Wells Fargo to pay $2B penalty tied to crisis-era mortgages

Wells Fargo on Wednesday agreed to pay more than $2 billion to settle allegations related to the bank’s offering of subprime mortgages in the years leading up to the 2008 financial crisis.

Wells Fargo said it will pay a $2.09 billion fine following Justice Department allegations that the lender misled purchasers of securities backed by flimsy mortgages issued by the bank between 2005 and 2007.

The Justice Department said purchasers of securities backed by Wells Fargo mortgages, including other federally insured banks, lost billions of dollars because the bank knowingly misrepresented the quality of loans funding those investments.

The settlement is the latest fine paid by a major bank for involvement in the risky lending and trading of mortgage-backed securities that led to the collapse of the U.S housing market and contributed to the 2008 financial crisis.

“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” said Alex G. Tse, acting U.S. attorney for the Northern District of California, in a statement. “Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted.”

Residential mortgage-backed securities are investment products funded by the profits a bank makes when a pool of customers pays off portions of their home loans. The success of the security is based on the expectation that the majority of mortgage recipients in the pool will meet their payments in full and on time.

Wells Fargo executives allegedly pushed their loan officers to offer mortgages to customers who would otherwise be ineligible through a 2005 “Courageous Lending” campaign.

Like several major U.S. banks at the time, Wells Fargo sold securities backed by so-called subprime and alt-A mortgages, or riskier home loans made to customers with troubled credit histories or limited incomes.

The Justice Department said Wells Fargo sold knowingly sold securities backed by more than 70,000 subprime and alt-A loans extended to customers who overstated their ability to pay the loans.

More than 70 percent of mortgages tested by Wells Fargo between 2005 and 2007 had “unacceptable” differences between income levels reported by customers and verified figures reported by the IRS, according to the settlement.

Wells Fargo allegedly circulated the results of the test internally, but decided to expand its subprime lending program instead of curtailing it. The bank also allegedly did not disclose the results of the study from purchasers of mortgage-backed securities, and continued to report incorrect debt-to-income ratios of the recipients of their subprime loans.