to charge mortgage fraud.
This is not to say that the Department of Justice should go after large lending institutions like Wells Fargo with criminal indictments. However, it is simply unfair that many smaller players who were active in the mortgage/home sales process in the boom years of the real estate market now face grand jury subpoenas, criminal charges, and potentially massive jail sentences as punishment for mounting a mortgage fraud defense but large companies can buy their way out of trouble.