Acting Manhattan U.S. Attorney Settles Civil Lawsuit Against HSBC Bank USA, N.A., Regarding Failure To Disclose Fraud Or Potential Fraud In Guaranteed Loans

Defendant HSBC Bank USA, N.A., Admits Submitting Dozens of Loans for Payment on SBA Guarantees Without Disclosing that Loans Had Been Identified as Fraudulent or Potentially Fraudulent

  Joon H. Kim, the Acting United States Attorney for the Southern District of New York, and Eric S. Benderson, the Acting General Counsel of the U.S. Small Business Administration (“SBA”), announced today that the United States has settled a civil fraud lawsuit against HSBC BANK USA, N.A. (“HSBC”). The Government’s complaint, filed on April 10, 2017 (the “Complaint”), sought damages and civil penalties under the False Claims Act for misconduct in connection with HSBC’s participation in the SBAExpress loan program, which was designed to help start-ups and existing small businesses. The Complaint alleged that, as part of an internal review designed to identify reasons for defaults on loans to small and medium-size enterprises, HSBC identified dozens of SBAExpress loans as fraudulent or potentially fraudulent, since borrowers appeared to have submitted false information to HSBC to obtain the loans. The Complaint further alleged that after 42 of these loans defaulted, HSBC sought reimbursement from the SBA without revealing the facts suggesting that borrowers submitted false information to HSBC to obtain many of the loans, or the fact that HSBC had included the loans on an internal list of fraudulent or potentially fraudulent loans. In the settlement approved today by U.S. District Judge Lorna G. Schofield, HSBC agreed to pay $2,118,861.36 to resolve the Government’s claims, and admitted, acknowledged, and accepted responsibility for conduct alleged in the Complaint.

Manhattan Acting U.S. Attorney Joon H. Kim said: “Lenders must disclose material information for our agency partners like the SBA, who administer federal loan programs. When they fail to do so – as HSBC did here, by submitting loans for repayment on SBA guarantees without disclosing that the loans had been identified as potentially fraudulent – they need to be held to account. This settlement reflects the Office’s continuing commitment to keep lenders who participate in federal lending programs honest.”

SBA Acting General Counsel Eric S. Benderson said: “This case is yet another example of the tremendous results achieved through the joint efforts of the SBA and the Department of Justice to uncover and forcefully respond to civil fraud committed by those who participate in SBA’s lending programs. Identifying and aggressively pursuing instances of civil fraud by participants in the Agency’s lending programs is one of SBA’s top priorities.”

The Government’s lawsuit alleged as follows:

In or around 2006, HSBC conducted an internal review to identify reasons for the default rates on loans it had made to small and medium-size enterprises, including but not limited to loans issued pursuant to SBAExpress. HSBC created a list of known fraud accounts as part of the review. HSBC identified many SBAExpress loans as fraudulent or potentially fraudulent in which borrowers may have submitted false information to HSBC in obtaining their loans, including 42 loans (the “Loans”) referenced in an exhibit attached to the Complaint.

After the Loans defaulted, HSBC sought reimbursement from SBA for the guaranteed amount on each of these Loans (up to 50 percent of the principal of the Loans) without telling SBA that many of the Loans were fraudulent or potentially fraudulent. Specifically, HSBC did not inform SBA of all of the facts indicating that borrowers may have submitted false information to HSBC in connection with the origination of many of the Loans, or that HSBC had included these Loans on an internal list of fraudulent or potentially fraudulent loans. HSBC’s failure to disclose that it had determined that many of the Loans were fraudulent or potentially fraudulent rendered HSBC’s reimbursement requests for losses incurred in connection with the Loans false, misleading, and/or fraudulent. The submissions made to SBA in connection with seeking reimbursement on many of these Loans contained half-truths and material omissions by failing to disclose facts about fraud or potential fraud by borrowers when the Loans were originated.

The case was initially brought by a whistleblower under the False Claims Act, and the Government intervened in the case.

