The Feds Come After Wells Fargo... Again

How many times is it appropriate to punish a company for its misdeeds? If that company is high-profile bank Wells Fargo (NYSE: WFC  ) , the answer seems to be "at least several." In the latest of a series of legal actions against mortgage lenders, Manhattan's U.S. Attorney's office has filed a civil lawsuit against the bank. It's accused of misconduct in its mortgage lending practices in relation to the Federal Housing Administration over a span of more than a decade. The amount the government is seeking wasn't specified, but the office says in the press release announcing the move that the bank's activities cost the government "hundreds of millions" of dollars. Wells Fargo is a multi-billion dollar bank, but even with its oceans of capital, that sort of fine could hurt. 

The wrong kind of three-peat
Wells Fargo must be getting used to this by now. Earlier this year, it settled, to the tune of $175 million, charges from the Department of Justice that it discriminated against more than 30,000 otherwise qualified minority borrowers in its mortgage-granting practices.

The Securities and Exchange Commission got into the act by fining the bank for broadly the same sins the U.S. Attorney says it committed. Taking a slightly condescending tone, the SEC chalked this up to ignorance, claiming that the bank unloaded complex investments tied to mortgage-backed securities "without fully understanding their complexity or disclosing the risks to investors."Which might be why the penalty it handed down was relatively low, at $6.5 million.

Most of the nation's top mortgage lenders have blood on their hands from their questionable actions during the housing boom, in which mortgages were pushed into the hands of many who didn't understand what they were committing to, couldn't afford the debt in the first place, or a suffered from a dangerous combination of the two. But this push by the Feds reeks of politics, election-year appeasement to an American public still angry over the actions of unscrupulous lenders who put many in tough financial positions they could barely escape, if at all.

In this regard, it was probably inevitable that Wells Fargo would find itself in the crosshairs of any government agency that regulates the housing market. The bank is far and away the top originator of housing finance in this country; around one-third of all American mortgages are sourced by the company. If nothing else, bringing the hammer down on such an entity serves notice that every lender that behaved poorly during that era could potentially pay a heavy price for doing so.

Big crowd in the paddy wagon
Very few big players involved in housing finance during that go-go era have escaped punishment. Late last year, Bank of America (NYSE: BAC  ) had to fork over $335 million to the DoJ for discriminatory treatment of borrowers applying for loans to the bank's train wreck of a mortgage subsidiary, Countrywide Financial. Meanwhile, the SEC several years ago punched Goldman Sachs (NYSE: GS  ) with a steep $550 million fine for essentially lying about one of its products tied to sub-prime mortgages.

So, true to form, the U.S. Attorney's fists have been flying in several directions with this initiative, and it's not only the big boys that have been hit. The Wells Fargo suit is the office's fifth action against "reckless residential mortgage lending"; three have been settled without much of a fight. The troika is Citibank (NYSE: C  ) subsidiary CitiMortgage, which paid nearly $160 million in its settlement, regional banking group Flagstar Bancorp's (NYSE: FBC  ) Flagstar Bank ($132.8 million), and Deutsche Bank, along with its subsidiary MortgageIT ($202.3 million). A fourth lawsuit, against Allied Home Mortgage and two of its officials, is yet to be settled or go to court.

Sin tax
Wells Fargo is a well-capitalized bank with a relatively strong balance sheet, but this latest government salvo raises the question of how sturdy it can remain. Cash and the amounts due from banks stood at a little under $17 billion in the company's most recent quarter. The US attorney's "hundreds of millions" surely won't destroy the bank, but along with the other fines it's paid the government it'll feel a deleterious series-of-tiny-pinpricks effect.

Will this hurt results? Not very much, however since the bank is the industry's Top Dog in terms of mortgage lending it'll take some damage to its reputation and possibly some loss in its current and potential customer base. So it's probably best off settling as quickly and as quietly as it can, as it did with the other fines handed down by the Feds. And hoping it doesn't become the target of yet another round of punishment by the government.

To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America’s prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

Eric Volkman has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup, and Wells Fargo and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Goldman Sachs and Wells Fargo. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 10, 2012, at 8:33 PM, neamakri wrote:

    I have an idea. Since WFC sources one third of all mortgages in the US, why don't they just keep those mortgages and services them by themselves. If they are so big, seems they don't need Freddie or Fannie.

    It would take a while to convert to this business model, but wouldn't it be more profitable in the end? After all, everyone else who handles the mortgages must be doing it for profit. Therefore WFC should cut out the middle men and do it all, keeping all the profit.

    Cash flow blah blah blah. WFC is big enough to pull it off. Plus I think investors would welcome the refreshing new clarity of purpose for a bank; real banking instead of derivatives etc.

    I promise that if WFC does this, I will buy some shares.

  • Report this Comment On October 10, 2012, at 9:03 PM, rd80 wrote:

    "the bank's activities cost the government "hundreds of millions" of dollars"

    Since gov't activities have cost Wells Fargo at least "hundreds of millions", the bank should counter sue.

    Long WFC

  • Report this Comment On August 17, 2013, at 11:27 AM, DukeMontrose wrote:

    As WFC has been a serial fine-payer for criminal activities, would it be fair to label is as a CRIMINAL ENTERPRISE?

Add your comment.

DocumentId: 2051540, ~/Articles/ArticleHandler.aspx, 7/30/2014 4:39:51 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement