Wells Fargo has agreed to pay $1.2 billion to put to rest claims that it engaged in reckless lending under a Federal Housing Administration program that left a government insurance fund to clean up the mess.
The bank, the nation’s largest mortgage lender, has been in talks with the government since 2012 over accusations that it improperly classified some FHA loans as qualifying for federal insurance when they did not, and that it knew of the misclassification but failed to inform housing regulators about the deficiencies before filing insurance claims.
Wells Fargo, based in San Francisco, had been a holdout among large lenders. Citigroup, Bank of America and JPMorgan Chase previously settled similar claims.
The settlement means that Wells Fargo has to reduce 2015 profit by $134 million to account for the extra legal expense.
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Wells Fargo said in a securities filing Wednesday that it had reached an agreement in principle with the Department of Justice and the U.S. attorney’s offices for the Southern District of New York and the Northern District of California, as well as the Department of Housing and Urban Development. The claims were civil and focused on Wells Fargo’s lending under the FHA program from 2001 to 2010.
When he filed the lawsuit in 2012, Preet Bharara, the U.S. attorney for the Southern District of New York, said that Wells Fargo had engaged in a “reckless trifecta” of poor training, deficient loan underwriting and poor disclosure in the government-backed loan program.
It was one of several lawsuits brought after the financial crisis that accused banks of shoddy lending practices. FHA-backed loans are typically made to first-time home buyers and those with lower incomes.
Wells Fargo denied the claims at the time, and settlement talks have broken down before. In the filing Wednesday, Wells said that although both sides reached the agreement, “there can be no assurance that the company and the federal government will agree on the final documentation of the settlement.”
Regulators have contended that the bank should not have received the insurance proceeds after some of the loans soured. The agreement also includes other potential civil claims relating to FHA lending for other periods, Wells Fargo said.
The settlement will increase the bank’s expenses for last year by $200 million, forcing it to restate 2015 net income by $134 million, or 3 cents a share, to $22.9 billion.