Pursuant to the settlement, HSBC will pay the United States $2,118,861.36. As part of the settlement, the bank admitted, acknowledged, and accepted responsibility for the following conduct:

• In or around 2006, HSBC voluntarily commenced an internal effort to gain an understanding of the reasons for the default rates on loans that it had made to small and medium-size enterprises, including but not limited to loans issued pursuant to the SBAExpress program. HSBC’s efforts included an attempt to identify whether any of the loans involved fraud or potential fraud by borrowers;
  
  
• As part of this effort, HSBC identified a number of loans as fraudulent or potentially fraudulent in which borrowers may have submitted false information to HSBC in obtaining their loans, including the Loans;
  
  
• HSBC subsequently sought from SBA the guaranteed amounts on each of these Loans (i.e., up to fifty percent of the principal of the Loans) after the loans defaulted;
  
  
• In submitting the requests for payment to SBA of the guaranteed amounts of certain Loans, HSBC did not inform SBA of all of the facts indicating that borrowers may have submitted false information to HSBC in connection with the origination of these loans, or that as a result HSBC had identified these loans as fraudulent or potentially fraudulent. 

Mr. Kim thanked SBA for its investigative efforts and assistance with the case.

Manhattan U.S. Attorney Announces $1.2 Billion Settlement Of Its Claims Against Wells Fargo Bank, N.A., For Improper Mortgage Lending Practices

 

Wells Fargo Bank Admits That It Certified That Loans Were Eligible for FHA Mortgage Insurance When They Were Not, and That It Did Not Report Thousands of Faulty Mortgage Loans to HUD

Preet Bharara, the United States Attorney for the Southern District of New York, Julián  Castro, Secretary of the U.S. Department of Housing and Urban Development (“HUD”), Benjamin C. Mizer, Principal Deputy Assistant Attorney General for the Justice Department’s Civil Division, Brian J. Stretch, United States Attorney for the Northern District of California, and David A. Montoya, Inspector General of HUD (“HUD-OIG”), announced today that the United States has settled civil mortgage fraud claims against WELLS FARGO BANK, N.A. (“WELLS FARGO” or the “Bank”), and WELLS FARGO executive KURT LOFRANO (“LOFRANO”), stemming from WELLS FARGO’s participation in the Federal Housing Administration (“FHA”) Direct Endorsement Lender Program.  In the settlement, WELLS FARGO agreed to pay $1.2 billion and admitted, acknowledged, and accepted responsibility for, among other things, certifying to HUD, during the period from May 2001 through December 2008, that certain residential home mortgage loans were eligible for FHA insurance when in fact they were not, resulting in the Government having to pay FHA insurance claims when certain of those loans defaulted.  The agreement resolves the United States’ civil claims in its lawsuit in the Southern District of New York, as well as an investigation conducted by the U.S. Attorney’s Office for the Southern District of New York regarding WELLS FARGO’s FHA origination and underwriting practices subsequent to the claims in its lawsuit, and an investigation conducted by the U.S. Attorney’s Office for the Northern District of California into whether American Mortgage Network, LLC (“AMNET”), a mortgage lender acquired by WELLS FARGO in 2009, falsely certified and submitted ineligible residential mortgage loans for FHA insurance.

The settlement was approved today by U.S. District Judge Jesse M. Furman.

Manhattan U.S. Attorney Preet Bharara said: “Today, Wells Fargo, one of the biggest mortgage lenders in the world, has been held responsible for years of reckless underwriting, while relying on government insurance to deal with the damage.  Wells Fargo has long taken advantage of the FHA mortgage insurance program, designed to help millions of Americans realize the dream of home ownership, to write thousands and thousands of faulty loans.  Driven to maximize profits, Wells Fargo employed shoddy underwriting practices to drive up loan volume, at the expense of loan quality.  Even though Wells Fargo identified through internal quality assurance reviews thousands of problematic loans, the Bank decided not to report them to HUD.  As a result, while Wells Fargo enjoyed huge profits from its FHA loan business, the government was left holding the bag when the bad loans went bust.  With today’s settlement, Wells Fargo has finally resolved the years-long litigation, adding to the list of large financial institutions against which this Office has successfully pursued civil fraud prosecutions.” 

HUD Secretary Julián Castro said: “This Administration remains committed to holding lenders accountable for their lending practices.  The $1.2 billion settlement with Wells Fargo is the largest recovery for loan origination violations in FHA’s history.  Yet, this monetary figure can never truly make up for the countless families that lost homes as a result of poor lending practices.” 

