Thousands of Wells Fargo & Co. home loan customers recently received a surprise in the mail: refund checks from the bank, along with letters saying they had paid unnecessary fees for their mortgages.
The unsolicited offers of thousands of dollars arrived with a catch – if the borrowers cash the checks, they can’t later sue the No. 1 U.S. home lender. The San Francisco bank said in the letters that borrowers were put into more expensive loans when they could have qualified for cheaper ones.
Analysts said the letters sent to potentially 10,000 Wells Fargo borrowers were a way for the bank to sidestep further litigation over “steering” customers into unfavorable loans – allegations that the government has made about certain Wells Fargo operations in the past.
It’s one in a long series of legal troubles for major U.S. mortgage lenders. The five largest lenders in February to a $25 billion settlement of accusations that they “robo-signed” foreclosure affidavits and otherwise abused distressed borrowers. Mortgage investors have barraged them with lawsuits over defaulted loans, and the government also recently filed separate complaints against a number of banks – including Wells Fargo, JPMorgan Chase & Co. and Bank of America Corp.
“It sounds like they either found some problems themselves or the regulators discovered them and told them to get things fixed,” said Paul J. Miller, an analyst who follows Wells Fargo for Friedman, Billings, Ramsey & Co.
Wells Fargo’s mailed refunds involve government-backed FHA mortgages made from 2009 through 2011. These loans are often made to borrowers with shaky credit or those who can’t come up with the 20 percent down payments required for conventional loans.
Though they require as little as 3.5 percent down, the FHA loans are also more expensive because they require borrowers to pay steep insurance payments to protect against a default. But in this case, the borrowers actually had the down payments or home equity needed to get a conventional loan, bank officials said.
Wells Fargo spokeswoman Vickee Adams said the problematic FHA loans turned up as the bank reviewed operations at two mortgage channels it has closed down: a subprime lending arm, Wells Fargo Financial, and a wholesale arm that made loans through independent brokers.
The bank previously paid a combined $260 million to settle Federal Reserve and Justice Department allegations that its lending, pay and sales quota practices in the home-lending business caused borrowers to be placed into higher-cost mortgages. It didn’t admit wrongdoing.
The loans were written as Wells Fargo surged to become the No. 1 originator of loans insured by the FHA. A bank mortgage spokesman said 528,000 Wells borrowers received FHA loans during the years 2009 through 2011, of which fewer than 2 percent, or 10,560, were offered refunds. He wouldn’t say exactly how many refunds the bank has offered.
Mortgage professionals say banks often make more money packaging FHA loans into mortgage bonds than they do on traditional loans because of the government guarantee. And at the time in question, loan officers often made higher commissions on FHA loans.
The refunds came to light when the Los Angeles Times obtained a copy of a letter. The bank never announced them publicly.
Loan officers were able to earn a commission of about 2.5 percent of the loan amount for FHA-backed mortgages in 2009, 2010 and part of 2011, said Fred Arnold, past president of the California Association of Mortgage Professionals. That compares with 1.75 percent commissions for conventional loans, he said.
For example, a $350,000 FHA mortgage would yield an $8,750 commission compared with $6,125 for a conventional loan.
“That meant that some unethical loan officers could potentially steer borrowers to the wrong loan,” said Arnold, who noted that regulatory reforms that took effect in 2011 make it impossible to pay a loan officer more for originating one type of loan rather than another.
A Wells Fargo spokeswoman declined to comment directly about the firm’s compensation practices: “We work hard to offer the appropriate loan options so that every borrower receives the appropriate loan based on his or her credit characteristics and personal circumstances and our compensation reflects that commitment,” she said in a statement.