WASHINGTON (CN) - The U.S. government can sue Wells Fargo for mortgage violations despite the liability release that accompanied its $5 billion settlement to foreclosure claims.
Wells Fargo had been one of five mortgage lenders to strike a $25 billion deal with the governments of the United States, 49 states and the District of Columbia in March 2012 amid claims that they defrauded the Federal Housing Administration.
Though FHA loan insurance is meant to hinge on strict underwriting criteria, including income verification, credit analysis and property appraisal, investigators said that Well Fargo and the other lenders failed to meet this standard.
Because the banks misrepresented their regulatory compliance in annual certifications, the government said it was left holding the bill on insurance claims for the defaulted FHA-insured mortgages.
Months after releasing Wells Fargo of certain types of liability in the consent decree, however, Wells Fargo sued the bank for violations of the False Claims Act.
Wells Fargo moved to dismiss the suit, which had been filed in the Southern District of New York, and it asked the U.S. District Court of the District of Columbia to enforce the settlement of the earlier suit.
U.S. District Rosemary Collyer in Washington agreed to review the settlement documents because of previous involvement in the March 2012 action and settlement.
"This court is best suited to interpret the terms of the consent judgment and accompanying release because it presided over the settlement of this case," she wrote.
"It makes logical sense for this court to address the scope of the release, as future disputes might arise with regard to the consent judgment and release concerning other parties to this case who are not part of the New York suit," she added.
Her analysis nevertheless ultimately favored the government.
The ruling notes that ambiguous language alone creates legal grounds for dispute over a consent decree.
"A contract is not rendered ambiguous merely because the parties disagree over its proper interpretation," Collyer wrote. "Instead, a contract is deemed ambiguous when it can be reasonably construed to have two or more different meanings."
Ultimately the Wells Fargo consent judgment passed the test as "clear and unambiguous," she concluded.
In comparing the documents, the judge found that "the government reserved the right to bring claims against Wells Fargo based on illegal conduct including material violations of HUD-FHA requirements, but did not reserve the right to bring claims based only on false annual certifications."
These certifications deal with company-wide compliance of regulations, but the conduct left open entitles the government can still sue over matters "directed toward directly or indirectly originating, assisting in the origination of, or purchasing single-family residential mortgage loans," according to the ruling.
"The plain language of the release governs, and it does not have the meaning ascribed to it by Wells Fargo," Collyer wrote.
She concluded the opinion by noting that it "leaves the interpretation of the SDNY amended complaint to the court that has jurisdiction over it, the United States District Court for the Southern District of New York."
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