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Instant Analysis: Wells Fargo Agrees to Pay $1.2 Billion in Mortgage Settlement

By Eric Volkman - Feb 8, 2016 at 4:21PM

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The settlement will put a long-simmering lawsuit to rest.

What happened?
Wells Fargo (WFC 1.92%) said that it has reached an agreement in principle to settle a complaint about its mortgage-lending practices. The bank is to pay $1.2 billion in order to, in its words, "resolve certain civil claims that the Federal Government had pending against the Company relating to the Company's Federal Housing Administration... lending program for the time period 2001-2010, as well as other potential civil claims relating to the Company's FHA lending activities for other periods."

In 2012, the Manhattan U.S. Attorney filed a mortgage-fraud lawsuit against Wells Fargo, alleging that, due to the company's "misconduct" in arranging those loans, the FHA was forced to pay hundreds of millions of dollars for insurance claims on mortgages that went into default.

The settlement has led to Wells Fargo increasing its legal accruals for fiscal 2015. This impacts the company's net income for the year, which has been reduced by $134 million ($0.03 per share) to $22.9 billion ($4.12).

Does it matter?
In and of itself, the settlement is not all that significant -- even the full amount is barely 5% of Wells Fargo's freshly adjusted net profit for the year. And relatively speaking, the company has paid relatively little in the wave of big-ticket legal settlements and fines arising from its crisis-era relationship with the FHA. Earlier this year, for example, Goldman Sachs said it would pay around $5.1 billion to settle a state and federal investigation into its conduct in relation to mortgage-backed securities in those bad old days.

Although the $1.2 billion won't make too much of a dent in Wells Fargo's finances -- or by extension, its stock price -- it seems that getting in hot legal water made the bank tighten its standards. Last year, it said it would raise the minimum credit score on selected types of FHA loans. That, plus the settlement, will hopefully make the bank more careful when arranging these mortgages.

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