U.S. Bancorp Settles Mortgage Issue With DOJ For $200 Million

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U.S. Bancorp (NYSE:USB) agreed to pay $200 million settlement to the U.S. Department of Justice (DOJ) related to the latter’s ongoing investigation into the bank’s mortgage-related misconduct before and during the recession. ((U.S. Bancorp Reaches Settlement with the U.S. Department of Justice, U.S. Bancorp Press Releases, Jun 30 2014)) The country’s fifth-largest commercial bank was accused of originating and submitting sub-standard loans to a Federal Housing Administration (FHA) insurance program and also of having an improper quality control program in place. [1] The settlement gets U.S. Bancorp off the hook with federal regulators for all mortgages it originated between 2006 and 2011.

The settlement is yet another victory for the DOJ, which has been doggedly pursuing the issue of problematic mortgage practices by the country’s lenders – something that was a major factor responsible for the downturn of 2008. After reaching settlements with the country’s biggest lenders – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) – over this issue, the regulator trained its guns on the smaller lenders earlier this year. Other banks currently under investigation are Capital One (NYSE:COF), Fifth Third Bancorp (NYSE:FITB) and Regions Financial (NYSE:RF). [2]

We maintain a $42 price estimate for U.S. Bancorp’s stock, which is slightly below the current market price.

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U.S. Bancorp revealed that it was under investigation by the Department of Justice as well as the Department of Housing and Urban Development (HUD) over FHA-related mortgage practices in its 10-Q SEC filing this May. [3] The bank was one of several mid-sized lenders under scrutiny by these regulators for abusing the FHA insurance program by submitting poor-quality mortgages in the years leading to the economic downturn of 2008 – and in several instances, continuing this practice as late as in 2012. Over recent years, regulators have settled similar matters with Bank of America for $1 billion, JPMorgan for $614 million and Citigroup for $158 million. [2] The latest settlement with SunTrust, reached a couple of weeks ago, saw the regional bank cough up almost $1 billion over this and other mortgage-related issues. [4]

U.S. Bancorp chose to settle without assuming any responsibility in the incident “to avoid the path of costly and protracted litigation as well as distractions to the business.” [1] In order to counter the negative impact of the $200-million settlement on its Q2 operating figures, the bank also sold 3 million shares it held in Visa (NYSE:V) for a net gain of $214 million. While the settlement will result in a one-time charge, which will increase U.S. Bancorp’s non-interest expenses for the quarter as well as the year (shown in the chart below as a percentage of revenues), the one-time boost to the top line will ensure that the earnings figure remains unaffected.

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Notes:
  1. U.S. Bancorp Settles With Justice Department Over Mortgage Loan Allegations, The Wall Street Journal, Jun 30 2014 [] []
  2. Mortgage Probes Shift to Smaller Banks, The Wall Street Journal, May 27 2014 [] []
  3. Form 10-Q, SEC Website, May 7 2014 []
  4. Federal Government and State Attorneys General Reach Nearly $1 Billion Agreement with SunTrust to Address Mortgage Loan Origination as Well as Servicing and Foreclosure Abuses, DOJ Press Releases, Jun 17 2014 []