Wells Fargo Bank Loses Foreclosure Lawsuit

Hundreds of homeowners were foreclosed on by Wells Fargo inadvertently.

Nearly 400 Wells Fargo clients had their homes foreclosed on by mistake after a software issue prevented them from modifying their mortgages while applying for federal relief. The bank said in a regulatory filing late Friday.

The bank has apologized and put aside $8 million to compensate customers who were harmed by the incident, which took place between 2010 and 2015.

According to Wells Fargo, the software error overestimated consumers’ eligibility for mortgage modifications. Due to the miscalculation, approximately 625 clients have rejected loan modifications from a federal program designed to help homeowners avoid foreclosure.

Despite the fact that Wells originated nearly $95 billion in mortgages in 2017 and is the largest mortgage servicer in the United States, the company has been dealing with public trust issues since September 2016, when it revealed a settlement with banking regulators over creating 3.5 million phantom accounts without customers’ knowledge to meet company sales targets. In one case, the bank agreed to pay $185 million in penalties and $5 million to clients and subsequently dismissed 5,300 people due to the scandal, including its CEO and other top consumer banking officials. The avalanche of scandals didn’t end there, either.

Wells Fargo, the second-largest mortgage lender, agreed to pay a $2.1 billion fine to the US Justice Department last week for offering loans it knew were based on fraudulent income information.

Wells Fargo is subject to a Federal Reserve asset growth cap put in place by former Fed Chair Janet Yellen before she stepped down in February. The Federal Reserve ordered Wells Fargo to correct control and compliance issues related to deceptive consumer banking sales practices. The Securities and Exchange Commission and the Justice Department are looking into its wealth management section separately. The bank said it had reimbursed $114 million to wealth management customers who had been overcharged in the previous seven years and $171 million to foreign-exchange customers.

Last year, Wells Fargo & Co. said that it overcharged 570,00 auto-loan clients for insurance they didn’t request or require. This was a practice that lasted from 2012 to 2017. The bank set aside $80 million for refunds and compensation to victims.

Wells Fargo has agreed to pay a $12 million fine for incorrectly refusing mortgage modifications.

More than 1,800 mortgage borrowers will be compensated in a class-action lawsuit settlement.

Wells Fargo agreed to pay $12 million to more than 1,800 mortgage borrowers to settle a class action complaint alleging that the bank’s clients were wrongly refused loan modifications owing to system mistakes.

Following a hearing between the parties, a judge from the United States District Court for the Southern District of Ohio approved the settlement.

Wells Fargo, the country’s largest depository residential mortgage lender, told HousingWire that the bank is “pleased to be able to put this lawsuit behind us,” but had no more comment on the settlement.

The settlement will give the class members $9 million, with the rest going to plaintiffs’ attorneys, costs, service awards, and settlement expenditures. The date for the benefit distribution is currently set for March 15.

The class action was filed in 2019 by Diane Hawkins and Ethan Ryder.

According to the lawsuit, between 2010 and 2018, Wells Fargo failed to uncover mistakes in its automated system when determining whether borrowers in default were eligible for loan modifications through Fannie Mae or Freddie Mac or through the U.S. Treasury’s Home Affordable Modification Program (HAMP).

Furthermore, the bank failed to examine the program for compliance with federal standards, enabling a potentially life-altering blunder to go untreated for years. One caveat: according to the lawsuit, the government supplied a free tool to the bank, but Wells Fargo chose to utilize its software.

Wells Fargo publicly recognized the computation error in 2018, and the information was included in filings with the Securities and Exchange Commission (SEC). According to the bank, around 625 customers have wrongfully rejected a mortgage modification, with 400 of them facing foreclosure.

Plaintiffs filed a complaint alleging breach of contract, deceptive concealment, and intentional infliction of emotional distress against the bank, which put aside $8 million to be used to compensate the consumers. Wells Fargo denies plaintiffs’ allegations, and the settlement document specifies that it may not be used as an acknowledgment or evidence of the claims’ legitimacy.

In September, the Office of the Comptroller of the Currency hit Wells Fargo with a $250 million civil penalty for “unsafe or unsound” activities in its home loan loss mitigation program.

The agency specifically accused the bank of charging consumers mortgage interest rate lock extension fees, even though specific loan closings failed due to the bank’s fault.

Wells Fargo recently signed a three-year deferred prosecution agreement that forced the bank’s management and board of directors to change. It also necessitated a more robust compliance program.

Last week, Derek Flowers was named as Wells Fargo’s new chief risk officer.

Wells Fargo Bank Acknowledges That It Certified Loans as FHA Mortgage Insurance Eligible When They Were Not, and What It Didn’t Tell HUD About Thousands of Faulty Mortgage Loans.

The U.S. Department of Justice announced that civil mortgage fraud claims against Wells Fargo Bank, N.A. (Wells Fargo), and Wells Fargo executive Kurt Lofrano had been settled. The claims stemmed from Wells Fargo’s participation in the Federal Housing Administration’s (FHA) Direct Endorsement Lender Program. Wells Fargo agreed to pay $1.2 billion and admitted, acknowledged, and accepted responsibility for, among other things, certifying to the Department of Housing and Urban Development (HUD) that certain residential home mortgage loans were eligible for FHA insurance when they were not, resulting in the government having to pay FHA insurance claims when some of those loans defaulted, between May 2001 and December 2008. The agreement resolves the United States’ civil claims in its lawsuit in the Southern District of New York, as well as a subsequent investigation by the United States Attorney’s Office for the Southern District of New York into Wells Fargo’s FHA origination and underwriting practices, and a subsequent investigation by the United States Attorney’s Office for the Northern District of California into whether American Mortgage Network, LLC (AMNET), a subsidiary of Wells Fargo, a subsidiary of Wells Fargo, a subsidiary of Wells

U.S. District Judge Jesse M. Furman for the Southern District of New York approved the settlement today.

