Wells Fargo: FHA Certifications and the False Claims Act Mortgage Settlement

In the Wells Fargo False Claims Act settlement, the bank agreed to pay $1.2 billion and admitted certifying ineligible mortgages for Federal Housing Administration insurance, leaving the government to pay claims when some of those loans defaulted. The bank’s own quality reviews had identified thousands of defective loans that it failed to report to the Department of Housing and Urban Development. For someone who underwrites, certifies or reviews mortgages, the striking part is how much the lender already knew.

The Department of Justice announced the civil settlement on April 8, 2016. The agreement resolved civil claims against the bank and its vice president responsible for credit-risk quality assurance. The United States had brought the case in the Southern District of New York over Wells Fargo’s participation in the Direct Endorsement Lender Program.

FHA Insurance Put the Lender’s Certification First

Wells Fargo could originate, underwrite and certify mortgages for Federal Housing Administration insurance without the agency or its parent department checking each loan’s compliance before insurance endorsement. That authority put the lender’s underwriting and quality control at the center of the government’s protection against defective loans.

The Justice Department’s account of the program explains the payment chain. If an insured loan later defaulted, its holder or servicer could submit a claim to the Department of Housing and Urban Development for the outstanding balance and associated costs. The lender’s certification came first. The government’s insurance payment came later.

That is why false certification in this setting reaches deep into the mortgage operation. The loan file supports the eligibility decision that exposes the government to an insured loss. A person reviewing the loan file may see the problem before anyone makes an insurance claim.

The program also required lenders to review loans after closing and disclose serious deficiencies. As described in the government’s complaint, early payment defaults required a full review: loans that went 60 days into default within the first six payments. Lenders also had to take prompt corrective action on fraud or serious underwriting problems and disclose affected loans to the department in writing.

Loan Volume Came With Bonuses, Pressure and Short Deadlines

The government alleged that Wells Fargo pushed FHA loan production at the expense of underwriting quality. Its complaint described temporary employees approving an increasing volume of loans without adequate training, underwriters under pressure to approve more loans, short turnaround times and bonuses tied to approvals.

According to the government’s allegations, management repeatedly received quality-assurance reports showing serious problems in the retail loans the bank was originating for Federal Housing Administration insurance. It nevertheless failed to put effective corrections in place, leaving the department to pay claims on defaulted loans.

We see a basic conflict in that account: the bank rewarded getting loans approved while the government carried the insured loss. A quality-control department can identify that conflict in loan after loan. The reporting decisions became a central part of the government’s claims.

Wells Fargo Admitted Certifying Ineligible Loans

Wells Fargo admitted that from May 2001 through December 2008 it certified certain residential mortgages as eligible for Federal Housing Administration insurance when they were not. It also admitted that the government paid insurance claims when some of those mortgages defaulted.

The admissions described in the settlement announcement show what the bank’s internal reviewers were finding. From May 2001 through January 2003, quality assurance reviewed random samples of retail FHA loans the bank had already originated, underwritten and closed. In several consecutive months, more than 40% of the reviewed loans had a material finding.

The bank’s material-finding category generally covered loan files that failed internal or FHA requirements, contained significant risk factors affecting the underwriting decision, or showed misrepresentation.

For an insider, that detail matters. A review report can show what the lender learned after approving a loan, while the original file and certification show what it had told the government before that review.

Known Defects Stayed Inside the Bank

Wells Fargo also admitted identifying thousands of FHA loans with material findings without reporting them to the Department of Housing and Urban Development.

Between 2002 and October 2005, the bank identified approximately 3,000 FHA loans with material findings through its internal quality reviews. During that period, it made only one self-report to the department, involving multiple loans.

Thousands of flagged loans. One report.

The admissions describe continued failures after the bank changed its reporting policy. Between October 2005 and December 2010, Wells Fargo self-reported approximately 300 loans. Its internal reviews identified more than 2,900 additional FHA loans with material findings that it did not report. The government paid insurance claims when some of those unreported loans defaulted.

The government’s complaint also alleged that the bank’s quality-assurance vice president signed its annual certifications to HUD for certain years. He separately admitted participating in the work on self-reporting policies. He acknowledged that, under the new policy and committee decisions, Wells Fargo did not report the majority of FHA loans its reviews had identified as having material findings.

The government explained why disclosure mattered: the Department of Housing and Urban Development could investigate a defective loan, seek reimbursement for an insurance claim it had already paid, or require the lender to cover a future claim. We see the absurdity: the bank found the defects, then kept the findings from the agency paying the claims.

The Evidence Runs From the Loan File to the Insurance Claim

The useful evidence in an FHA mortgage case connects the underwriting decision, the certification, the lender’s later knowledge and the government payment. Wells Fargo’s admissions make those connections concrete: closed loan files went into quality reviews, reviews produced material findings, and reporting policies determined what reached the department.

An underwriting employee may know why a loan received approval despite a defect. A quality-assurance employee may know how a finding was classified and who received the report. Someone responsible for self-reporting may know which findings reached the committee and why a loan stayed off the disclosure. The holder’s or servicer’s claim records complete the path to the insured loss.

Those records answer different questions. The original file shows the basis for eligibility. The review and its distribution show what the lender knew when it acted. The reporting decision shows how the lender handled that knowledge. Our work with an insider is to connect those decisions to the same loans, rather than leave a serious quality problem floating above the payment evidence.

The Congressional Research Service’s 2009 report, Qui Tam: The False Claims Act and Related Federal Statutes, describes how the law reaches both false requests for payment and knowingly false records that influence payment. In a mortgage business, that helps explain why the certification matters even when a different company later sends the insurance claim.

Which defect affected eligibility, what the department was told, and how that information connected to the insurance payment are questions we work through with the people who know the files.

Other Mortgage Cases Show Why Signoffs and Default Files Matter

In the separate JPMorgan Chase mortgage case, a whistleblower’s complaint alleged that an internal investigation led to a change in who signed lender certifications:

The same complaint alleged that internal reports identified defective Federal Housing Administration and Department of Veterans Affairs loans and that the Department of Housing and Urban Development paid insurance claims involving mortgages that should never have been insured. The alleged change in signers gives an insider something specific to recognize: who was authorized to certify a loan after the internal investigation, and what the underlying file showed when they signed.

The Allied mortgage case supplies the other end of the connection. In its 2019 decision involving Allquest Home Mortgage and Americus Mortgage, the Fifth Circuit tied FHA default losses to the risks created by underwriting defects and unauthorized branches. That makes the default and insurance-payment records part of the same story as the original underwriting.

The Civil Settlement Reached Beyond the Filed Case

The agreement also settled an investigation by the U.S. Attorney’s Office for the Southern District of New York into later Federal Housing Administration lending practices. The U.S. Attorney’s Office for the Northern District of California investigated whether American Mortgage Network, a lender Wells Fargo acquired in 2009, falsely certified and submitted ineligible mortgages for that insurance.

For mortgage insiders with knowledge of false certifications elsewhere, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the Loan Review Found

If you know how defective FHA loans won approval or disappeared from reporting to HUD, speak with our whistleblower experts about those approvals and reporting decisions. We bring in FHA mortgage fraud whistleblower lawyers who understand underwriting and insurance claims, and stay beside you to build your strongest case around what the lender knew and did.