Wells Fargo To Settle Mortgage Abuses For $85 Million

Mortgage lender Wells Fargo hopes it has closed the books on the subprime debacle by agreeing to a settlement with federal regulators.

The settlement with the Federal Reserve will require the bank to make changes in the way it supervises mortgage lending and set up a means to compensate consumers harmed by predatory lending practices. In a statement, company officials maintained any misdeeds were few and not indicative of normal business practices/

“The alleged actions committed by a relatively small group of team members are not what we stand for at Wells Fargo,” said Chairman and CEO John Stumpf. “Fair and responsible lending practices have been at the core of our culture, and they will continue to guide us as we work closely with the Federal Reserve to provide restitution to customers who may have been harmed, and to reinforce our internal controls so they further reflect Wells Fargo’s commitment to helping customers succeed financially.”

Critical 2004 to 2008 period

The Company’s agreement with the Fed does not include an admission of the allegations, which cover lending practices at Wells Fargo Financial between January 2004 and September 2008. The agreement notes Wells Fargo Financial identified instances in which sales personnel altered income documents to inflate prospective borrowers’ incomes, so the customers could qualify for loans they may not have otherwise been eligible to receive.

Wells Fargo closed its Wells Fargo Financial division in July, 2010, including its 638 stores across the U.S., a move that also resulted in the company exiting the origination of non-prime portfolio mortgage loans. By the first quarter of 2010, less than 2 percent of Wells Fargo’s real estate loans were originated in Wells Fargo Financial stores.

 The agreement addresses allegations that Wells Fargo Financial employees steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications, a not-uncommon practice among some mortgage lenders at the height of the housing bubble, when home prices rapidly inflated.

Financial incentives

The investigation alleged these practices were fostered by Wells Fargo Financial's incentive compensation and sales quota programs and the lack of adequate controls to manage the risks resulting from these programs. The Fed charged that these practices constituted unsafe and unsound banking practices and unfair or deceptive acts or practices that are prohibited by the Federal Trade Commission Act and similar state laws.

The order requires Wells Fargo to compensate borrowers affected by these practices. To identify prime-eligible borrowers with cash-out refinancing loans who were subject to improper steering, Wells Fargo is required to reevaluate the qualifications of all borrowers who took out a subprime, cash-out refinancing loan between January 2006 and June 2008 to account for certain specific steering techniques.

To identify Wells Fargo Financial borrowers whose income information was falsified without their knowledge, the Fed sahs Wells Fargo will be required to set up a procedure for potentially affected borrowers to show that their actual income at the time did not qualify them for the loans they were granted. Wells Fargo is required to provide notice of this procedure to all borrowers who obtained cash-out refinancing loans between January 2004 and June 2008 at a Wells Fargo Financial office where there is evidence that sales personnel at that office altered or falsified borrowers' income information.

The $85 million civil money penalty is the largest the Fed has assessed in a consumer-protection enforcement action and is the first formal enforcement action taken by a federal bank regulatory agency to address alleged steering of borrowers into high-cost, subprime loans.