The government claimed the following in its second amended complaint filed in federal court in Manhattan:

Wells Fargo has participated in the Direct Endorsement Lender program, run by the Federal Housing Administration. Wells Fargo has the capacity to originate, underwrite, and certify mortgages for FHA insurance as a Direct Endorsement Lender. Suppose a Direct Endorsement Lender authorizes a mortgage loan for FHA insurance, and the loan goes into default. In that case, the holder or servicer of the loan can file an insurance claim with HUD for the outstanding balance of the defaulted loan, plus any associated fees, which HUD must pay. The FHA and HUD do not assess a loan for compliance with FHA standards before it is endorsed for FHA insurance under the Direct Endorsement Lender program. Direct Endorsement Lenders must follow program guidelines to ensure that they are correctly underwriting and certifying mortgages for FHA insurance and maintaining a quality control program that can detect and remedy any underwriting flaws. Conducting a full review of all loans that default 60 days or more within the first six payments, known as “early payment defaults,” taking prompt and adequate corrective action upon discovery of fraud or severe underwriting problems, and disclosing all loans containing evidence of fraud or other serious underwriting deficiencies to HUD in writing are all requirements of the quality control program. Wells Fargo did not meet these essential conditions.

First, between May 2001 and October 2005, Wells Fargo, the nation’s largest HUD-approved residential mortgage lender, engaged in a pattern of reckless origination and underwriting of its FHA retail loans, knowing full well that it would not be held liable if the loans defaulted. Wells Fargo chose to engage temporary personnel to churn out and approve an ever-increasing number of FHA loans to maximize loan volume (and profits) but neglected to give this inexperienced staff sufficient training. Meanwhile, Wells Fargo’s management put pressure on its underwriters to accept an increasing number of FHA loans. The bank also required quick decision-making on whether or not to approve the loans, used inadequate underwriting standards and controls, and rewarded underwriters and other employees depending on the quantity of loans authorized. Wells Fargo’s lending volume and earnings surged as a result, but the quality of its loans deteriorated considerably. Despite the fact that Wells Fargo’s senior management was repeatedly advised by its own quality assurance reviews of severe problems with the quality of the retail FHA loans that the bank was originating, management ignored the findings. It failed to implement proper and effective corrective measures, leaving HUD to pay hundreds of millions of dollars in defaulted loan claims.

Second, Wells Fargo violated FHA program reporting standards by failing to self-report the problematic loans it was originating to HUD. HUD mandated Direct Endorsement Lenders to conduct post-closing reviews of the loans they originated from 2002 to 2010 and report any loans that contained fraud or other significant flaws to HUD in writing. This provision allowed HUD to examine the problematic loans and, if necessary, seek compensation for any claims it had already paid or indemnification for any future claims. During these nine years, Wells Fargo identified thousands of problematic FHA loans that it was required to self-report to HUD through its post-closing assessments, including a significant number of loans that had gone into “early payment default.” However, rather than reporting these loans to HUD as required, Wells Fargo did almost no self-reporting from 2002 to 2005 and barely minor self-reporting after that.

Lofrano, as Vice President of Credit-Risk – Quality Assurance at Wells Fargo, completed the annual certifications necessary by HUD for the bank’s participation in the Direct Endorsement Lender program for specific years on behalf of Wells Fargo. Lofrano also formed and participated in the Wells Fargo self-reporting working group, which was in charge of developing and implementing the company’s self-reporting policies and procedures. That group neglected to report to HUD loans that Wells Fargo had internally identified as having significant underwriting findings, violating HUD’s regulations.

Wells Fargo had confessed, acknowledged, and accepted responsibility for, among other things, the following actions as part of the settlement: Wells Fargo submitted to HUD certifications saying that certain residential house mortgage loans were qualified for FHA insurance when they were not, from May 2001 to on or about December 31, 2008, resulting in the government having to pay FHA insurance claims when some of those loans defaulted. From May 2001 to January 2003, Wells Fargo’s quality assurance group conducted monthly internal reviews of random samples of retail FHA mortgage loans that the bank had already originated, underwritten, and closed, identifying that more than 25% of the loans had a material finding for most of the months. More than 40% of the loans had a material finding for several months. During the months of February 2003 to September 2004, the material discovery rate was more than 20% on several occasions. Wells Fargo classified a “substantial” result as a loan file that did not correspond to internal and particular FHA requirements, had significant risk factors affecting the underwriting decision, and had evidence of fraud.

In addition, Wells Fargo admitted, acknowledged, and accepted responsibility for the following actions: Wells Fargo only submitted one self-report to HUD between 2002 and October 2005, and it involved multiple loans. The bank identified about 3,000 FHA loans with material findings through internal quality assurance checks during the same period. Furthermore, Wells Fargo only self-reported about 300 loans to HUD between October 2005 and December 2010. Wells Fargo’s internal quality assurance reviews found more than 2,900 additional FHA loans with substantial findings that the bank did not self-report to HUD over the same period.