Principal Deputy Assistant Attorney General Benjamin C. Mizer said: “This settlement is another step in the Department of Justice’s continuing efforts to hold accountable FHA approved lenders that unlawfully submitted false claims at the expense of American homeowners and taxpayers.  In addition to today’s resolution with Wells Fargo, the department has pursued similar misconduct by numerous other lenders, returning more than $4 billion to the FHA fund and the Treasury and filing suit where appropriate.  We remain committed to protecting the public fisc from all who seek to abuse it, whether they do business on Wall Street or Main Street.”

Northern District of California U.S. Attorney Brian Stretch said: “Misconduct in the mortgage industry helped lead to a destructive financial crisis that spanned the globe.  American Mortgage Network’s origination of FHA-insured loans that did not comply with Government requirements also caused major losses to the public fisc.  Today’s settlement demonstrates the Department of Justice’s resolve to pursue remedies against those who engaged in this type of misconduct.”                     

HUD Inspector General David A. Montoya said:  “This matter is not just a failure by Wells Fargo to comply with federal requirements in FHA’s Direct Endorsement Lender program – it’s a failure by one of our trusted participants in the FHA program to demonstrate a commitment to integrity and to ordinary Americans who are trying to fulfill their dreams of homeownership.”

According to the Second Amended Complaint filed in Manhattan federal court:

WELLS FARGO has been a participant in the Direct Endorsement Lender program, a federal program administered by FHA.As a Direct Endorsement Lender, WELLS FARGO has the authority to originate, underwrite, and certify mortgages for FHA insurance.If a Direct Endorsement Lender approves a mortgage loan for FHA insurance and the loan later defaults, the holder or servicer of the loan may submit an insurance claim to HUD for the outstanding balance of the defaulted loan, along with any associated costs, which HUD must then pay.Under the Direct Endorsement Lender program, neither FHA nor HUD reviews a loan for compliance with FHA requirements before it is endorsed for FHA insurance.Direct Endorsement Lenders are therefore required to follow program rules designed to ensure that they are properly underwriting and certifying mortgages for FHA insurance and maintaining a quality control program that can prevent and correct any deficiencies in their underwriting.The quality control program requirements include conducting a full review of all loans that go 60 days into default within the first six payments, known as “early payment defaults”; taking prompt and adequate corrective action upon discovery of fraud or serious underwriting problems; and disclosing to HUD in writing all loans containing evidence of fraud or other serious underwriting deficiencies.WELLS FARGO failed to comply with these basic requirements.

First, between at least May 2001 and October 2005, WELLS FARGO, the largest HUD-approved residential mortgage lender, engaged in a practice of reckless underwriting of its retail FHA loans, all the while knowing that it would not be responsible when the defective loans went into default.To maximize its loan volume (and profits), WELLS FARGO elected to hire temporary staff to churn out and approve an ever increasing quantity of FHA loans, but neglected to provide this inexperienced staff with proper training.At the same time, WELLS FARGO’s management applied pressure on its underwriters to approve more and more FHA loans.The Bank also imposed short turnaround times for deciding whether to approve the loans, employed lax underwriting standards and controls, and paid bonuses to underwriters and other staff based on the number of loans approved.Predictably, as a result, WELLS FARGO’s loan volume and profits soared, but the quality of its loans declined significantly. Yet, when WELLS FARGO’s senior management was repeatedly advised by its own quality assurance reviews of serious problems with the quality of the retail FHA loans that the Bank was originating, management failed to implement proper and effective corrective measures, leaving HUD to pay hundreds of millions of dollars in claims for defaulted loans.

Second, WELLS FARGO failed to self-report to HUD the bad loans that it was originating, in violation of FHA program reporting requirements.During the period 2002 through 2010, HUD required Direct Endorsement Lenders to perform post-closing reviews of the loans that they originated and to report to HUD in writing loans that contained fraud or other serious deficiencies.This requirement provided HUD with an opportunity to investigate the defective loans and request reimbursement for any claim that HUD had paid or request indemnification for any future claim, as appropriate.During this nine-year period, WELLS FARGO, through its post-closing reviews, internally identified thousands of defective FHA loans that it was required to self-report to HUD, including a substantial number of loans that had gone into “early payment default.”However, instead of reporting these loans to HUD as required, WELLS FARGO engaged in virtually no self-reporting during the four-year period from 2002 through 2005, and only minimal self-reporting after 2005.

