The Federal Reserve Board (FRB) has issued a consent cease and desist order and assessed an $85 million penalty against Wells Fargo & Company of San Francisco and Wells Fargo Financial Inc. The order addresses allegations that Wells Fargo Financial employees steered potential prime borrowers into more costly sub-prime loans and separately falsified income information in mortgage applications. In addition to the civil money penalty, the order requires that Wells Fargo compensate borrowers who were impacted by these practices.
The $85 million civil money penalty is the largest the FRB 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 sub-prime loans.
Wells Fargo Financial—a once-active, non-bank subsidiary of Wells Fargo—made sub-prime loans that primarily refinanced existing home mortgages in which borrowers received additional money from the loan proceeds in cash-out refinancing loans. The order addresses allegations that Wells Fargo Financial sales personnel steered borrowers who were potentially eligible for prime interest rate loans into loans at higher, sub-prime interest rates, resulting in greater costs to borrowers. The order also addresses separate allegations that Wells Fargo Financial sales personnel falsified information about borrowers' incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes.
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. 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. In agreeing to the order, Wells Fargo did not admit any wrongdoing. 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 sub-prime, 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, Wells Fargo is 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.
These compensation plans must be approved by the FRB. An independent, third-party administrator will review determinations about the eligibility of individual borrowers for compensation and the amounts of compensation provided. The Federal Reserve will also monitor compliance with the approved plans. Failure to comply with the plans will constitute a breach of the cease and desist order.
The amount of compensation provided to individual borrowers will depend on a number of factors, including differences between what borrowers paid and what they should have paid in terms of origination points, interest payments, fees, and penalties. Until specific determinations of harm to individual borrowers are made, it is difficult to determine the total amount of compensation provided to borrowers. Based on preliminary estimates, the amount of compensation that each eligible borrower will receive ranges between $1,000 and $20,000, but some eligible borrowers may receive less than $1,000 and others may receive more than $20,000. The number of borrowers who may receive compensation under both plans is estimated to be between 3,700 and possibly more than 10,000.
In addition to the monetary components of the settlement, Wells Fargo is required to improve oversight of its anti-fraud and compliance programs and incentive compensation and performance management policies for personnel who sell and underwrite home mortgage loans. The FRB has also issued consent orders against 16 former Wells Fargo Financial sales personnel prohibiting them from becoming employed in the banking industry. The Board has also issued a consent cease and desist order against another former Wells Fargo Financial sales person prohibiting future improper conduct.