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Wells Fargo Enters Into Settlement With DOJ for RMBS Suit

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Wells Fargo & Company (WFC - Free Report) has been slapped with a penalty of $2.09 billion by the U.S. Department of Justice (“DOJ”) for actions that the regulator assumes contributed to the 2008 financial crises. Wells Fargo did not admit liability.

Allegations Put Forth by Regulator

Wells Fargo has been charged for originating and selling residential mortgage loans, despite having knowledge that these loans contained misstated income information and did not meet the quality that the company represented.

Further, the regulator noted that in 2005, Wells Fargo underwent an initiative to speed up its subprime and other risky loans originations by loosening requirements that customers had to fulfill for borrowing loans.

Further, Wells Fargo kept this information from its investors by reporting false debt-to-income ratios relating to the loans sold. Wells Fargo sold at least 73,539 such loans that were included in RMBS between 2005 and 2007.

The bank’s misdeed is said to have impacted a number of investors, including federally insured financial institutions, and led to billions of dollars in losses as nearly half of these loans defaulted.

Wells Fargo’s Reaction

“We are pleased to put behind us these legacy issues regarding claims related to residential mortgage-backed securities activities that occurred more than a decade ago,” said Wells Fargo CEO Tim Sloan.

The bank plans to continue providing mortgage finance and remains committed to expanding sustainable homeownership opportunities for customers.

Per the statement released by bank, the amount of the settlement was fully accrued as of Jun 30, 2018.

Similar Action Against Other Banks

The DOJ has made settlements with a number of banks, including Wall Street biggies such as Bank of America, JPMorgan (JPM - Free Report) , Goldman Sachs and Citigroup (C - Free Report) . Some foreign banks such as Deutsche Bank (DB - Free Report) , Credit Suisse and The Royal Bank of Scotland have been found to have conducted improper RMBS sale activities prior to the financial crisis.

Bank of America and JPMorgan are likely to have paid the highest penalty of nearly $17 billion and $13 billion, respectively.

Our Viewpoint

The latest settlement comes as another blow to the bank’s reputation, which was already severely impacted by the illegal sales activities that became public in September 2016.

However, Wells Fargo’s efforts to move ahead of its past misconducts and legal involvements are encouraging. Further, its full-year cost savings plan of $2 billion will help it deal with the pressure on financials. Also, the bank’s efforts to recover its image, along with an improving economic backdrop might support its growth in the near term.

The stock has declined 4.9% so far this year, versus the industry’s rally of 1.1%.

Wells Fargo currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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