July 20, 2011 – By Dan Levine
San Francisco-based Wells Fargo will also compensate prime borrowers who were allegedly steered into more costly subprime loans, according to a cease and desist order issued by the Fed on Wednesday.
A Fed spokeswoman said the penalties were not part of a broader deal between federal regulators and mortgage servicing companies announced in April to settle mortgage fraud allegations.
Politicians and consumer advocates have long criticized industry for enticing borrowers into subprime loans when they could have qualified for more affordable prime mortgages.
Wells Fargo did not admit any wrongdoing in agreeing to the cease and desist order.
"The alleged actions committed by a relatively small group of team members are not what we stand for at Wells Fargo," said Chief Executive John Stumpf in a statement.
Wells Fargo might have to pay between $1,000 and $20,000 in restitution to borrowers affected by the alleged faulty mortgage practices, the order said. The number of borrowers who may be compensated is estimated to be between 3,700 and possibly more than 10,000, meaning the potential exposure could reach $200 million.
The company closed its Wells Fargo Financial division in July 2010, and has accounted for this matter in its reserves, according to a Wells statement.
The Fed spokeswoman declined to say whether the Fed was pursuing similar penalties against other mortgage lenders for underwriting abuses. She also declined to comment on whether this would affect any penalties in the mortgage servicing probe.
The cease and desist order also addresses allegations that Wells Fargo sales personnel falsified information to make it appear that borrowers qualified for loans, when they would not have qualified based on their actual incomes. The order provides for Wells to submit a fraud prevention and detection plan within 90 days.
The Fed said it has issued orders against 16 former Wells Fargo sales personnel prohibiting them from becoming employed in the banking industry.
(Reporting by Dan Levine, David Lawder, David Henry and Margaret Chadbourn; editing by Carol Bishopric, Bernard Orr)