Wells Fargo Mortgage Suit: Using Existing Powers to Confront Housing Problems

David C. John / October 18, 2012

Last week, Wells Fargo, the nation’s largest mortgage lender, was sued by the U.S. Attorney in Manhattan for allegedly defrauding the Federal Housing Administration (FHA).

This is just the latest proof that additional regulation of major banks’ mortgage lending is not needed. As a series of recently filed lawsuits shows, regulators and the Justice Department already have sufficient powers to deal with these major problems.

The validity of the charges against Wells Fargo is something for the courts to decide. The civil suit charges that the lender made over 100,000 FHA-insured mortgages that it knew were substandard and then failed to notify the agency when problems appeared. FHA ended up paying about $190 million in insurance claims on about 6,320 mortgages that defaulted.

This is the latest of several such suits filed by a special task force that was created in 2009 to pursue financial crimes that grew out of the 2008 housing and financial crash. Bank of America, Citi, and Michigan’s Flagstar paid hefty settlements after they were hit with similar charges.

The cases are being brought using the Financial Institutions Reform, Recover, and Enforcement Act, a 1980s law that gives the government broad authority to file civil cases that can result in large financial penalties against federally insured banks.

This law and those used to file other suits against mortgage lenders show that the government has had sufficient powers for many years to deal with the kind of financial misdoing that helped to cause the 2008 crash but failed to use them until recently. The dozens of new laws and regulations resulting from the ill-conceived Dodd–Frank financial reform law were largely unnecessary and have only served to discourage mortgage lending and make the housing crisis worse.