(Adds background, comments, related FDIC lawsuit against PwC, adds bylines and adds NEW YORK to dateline)
By Jonathan Stempel and Tim Ahmann
NEW YORK/WASHINGTON, Feb 28 (Reuters) - Deloitte & Touche has agreed to pay the U.S. government $149.5 million to settle claims it failed to uncover fraud at the failed Taylor, Bean & Whitaker Mortgage Corp, the Department of Justice said on Wednesday.
Taylor Bean had been the 12th largest U.S. mortgage lender before U.S. regulators shut it down in August 2009. Its former chairman, Lee Farkas, is serving a 30-year prison term following his 2011 conviction on 14 fraud and conspiracy counts.
In a statement, Deloitte said it was pleased to settle, to avoid the risk and uncertainty of litigation.
Deloitte had been Taylor Bean's outside auditor and issued audit reports for its 2002 to 2008 fiscal years.
The Justice Department said Deloitte's audits "knowingly deviated" from applicable standards, and failed to detect how Taylor Bean was concealing its mounting financial distress by selling nonexistent or worthless mortgages.
It said this enabled the Ocala, Florida-based lender to keep making mortgage loans insured by the Federal Housing Administration, causing taxpayer losses. The settlement resolved Deloitte's potential liability under the False Claims Act.
"When auditors fail to exercise their professional judgment, and make false statements that allow bad actors to remain in government programs and submit false claims to the government, there will be consequences," Acting Assistant Attorney General Chad Readler said in a statement.
In December, U.S. District Judge Barbara Rothstein found the auditor PricewaterhouseCoopers liable to the Federal Deposit Insurance Corp for failing to undercover a fraud scheme between its Alabama-based client Colonial Bank and Taylor Bean.
A damages trial is scheduled for March 20, court records show. Colonial also failed in August 2009.
"Members of Taylor Bean & Whitaker management, including its CEO, were convicted of engaging in a complex, collusive fraud with a counterparty bank specifically aimed at misleading our organization and investors," Deloitte said. "Deloitte & Touche is deeply committed to the highest standards of professionalism, and we stand behind this work that dates back over a decade." (Reporting by Jonathan Stempel in New York and Tim Ahmann in Washington; editing by Mohammad Zargham and David Gregorio)