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Wells Fargo Under Criminal Investigation for Low-Income Tax Credit Scam


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8/23/2018
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Wells Fargo Under Criminal Investigation for Low-Income Tax Credit Scam

The U.S. Attorney’s Office in Miami has convened a Grand Jury to look into whether Wells Fargo colluded with corrupt affordable housing developers to underbid for low-income housing tax credits.  By aiding and abetting underbidding, Wells Fargo allegedly defrauded the federal government out of hundreds of millions of dollars of low-income housing tax credits the bank literally got for a steal.

“We see potential anomalies in the purchase prices that suggest theft,” Assistant U.S. Attorney Michael Sherwin told Bloomberg, although he was not speaking about Wells Fargo specifically.

In the previous five years, Wells Fargo has invested $5-to-$9 billion into deals funded by federal low-income housing tax credits under federal programs.  The price anomalies on Wells Fargo deals may form a pattern of fraudulent conduct.  The corruption unit of the Department of Justice is investigating Wells Fargo’s low-income tax credit purchases over more than a decade.

"Federal government agencies have undertaken formal or informal inquiries or investigations regarding the manner in which the Company purchased, and negotiated the purchase of, certain federal low-income housing tax credits in connection with the financing of low income housing developments," Wells Fargo stated in its second quarter 10-Q filing with the Securities and Exchange Commission earlier this month

Michael Cox of Miami-based Biscayne Housing Group, recently sentenced in 2016 for his role in a $36 million affordable scheme, implicated Wells Fargo as a persistent offender making deals to trade low bids for transfers of tax-credits to other deals.  This type of bid trading is illegal. 

The scam works like this.  Driving down prices means the bank pays less for coveted low-income tax credits.  The credits are more expensive because they are generating less housing, depriving the U.S. taxpayer of the benefit of the program—which to date has caused more than 2.4 million affordable housing units to be created across the country.  A greater amount of credits are needed when the prices are driven down and as a result, credits are reallocated from projects that need them to the rigged deals.

The affordable housing incentive program was created by the Tax Reform Act signed into law by President Ronald Reagan in 1986.  Since the mid-1980s, the federal government has subsidized low-income housing tax credits under the Community Reinvestment Act (“CRA”).  Low Income Housing Tax Credits (“LIHTC”) provide a dollar-for-dollar credit against taxes paid.  Banks that sell the credits or receive credit for lending to developers undertaking affordable housing projects, earn a return, while minimizing risk, since the projects are backed by these government incentives.

Local agencies handle the sale of these tax credits to developers who are creating affordable housing in local communities.  The developers put the credits out for bid to investors, including banks like Wells Fargo and PNC, that wish to offset taxable income by purchasing the credits.  The credits can be used to offset higher-income and higher-tax periods for as long as ten years.

The banks are the biggest buyers of the credits because they not only receive a tax write-off but also get credit under the CRA, which requires banks to invest in poorer neighborhoods where they have customers.  The banks that have the greatest share of the market are Wells Fargo, Citigroup Inc., Bank of America Corp., KeyCorp, boutique real estate lender Walker & Dunlop and JPMorgan Chase & Co.

PNC Financial Services Group, Inc., a somewhat smaller player, also received subpoenas from the U.S. Attorney’s Office in Miami seeking information pertaining to its role in financing underbid low-income tax credits.  Like Wells Fargo, PNC has a Tax Credit Investment Group.

http://www.investmentnews.com/article/20180813/BLOG09/180819984/tax-credit-investigation-may-trip-up-wells-fargo?ite=52080&ito=583&itq=545fee27-dc59-455f-8ee9-36fd662a9845&itx%5Bidio%5D=&itx[idio]=13423456

https://therealdeal.com/miami/2018/08/13/wells-fargo-under-investigation-for-its-alleged-role-in-low-income-housing-tax-credit-fraud/

https://www.reuters.com/article/us-wells-fargo-housing/wells-fargo-faces-tax-credit-probes-new-problems-with-mortgage-borrowers-idUSKBN1KO2LE

https://www.accountingtoday.com/articles/wells-fargo-tests-investor-patience-with-new-low-income-housing-tax-credit-scandal-details

https://www.bisnow.com/national/news/affordable-housing/wells-fargo-under-investigation-for-alleged-role-in-low-income-housing-tax-credit-fraud-91797

https://www.bloomberg.com/news/articles/2018-08-15/pnc-is-said-to-face-subpoena-over-low-income-housing-tax-credits

https://www.thebotnews.com/posts/Wall-Street-Journal-reported--PNC-Faces-Probe-Over-Low-Income-Tax-Credits---on-Friday.Skyt0dCvDN8Q.html

https://www.mpamag.com/news/wells-fargo-being-investigated-over-tax-credits--report-108668.aspx

https://showmeinstitute.org/blog/transparency/low-income-housing-tax-credit-mathematics

https://www.americanbanker.com/opinion/lower-taxes-would-be-boon-for-banks-except-in-affordable-housing

https://www.americanbanker.com/opinion/lower-taxes-would-be-boon-for-banks-except-in-affordable-housing

https://wolfstreet.com/2018/08/06/wells-fargo-rap-sheet-new-investigation-low-income-housing-tax-credits/

https://www.nreionline.com/finance-investment/pnc-faces-subpoena-over-low-income-housing-tax-credits



Category: Tax Law


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