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Wells Fargo Reaches $2 Bil Subprime RMBS Settlement

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More than two years after revealing a government investigation into how it handled sales of subprime residential mortgage-backed securities, Wells Fargo & Co. has agreed to a more than $2 billion settlement.

In November 2016, the San Francisco-based firm disclosed it was being investigated
various government agencies that are part of the RMBS Working Group of the Financial Fraud Enforcement Task Force.

The agencies, which included the U.S. Department of Justice, were looking into Wells Fargo’s
origination, underwriting and securitization of residential mortgages, including subprime loans.

On Wednesday, the Justice Department announced that it has reached a $2.09 billion settlement with Wells Fargo Bank, N.A., which sponsored the deals, and several of its affiliates.

According to the government, the Sioux Falls, South Dakota-headquartered bank knew misstated income was utilized in the origination and sale of its home loans — which actually didn’t meet the degree of quality it was representing to investors. The misrepresentations allegedly cost investors “billions of dollars.”

False debt-to-income ratios were reported, and fraud controls were touted
to investors even though Wells Fargo failed to disclose discrepancies revealed by the fraud controls, the Justice Department’s news release said.

Securitizations of
Wells Fargo’s stated-income mortgages was 73,539 units between 2005 and 2007, the government’s statement said, and nearly half of the loans defaulted.

The Justice Department noted that the bank insulated itself from stated-income loans by keeping many of them out of its own investment portfolio and limiting its liability to third parties for the accuracy of the loans.

Its alleged actions violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

The Justice Department said the practices began in 2005 as part of Wells Fargo’s initiative
to double its origination of subprime and Alt-A mortgages.

A sample testing by Wells Fargo utilizing Internal Revenue Service form 4506-T on its stated-income loans reportedly indicated an average variance of around 65 percent.

“After receiving these results, Wells Fargo conducted further internal testing,” the Justice Department said. “This additional testing, performed by quality assurance analysts, was designed to determine if ‘plausible’ explanations existed for the ‘unacceptable’ variances over 20 percent.

“This additional step revealed that nearly half of the stated income loans that Wells Fargo tested had both an unacceptable variance and the absence of a plausible explanation for that variance.”

But even though the results from the 4506-T testing were disclosed in widely distributed internal company reports, Wells Fargo expanded its stated-income lending, the government claims.

“Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted,” Acting U.S. Attorney for the Northern District of California Alex G. Tse said in the government’s announcement. “Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.”

In a written statement, Wells Fargo said that it will be released from any potential claims arising under the Program Fraud Civil Remedies Act, the Injunctions against Fraud Act and on certain other grounds.

Wells Fargo & Co. Chief Executive Officer Tim Sloan noted in the statement that the activities happened more than a decade ago and the company is glad to put RMBS legacy issues “behind us.”

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