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Are Banks Finally Being Held Accountable for their Role in the Financial Meltdown?

Corporate Social Responsibility Run Amok at Wells Fargo and Bank of America

Have you lost thousands of dollars in retirement money due to stock market declines since the financial meltdown started in 2007? Is your mortgage underwater because lenders made ill-advised loans only to find risky homeowners defaulting on their mortgages? Well, you are not alone in your misery. The recent recession wiped out nearly two decades of Americans’ wealth, according to government data published in the June 2012 Federal Reserve Bulletin, with ­middle-class families bearing the brunt of the decline.

The Federal Reserve Bank said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were in 1992.

The U.S. government has failed to hold banks and financial institution lenders accountable for their lax and even fraudulent mortgage-lending activities that ushered in a period of financial distress from which we still haven’t recovered. If you are looking for institutions to blame for our financial meltdown, look no further than the mega-financial institutions such as Bank of America and Wells Fargo.

On October 9 the government sued San Francisco-based Wells Fargo accusing the biggest U.S. mortgage lender of "reckless" lending and leaving a federal insurance program to pick up the pieces. The action, filed in federal court in Manhattan, is the latest use of the Federal False Claims Act against a lender accused of fraud against the government-backed mortgage insurer, Federal Housing Administration, which has historically backed loans to first-time buyers and those with low incomes.

The Federal False Claims Act has often been used as an effective legal tool because the government can collect treble damages if violations are proven. Back in February, Bank of America agreed to a $1 billion settlement of False Claims Act fraud allegations involving FHA-backed loans without admitting wrongdoing, and three other large banks have agreed to pay more than $490 million total in similar cases, each accepting responsibility for "certain conduct."

Wells Fargo's internal reviews identified more than 6,500 deficient loans it was required to report from 2002 to 2010, including more than 3,000 that were 60 days into default within the first six months, yet only reported about 300 of them to the FHA, allowing it to avoid repayment on about $190 million in benefits, according to the complaint.

Prosecutors are seeking "hundreds of millions of dollars" in damages on behalf of the FHA. The complaint alleges nearly a decade of misconduct dating back to May 2001. The lawsuit contends that Wells Fargo engaged in "regular practice of reckless origination and underwriting" of government-backed loans.

The lawsuit is the third federal mortgage-related case this year for Wells Fargo. The current complaint alleges that the bank knew that in at least half the cases those loans didn't meet federal requirements that would allow them to be insured by the government.

Wells Fargo denied the allegations in the complaint. In a statement in response to the charges, a company spokesperson said it acted in "good faith and in compliance" with federal rules. Many of the issues in the lawsuit had been previously addressed with federal agencies, the company said. “The bank will present facts to vigorously defend itself against this action."

Wells Fargo is not alone in being sued by the government.  In February, Bank of America, the nation’s second biggest lender by size of assets, settled a $1 billion action brought by the U.S. attorney in Brooklyn that sought penalties over loans sold to the FHA. More recently, on October 24, federal prosecutors in New York filed a lawsuit against Bank of America, seeking at least $1 billion in damages for mortgage fraud. According to that suit, after acquiring Countrywide Financial in 2008, Bank of America continued that firm's practice of rapidly issuing mortgages without safeguards that could have weeded out unqualified applicants, then sold the bad mortgages to the federal agencies Fannie Mae and Freddie Mac, sticking them -- and in turn U.S. taxpayers -- with heavy losses and foreclosed properties.

Commenting to Forbes Magazine on October 29 about the October 24, $1 billion suit, Alexandra Liftman, Global Environmental Executive for Bank of America, said:

“Around these legacy mortgage issues…the claim that we failed to repurchase loans from Fannie [Mae], is just false. At some point, Bank of America can’t continue to be expected to compensate entities for the losses that were the result of the financial crisis. That’s the position we have taken on this particular instance…I would also say that whether it’s the principle reduction programs that we have or the loan modification programs that we have, you would come to the conclusion in looking at the numbers, that we have worked really hard to address these issues and that is a big part of our being a socially responsible company.”

I’m not sure how Bank of America defines ‘corporate social responsibility’. I like the straight-forward definition of The World Business Council for Sustainable Development: "Corporate Social Responsibility is the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large."

Given this definition, it is a stretch to consider Bank of America’s actions (and responses) to the financial crisis as a responsible approach to business decision-making. Moreover, the statement by Ms. Liftman that “Bank of America can’t continue to be expected to compensate entities for the losses that were the result of the financial crisis” is a rationalization for unethical actions that Bank of America participated in by selling off securitized mortgage assets to Fannie Mae, the government-sponsored enterprise charged with facilitating the mortgage lending process, all the while knowing those assets were of dubious value.

The collapse of the housing market goes far beyond just the people who lost houses and the federal agencies that ended up stuck with the tab for the bad loans. The results include steep decreases in home prices, underwater mortgages, a stagnant market for home sales in many parts of the country, and now fewer people are qualifying for home loans. These damaging effects will last for a long time until banks become more confident of lending and homeowners feel comfortable enough that an uptick in real estate prices will stabilize the market.

Blog posted by Steven Mintz, aka Ethics Sage, on November 9, 2012