In his capacity as Vice President of Credit-Risk – Quality Assurance at WELLS FARGO, LOFRANO executed on WELLS FARGO’s behalf the annual certifications required by HUD for the Bank’s participation in the Direct Endorsement Lender program for certain years.  LOFRANO also organized and participated in the working group responsible for creating and implementing WELLS FARGO’s self-reporting policies and procedures.  In contravention of HUD’s requirements, that group failed to report to HUD loans that WELLS FARGO had internally identified as containing material underwriting findings.  Moreover, LOFRANO received WELLS FARGO quality assurance reports identifying thousands of FHA loans with material findings – very few of which WELLS FARGO reported to HUD.

As part of the settlement, WELLS FARGO has admitted, acknowledged, and accepted responsibility for, among other things, the following conduct:During the period from May 2001 through on or about December 31, 2008, WELLS FARGO submitted to HUD certifications stating that certain residential home mortgage loans were eligible for FHA insurance when in fact they were not, resulting in the Government having to pay FHA insurance claims when certain of those loans defaulted.From May 2001 through January 2003, WELLS FARGO’s quality assurance group conducted monthly internal reviews of random samples of the retail FHA mortgage loans that the Bank had already originated, underwritten, and closed which identified for most of the months that in excess of 25 percent of the loans, and in several consecutive months, more than 40 percent of the loans, had a material finding.For a number of the months during the period from February 2003 through September 2004, the material finding rate was in excess of 20 percent.  A “material” finding was defined by WELLS FARGO generally as a loan file that did not conform to internal parameters and/or specific FHA parameters, contained significant risk factors affecting the underwriting decision, and/or evidenced misrepresentation.

WELLS FARGO also admitted, acknowledged, and accepted responsibility for the following additional conduct:Between 2002 and October 2005, WELLS FARGO made only one self-report to HUD, involving multiple loans.During that same period, the Bank identified through its internal quality assurance reviews approximately 3,000 FHA loans with material findings.Further, during the period between October 2005 and December 2010, WELLS FARGO only self-reported approximately 300 loans to HUD.During that same period, WELLS FARGO’s internal quality assurance reviews identified more than 2,900 additional FHA loans containing material findings.The Government was required to pay FHA insurance claims when certain of these loans that WELLS FARGO identified with material findings defaulted.

LOFRANO admitted, acknowledged, accepted responsibility for, among other things, the following matters in which he participated:From January 1, 2002, until December 31, 2010, he held the position of Vice President of Credit Risk – Quality Assurance at WELLS FARGO; in that capacity, he supervised the Decision Quality Management group; in 2004, he was asked to organize a working sub-group to address reporting to HUD; in or about October 2005, he organized a working group that drafted WELLS FARGO’s new self-reporting policy and procedures; and during the period October 2005 through December 31, 2010, based on application of the Bank’s new self-reporting policy and by committee decision, WELLS FARGO did not report to HUD the majority of the FHA loans that the Bank’s internal quality assurance reviews had identified as having material findings.

Mr. Bharara and Mr. Stretch thanked HUD’s Office of General Counsel, HUD-OIG, and the Commercial Litigation Branch of the U.S. Department of Justice’s Civil Division for their extraordinary assistance with the prosecution and settlement of this case.

This case against WELLS FARGO is the latest in a string of civil fraud lawsuits brought by this Office since May 2011 alleging fraudulent lending practices by residential mortgage lenders.  In addition to WELLS FARGO, this Office has pursued claims against Citi Mortgage (a subsidiary of Citibank), Flagstar Bank, Deutsche Bank (and a number of its subsidiaries), Countrywide, Bank Of America (“BOA”), former BOA executive Rebecca Mairone, Golden First Mortgage Corp. (“Golden First”), former Golden First owner David Movtady, Allied Home Mortgage Corp. (“Allied”), and former Allied executives Jim Hodge and Jeanne Stell.

Assistant U.S. Attorneys Jeffrey S. Oestericher, Christopher B. Harwood, Rebecca S. Tinio, Caleb Hayes-Deats, and Dominika Tarczynska are in charge of the case.