Wells Fargo & Co. was hit with a cease-and-desist order and a record civil money penalty over allegations that employees at its former subprime unit committed mortgage fraud and unnecessarily put borrowers into more expensive loans. In addition, required compensation to impacted borrowers will likely cost between $4 million and $200 million.
Word of the actions came today from the Federal Reserve Board.
According to a Fed statement, the $85 million civil money penalty was “the largest the board 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.”
Wells consented to the cease-and-desist order, though it did not admit any wrongdoing.
The action stems from Wells Fargo Financial Inc., which was shut down by its San Francisco-based parent in July 2010. At least 3,800 of the unit’s 14,000 employees were expected to be impacted by the move.
According to the Fed, Wells Fargo Financial employees steered potential prime borrowers seeking cashout transactions into more expensive high-cost subprime loans.
The employees also allegedly falsified income information on mortgage applications for borrowers who didn’t qualify.
“These practices were allegedly 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 central banker said. “These deficiencies allegedly constitute 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 to compensate affected borrowers over and above the cost of the penalty. In addition, consent orders issued against 16 former Wells Fargo Financial salespeople ban them from jobs in banking.
Wells will need to go back and re-underwrite refinance transactions closed between January 2006 and June 2008 in order to determine if the borrowers were improperly steered into subprime loans.
The fraud acts will be uncovered by notifying borrowers who closed cashout refinances between January 2004 and June 2008 at branches suspected of fraud that they can provide proof they were making less at the time.
After the Fed approves Wells’ plan to compensate impacted borrowers, an independent, third-party administrator needs to review determinations about the eligibility of individual borrowers for compensation and the amounts of compensation to be paid.
The Fed estimates that between 3,700 and 10,000 borrowers will be compensated somewhere around $1,000 to $20,000 each.
It’s not the first time that Wells has been accused of placing borrowers in higher-priced loans.
Beginning in 2003, the Association of Community Organizations for Reform Now — or ACORN — started a campaign against the lending behemoth over allegations that it charges African-American and Latino borrowers higher interest rates than whites.