Wells Fargo officially reaches $1.2B settlement over its FHA lending

The Settlement Resolves claims for the time period between 2001-2010

NEW YORK -- San Francisco bank Wells Fargo Wednesday said it has agreed to fork over $1.2 billion to settle allegations that it fraudulently certified loans in connection with a government insurance program.

In a 2012 lawsuit, the U.S. government accused Wells Fargo of sticking it with "hundreds of millions of dollars" in Federal Housing Authority insurance claims as a result of years of "reckless" underwriting and fraudulent loan certification.

As a result, FHA had to pay out insurance claims on thousands of FHA-insured mortgages that defaulted, the government said.

On Wednesday, Wells Fargo said it had "reached an agreement in principle" with the parties that brought the complaint, including the U.S. Department of Justice, the U.S. Manhattan Attorney’s Office the U.S. Attorney’s Office for the Northern District of California, and the U.S. Department of Housing and Urban Development.

The settlement is expected to retroactively ding the bank's 2015 net income by $134 million, or 3 cents a share, to $22.9 billion, or $4.12 a share, the bank said.

The lawsuit alleged that Wells Fargo recklessly underwrote loans backed by FHA insurance from at least 2001 to 2010.

In that time, the bank certified over 100,000 FHA loans as meeting HUD’s requirements and therefore eligible for FHA insurance, even though the loans had not been properly underwritten and did not meet HUD’s requirements, the lawsuit said.

Wells Fargo also internally identified 6,558 seriously deficient loans that it was required to self-report. But rather than reporting the loans as required, the bank concealed 6,320 of these improperly certified loans, the government alleged.

Eight years after the mortgage meltdown of 2008, big banks continue to pay hefty fines for their alleged contributions to the crisis, including faulty underwriting and their handling of risky mortgage-backed securities, or loans bundled and then sold in slices to investors.

Last month, Goldman Sachs announced a $5.1 billion tentative settlement of a federal and state investigation of the investment for its handling of mortgage-backed securities leading up to the financial crisis.

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