Wells Fargo will pay more than $2 billion for allegedly lying about the quality of subprime and Alt-A mortgages that secured residential mortgage-backed securities in the run-up to the 2008 housing crisis, the Department of Justice (DOJ) announced just last week.
It was similar abuses in the mortgage-backed securities industry that led to the 2008 financial crisis that devastated millions of Americans. Acting U.S. Attorney for the Northern District of California, Alex Tse, said that this “agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted. Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.”
The loans cited by the DOJ were “stated income loans,” a mortgage loan product where the lender accepts the borrower’s stated income without any documentation or verification. According to the DOJ, Wells Fargo was aware that a “substantial” portion of its stated income loans contained inflated incomes from borrowers. However the bank not only failed to disclose this information, but it also misrepresented the income and quality of mortgage borrower’s debt-to-income ratios in selling the loans to mortgage securitizations.
It seems that Wells Fargo even “took steps” to insulate itself from the known risks of those stated income loans by selling most of the loans to mortgage securitizations and not holding them in its own portfolio.
The DOJ noted that Wells Fargo sold at least 73,539 stated income loans that were included in residential mortgage-backed securities (RMBS) between 2005 to 2007. Half of those defaulted. According to the DOJ, “Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in residential mortgage-backed securities containing loans originated by Wells Fargo.”
As with most banks making stated loans, Wells Fargo required its stated loan borrowers to complete the 4506-T form, giving the bank permission to obtain the borrower’s IRS income documents. However, unlike most banks, Wells Fargo had implemented “4506-T testing” in which the bank obtained the borrowers IRS documents on an ongoing sample of loans made and compared the borrower’s stated income to their IRS tax documents.
This testing showed that more than 70% of the loans that Wells Fargo sampled had an “unacceptable” variance, i.e. greater than a 20% discrepancy between the borrower’s stated income and the income information reported to the IRS. Testing further showed the average stated loan borrower inflated income by 65%. However, even though the testing results were widely reported, and employees had called this “discrepancy” to the attention of bank management, the bank still continued making and selling increasing volumes of stated loan mortgages with large unacceptable variances.
Wells Fargo has paid several fines totaling over $2 billion in the past two years, including a record $1.2 billion fine for misrepresenting loans as being eligible for FHA insurance before and during the financial crisis. The bank has also paid fines associated with the succession of scandals starting in 2016 when regulators said the bank had opened millions of fake accounts which resulted in significant unwarranted fees being levied on consumers.
[bctt tweet=”Another giant suffers humiliation and lost customer loyalty. #TBTF #wallstreet #wellsfargo” username=”RichardMBowen”]
While the DOJ’s Alex Tse notes the bank is responsible for originating and selling the tens of thousands of loans that were packaged into securities and which defaulted, Wells Fargo was allowed to not admit liability as part of the settlement. And it’s CEO, Tim Sloan, seems to take this agreement with a grain of salt, stating, “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.”
And it should be noted that although Wells Fargo is the latest bank to settle mortgage-related claims under President Trump’s administration, their fine doesn’t include the billions of dollars in consumer relief that other lenders had to pay in the earlier administration. Wells Fargo has actually gotten off lightly.
The list of lenders called to accountability this year includes, U.K.’s Barclays PLC which agreed to pay $2 billion to settle with the Justice Department over its sale of residential mortgage-backed securities. The Royal Bank of Scotland Group PLC also agreed to pay $4.9 billion in civil penalties. These fines were less than what U.S. authorities had initially asked the banks to pay.
In 2014, Bank of America agreed to pay $16.65 billion to settle RMBS claims, Citigroup settled for $7 billion and JPMorgan Chase & Co. settled similar claims for $13 billion in 2013.
Well, the “misrepresentations” may have occurred a decade ago; however, the damage was monumental and is not over yet. There is a common thread running through the many banks which have been cited for fraud, as I can personally attest to from my own experience at Citigroup and what was certainly at the core of the Too Big To Fail debacle. The parallels between my experience and that reported by other bank whistleblowers, and the continuing saga of bank fraud, theft, misconduct, greed, lack of ethics and governance are astounding.
And so, another financial giant suffers humiliation and lost customer loyalty.
Is the solution a simple one? No. Yet, as I have repeatedly said, an ethical business culture starts at the top, is the expectation, and the senior suite models the behavior it wants and holds all accountable for a culture that meets the company’s stated values.
[bctt tweet=”How did a bank that once supposedly had a strong reputation as being there for customers get to this point? #wellsfargo #TBTF #wallstreet” username=”RichardMBowen”]
The violations and consistent misleading statements by Wells Fargo are problematic. How did a bank that once supposedly had a strong reputation as being there for customers get to this point? Their motto: “Our product: SERVICE. Our value-added: FINANCIAL ADVICE. Our competitive advantage: OUR PEOPLE.”
REALLY? I’ve not seen evidence of this. As we’ve said over and over, it is not the company’s motto or posted ethics guidelines or executives’ lip service that encourages honesty. Much of the financial crisis could have been prevented if the large banks had listened to their own employees and actually followed their own published ethics policies, instead of ignoring and then retaliating against those employees as Wells Fargo and others have done.
To date, though, not much Wells Fargo has said or done builds trust in the company. Wells Fargo, if you’re serious, be transparent, offer real apologies, don’t just slough it off with a “pleased to put behind us these legacy issues.”