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At the same time, the United States Department of Justice filed a lawsuit against Wells Fargo alleging that Wells Fargo engaged in a pattern of deficient training, underwriting, and disclosure causing FHA to incur millions of dollars in insurance claims. Specifically, Wells Fargo’s practices of hiring temporary staff, paying bonuses to approve loans, and incentivize loan officers to originate inappropriate loans combined with a failure to provide adequate quality control lead and report material internal violations resulted in millions in insurance claims.
These are likely the first of numerous lawsuits that will be filed by federal and state governments and agencies asserting claims of downstream losses associated with improper underwriting and lending practices. While these cases will most likely focus upon practices that have long since changed since the mortgage meltdown, it is probable that the claims will result in new legal theories to challenge compliance deficient practices moving forward. Indeed, as patterns of deficiency become legally synonymous with fraud the opportunity for investors, mortgage insurers and downstream purchasers of mortgage backed securities to initiate litigation expand. Of course, this will only compound investors’ desire to ensure that lenders as a matter of practice and procedure maintain compliant practices and an infrastructure and business model consistent with compliance. Moreover, it is incumbent to balance compensation and origination incentives with quality assurance. Lenders must be cautious to implement compensation protocols that balance risk with reward.
None of the above is new. We have been hearing about such concepts and requires for several months. However, rather than this being driven by new regulations and laws, it is now being driven by litigation–which often is even more effective in permanently institutionalizing change.
