Fifth Third Bancorp has agreed to pay nearly $85 million to settle fraud charges related to undisclosed defective Federal Housing Administration-insured loans.

The settlement, reached with Christy Romero, the special inspector general for the Troubled Asset Relief Program, and U.S. Attorney General Preet Bharara, will compensate the government for 519 materially defective loans that defaulted, triggering federal insurance claim payments. The amount also covers costs the government might incur for defective loans that have yet to default.

The $139 billion-asset Fifth Third, which is based in Cincinnati, will also pay $2 million to the Department of Housing and Urban Development in a separate settlement.

Between 2003 and 2013, Fifth Third originated 1,439 loans that it later found to be defective under post-closing quality reviews, but did not immediately report to HUD. The bank disclosed the defective loans in 2012 after a whistle-blower complaint filed by John Ferguson and George Mann, who will receive $6.37 million from the settlement, according to Reuters.

Fifth Third came clean without knowledge of the ongoing lawsuit or ensuing investigation, SIGTARP said. It also fired several employees responsible for the tainted loans and took steps to improve its quality control system, the auditor added.

Romero cautioned that other banks finding themselves in violation of Troubled Asset Relief Program terms should act swiftly.

"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," she said in a Tuesday press release.

This article first appeared in National Mortgage News

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