• Thu. Dec 1st, 2022

Judge may soon rule on Wells Fargo commercial real estate ‘ticking time bomb’

ByWillie M. Evans

Mar 7, 2022

A federal judge is set to rule on Wells Fargo’s motion to dismiss a lawsuit that alleges the bank routinely made risky commercial real estate loans using improperly inflated underwriting parameters in the years before and after. the pandemic that left the company and its shareholders vulnerable to losses in 2020.

It also comes as an independent civilian investigation is underway into allegations that the Trump Organization inflated property values to obtain favorable terms on the loans it was requesting or trying to modify.

The plea alleges Wells Fargo had loose underwriting practices that were part of a strategy designed to win over borrowers and grow its commercial real estate business, according to an amended complaint filed Aug. 31. At the same time, the class action alleges the practices contradicted bank executives’ assurances that it used conservative and disciplined underwriting standards.

Instead, the suit alleges, “Wells Fargo was…sitting on a ticking time bomb. His commercial loan portfolio might have flown under the radar when times were good. But when the coronavirus pandemic hit, that market stress exposed pre-existing risks in Wells Fargo’s commercial loans.

Wells Fargo shares fell as this “previously unknown level of risk resulted in huge losses in its commercial lending business during 2020,” the lawsuit says. The bank suffered a loss of $2.4 billion in the second quarter of 2020, its first quarterly loss since late 2008. Wells Fargo shares hovered around $40 in January 2020 but fell to teenage lows in September before recovering to around $30 a year. -end.

The litigation continues as the bank has regained its financial footing. Profit soared 86% in the fourth quarter of 2021 as the company announced an $875 million decrease in the provision for credit losses, marking the fifth consecutive quarter that Wells Fargo has reduced the financial safety net it established in the covid-19 most uncertain days of the pandemic.

Complaint from a whistleblower

The Amended and Consolidated Complaint draws heavily on the analysis of John Flynn, a veteran of Moody’s, Fitch and GMAC Commercial Mortgage, who filed a whistleblower complaint with the Securities and Exchange Commission (SEC) in 2019 which also alleged a pervasive problem of lenders and issuers of commercial mortgage-backed securities, including Wells Fargo, regularly changing the financial data of commercial properties to make them appear more valuable . A spokesperson for the SEC declined to confirm or comment on the whistleblower complaint.

The lawsuit says Flynn discovered that Wells “was able to lend to borrowers who would not otherwise have qualified based on their financial performance” by inflating net operating income (NOI) and flows. historical net cash flows (NCF) of properties above the levels indicated for the same years by the loan servicers. NCF and NOI are key metrics that reflect the funds a borrower has available to repay their loans,

The lawsuit also detailed a study by John Griffin, a professor at the University of Texas, which analyzed Flynn’s findings based on loan-level data for 39,522 loans in commercial mortgage-backed securities pools that were underwritten between 2013 and 2019. Wells Fargo Loans, he found that more than 30% of commercial loans issued by the bank had an inflated net operating income.

Opportunistic litigation

In an emailed statement, Wells Fargo said, “We believe the allegations are without merit and intend to defend ourselves vigorously.”

The consolidated class action lawsuit, brought against the bank on behalf of shareholders who acquired Wells stock between Oct. 13, 2017 and Oct. 13, 2020, also names six current or former Wells executives as defendants, including former CEO Tim Sloan. and former chief financial officer John Shrewsberry.

In the bank’s motion to dismiss the lawsuit with prejudice, Wells Fargo called it an “opportunistic” lawsuit that seeks to spin the events of the COVID-19 pandemic into a “litigation sheath.” Wells Fargo attorneys disputed the suit’s claims, attacking its reliance on “hearsay” in the articles, including a May 2020 ProPublica article on the non-public whistleblower complaint.

The motion, filed Oct. 12, also said it is standard practice for underwriters to adjust a property’s cash flow and other figures and that they may not be the same as those reported by the company. borrower to loan officers. “Underwriters are permitted, in effect expected to adjust the historical NOI to filter out non-recurring items and other misstatements, and provide an estimate of a property’s sustainable cash flow over the life of the loan,” the motion reads.

He also argued against the allegation that some of the executives violated federal securities laws when they said the company exercised credit discipline. “Credit discipline is a vague and unquantifiable term that no reasonable investor would rely on when evaluating an investment in Wells Fargo stock,” the filing said. He says statements about discipline and credit quality are not justifiable.

Attorneys for Wells Fargo and the lead and plaintiff class, the Hawaii State Employees Retirement System, did not respond to requests for comment.