NEW YORK (CNN/Money) - Washington Mutual has been ordered to rehire a former executive who questioned the bank's lending practices as possibly improper, according to a published report.

The Wall Street Journal reports that Theresa Hagman had been vice president and national manager of the custom-home construction-loan disbursement center in late 2003 when she raised questions about whether the nation's largest thrift might be violating federal regulatory requirements by improperly underwriting and funding custom-home construction loans. She was fired three months later.

Hagman filed a complaint with the Labor Department in May 2004, alleging that Washington Mutual had violated the employee-protection provisions of the Sarbanes-Oxley Act, the law designed to prevent corporate misdeed that includes protections for so-called whistleblowers.

The newspaper reported that the department found in her favor, sending her attorney a letter this week that said "she reasonably believed the bank was engaged in illegal activity and that this activity could expose its shareholders to financial risk."

Hagman told the newspaper, "Washington Mutual's policies, procedures and lending practices were really the heart of my issue and fundamental to what we did as a lender for our borrowers. They were broken, and that was my issue."

Washington Mutual spokesman Alan Gulick said the bank may appeal the decision, which in addition to rehiring Hagman requires it to pay back wages, attorneys' fees and other compensation of more than $167,000.

"We strongly dispute the allegations by our former employee," he said. "At the time the allegations were raised, we took them very seriously and began an immediate investigation." He said the bank found no merit to the obligations.

The newspaper said Washington Mutual's mortgage unit has sought to slash costs in the unit and cut jobs in its mortgage unit since a slowdown in mortgage refinancings in 2003 trimmed profits.

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