Wells Fargo Bank has agreed to pay a $2.09 billion fine to settle claims that it misled investors about the quality of subprime mortgage loans it created and sold between 2005 and 2007, the U.S. Department of Justice announced Wednesday.
The collapse of the subprime mortgage market helped to trigger the global financial crisis of 2008. Other financial institutions that participated have previously also agreed to settlements with the Justice Department.
San Francisco-based Wells Fargo does not admit to any wrongdoing in the settlement, which was signed by both sides today.
“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,” Wells Fargo chief executive officer Tim Sloan said in a statement.
U.S. Attorney Alex Tse said, “Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted.
“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” Tse said.
Subprime mortgages are those given to people who have lower credit ratings and therefore pay interest rates above the prime interest rate. The settlement also concerns another mortgage category known as Alt-A, which is rated between subprime and prime.
According to Justice Department allegations set forth in the settlement documents, Wells Fargo decided in 2005 to double its production of subprime and Alt-A loans. To promote that goal, it allowed more so-called stated-income loans, in which borrowers could state their income without being required to provide documentation.
The settlement document alleges that internal testing by Wells Fargo showed that nearly half the borrowers had an actual income at least 20 percent lower than the stated income without a plausible explanation. The average discrepancy in an initial round of testing was 65 percent, the document said.
Wells Fargo failed to disclose the discrepancies to investors when it packaged the loans into financial instruments known as residential mortgage-based securities, according to the Department of Justice.
The settlement document alleges that between 2005 and 2007, Wells Fargo sold at least 73,539 stated-income loans bundled into securities packages, and nearly half those loans have defaulted, causing investors to lose billions of dollars.
The government claims were made under the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The settlement was made out of court without a lawsuit.
Wells Fargo said today it has already set aside the funds for the penalty.
Sloan said the bank now “remains focused on our important role as one of the nation’s leading providers of mortgage financing and on our commitment to expanding sustainable homeownership opportunities for our customers.”
Wells Fargo, which says it is now “recommitting to build a better bank,” has been under fire in the past several years for other practices, including opening unauthorized accounts, charging auto loan customers for unneeded car insurance and allegedly charging overdraft fees in an unfair way.