Wells Fargo branch in San Francisco. Credit: Mike Scarcella/ ALM

Wells Fargo Bank will pay a $2 billion civil penalty to settle claims that its home mortgages contained misstated information in violation of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, federal prosecutors in California announced Wednesday.

Investors in residential mortgage-backed securities incurred billions in losses as a result of the bank’s conduct, according to a statement from the U.S. District Attorney’s Office for the Northern District of California.

“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” said acting U.S. Attorney for the Northern District of California Alex G. Tse. “Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted. Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.”

Wells Fargo did not immediately respond to a request for comment.

The government claimed that in 2005 Wells Fargo started to double its production of subprime and Alt-A loans. As part of the alleged scheme, Wells Fargo slackened its requirements for originating stated income loans, or loans where borrowers list their income without providing any evidence.

Wells Fargo subjected the loan applications to 4506-T form testing, which allows a lender to look up a borrower’s IRS history. The results showed that nearly half of all the stated incomes of the prospective borrowers had “unacceptable variances.”

The government further claimed that despite Wells Fargo’s “knowledge that a substantial portion of its stated income loans contained misstated income, Wells Fargo failed to disclose this information, and instead reported to investors false debt-to-income ratios in connection with the loans it sold,” the statement said.

“Wells Fargo also allegedly heralded its fraud controls while failing to disclose the income discrepancies its controls had identified,” it continued. “The United States further alleged that Wells Fargo took steps to insulate itself from the risks of its stated income loans, by screening out many of these loans from its own loan portfolio held for investment and by limiting its liability to third parties for the accuracy of its stated income loans. Wells Fargo sold at least 73,539 stated income loans that were included in RMBS between 2005 to 2007, and nearly half of those loans have defaulted, resulting in billions of dollars in losses to investors.”

Tse’s office prosecuted the case in cooperation with the Department of Justice Commercial Litigation Branch and the Office of the Inspector General.