Wells Fargo Suit Can Proceed Despite Mortgage Settlement

A federal judge has ruled that the multistate mortgage settlement does not bar a lawsuit by the government against Wells Fargo (WFC) over its lending practices before and after the financial crisis.

The suit, filed in New York in October by the U.S. Attorney's office in Manhattan, may proceed, Judge Rosemary Collyer of the U.S. District Court in Washington ruled on Tuesday. The Justice Department charges the nation's fourth-biggest bank by assets with wrongdoing in connection with loans insured by the Federal Housing Administration over roughly a decade beginning in May 2001.

Wells Fargo contended that a $25 billion pact the judge approved in April among Wells Fargo, Bank of America (BAC), Citigroup (NYSE:C), JPMorgan Chase (JPM), Ally Financial, the Justice Department and 49 states bars the lawsuit.

As part of the settlement, Wells Fargo agreed to pay $5 billion and to take varied steps to help borrowers at risk of foreclosure in exchange for the government's releasing the company from certain liability.

The settlement "wiped the slate clean for Wells Fargo in terms of facing any further liability to the United States (except in carefully crafted, narrow circumstances) for a wide range of Wells Fargo conduct relating to its FHA mortgage loan portfolio, among other areas," Wells' lawyers wrote in court papers filed with Collyer, who approved the settlement.

According to Wells Fargo, the settlement barred the government from bringing additional cases against the bank based on the FHA program unless the government could show that an individual Wells underwriter certified falsely that a specific loan met FHA eligibility requirements,

The company contended that the Justice Department's charges related to allegedly false certifications by the company and not to individual certifications.

Collyer disagreed, interpreting the settlement as authorizing the government to sue Wells Fargo based on allegedly illegal conduct, including violations of FHA requirements, so long as the charges are not based solely on false annual certifications. "The plain language of the release governs and it does not have the meaning ascribed to it by Wells Fargo." Collyer wrote.

"Wells Fargo respectfully disagrees with the court's interpretation of the scope of the release, and is considering its options regarding appeal," Wells Fargo spokeswoman Mary Eshet said in an email.

Ellen Davis, a spokeswoman for the U.S. attorney's office, declined to comment.