Fifth Third pays $85M to settle fraud

Fifth Third admitted on Tuesday it improperly certified more than 1,400 mortgage loans it knew were defective as eligible for Federal Housing Administration insurance, costing taxpayers millions.

Now, the Cincinnati-based regional bank will pay $85 million to settle a civil fraud claims, federal authorities said Tuesday.

The FHA lost millions of dollars as a result of bad loans made by Fifth Third between 2003 and 2013, leading up to and continuing after the nation's real estate collapse and subsequent foreclosure crisis.

Fifth Third later discovered the 1,439 mortgages were materially defective – and therefore ineligible for FHA insurance – during post-closing quality reviews, but did not voluntarily report its findings to the government until 2012. The U.S. Department of Housing and Urban Development ultimately paid insurance claims on 519 of the loans that defaulted.

Fifth Third's quality control personnel were making false representations about the loans before and during the time the bank accepted $3.4 billion in federal money from the Troubled Asset Relief Program, the bank acknowledged in the settlement. The bank participated in the program from 2008 to 2011.

Regulators demand full and timely disclosure of such issues because taxpayers ultimately foot the bill when the FHA must cover bad loans, federal authorities said.

“Federal insurers rely on banks when they promise that the mortgage loans they originate are eligible for that insurance,” U.S. Attorney Preet Bharara said in a prepared statement. “When banks discover that some of the loans are lemons and that their promises of quality were false, as Fifth Third Bank did, they must come forward and report it promptly, so that taxpayers don’t get stuck with the bill."

Shoddy lending practices to risky mortgage borrowers are widely blamed for perpetuating the real estate bubble that touched off the 2008 financial crisis and ultimately the Great Recession. Financial markets plowed money into the U.S. real estate market, and banks and mortgage lenders were flush selling off those home loans to eager bond investors.

But panic ensued when homeowners began to default on their mortgages. Beyond government-guaranteed loans, Fifth Third and  many peers were saddled with billions of dollars in bad mortgages they were ultimately forced to write off.

Fifth Third has fired bank employees responsible for not disclosing the problem loans sooner. It could not be learned Tuesday if these ex-employees faced any other consequences.

Under the settlement, Fifth Third agreed to cover federal losses on the loans that defaulted. The bank also agreed to cover HUD for all losses the agency may incur on the remaining defective loans that have not yet defaulted.

Fifth Third admitted and accepted responsibility for failing to self-report mortgage loans it knew to be defective, contrary to HUD requirements. The bank has also reformed its business practices.

Federal officials said Fifth Third's failure to disclose the faulty loans was costly, but praised the bank for ultimately coming clean and resolving the case.

“The bank’s false representations cost HUD millions of dollars to pay insurance claims," said Christy Goldsmith Romero, Troubled Asset Relief Program special inspector general. "Fifth Third’s actions to fire those employees, voluntarily disclose its violations... to law enforcement, and make corporate changes should stand as an example for others who violated the law. It is always better to disclose those violations rather than wait" for federal authorities to find them, she said.

Fifth Third's stock closed at $18.95, down 18 cents on Tuesday.

"We are pleased to have concluded this agreement with the government, covering loans dating to the financial crisis," Fifth Third spokesman Larry Magnesen said. "We are excited about the future of our mortgage business." He said the bank would have no further comment.