Wells Fargo (WFC) steered nearly 10,000 borrowers into higher-cost Federal Housing Administration loans from 2009 to 2011 and has been sending refunds to borrowers acknowledging that they would have qualified for less-expensive conventional financing.
Wells, the No. 1 originator of home loans, started mailing letters and refund checks to borrowers in September after an internal review uncovered the errors, says Wells Fargo spokeswoman Vickee Adams.
The refunds were not prompted by any regulatory action, Adams said. They also are not related to a federal lawsuit filed early this month by the U. S. attorney's office in Manhattan accusing Wells of more than 10 years of misconduct including "reckless" origination and underwriting of FHA loans, and "intentional concealment" of loans that had deficient underwriting and disclosures. That lawsuit seeks hundreds of millions of dollars in damages.
The refund checks mailed to borrowers range from $2,000 to $5,000 to cover the cost of mortgage insurance premiums, appraisal and processing fees on FHA loans.
The letters and checks mailed to borrowers may be a way for Wells to avoid further costly litigation.
The letters state that if the borrower cashes the refund check they "agree to release Wells Fargo… from any and all claims relating to Wells Fargo's origination of a more expensive mortgage loan than the loan for which you may have qualified."
Ed Pinto, a mortgage industry consultant and former executive at Fannie Mae, said the boiler-plate legal language was an effort by Wells to reduce civil lawsuits.
"Obviously if a borrower cashes a check, Wells doesn't want them to sue," he says.
Wells' internal review identified borrowers who had received FHA loans but found they would have qualified for a conventional mortgage from Fannie Mae or Freddie Mac.
Underwriting requirements for FHA loans are fairly loose — borrowers must have minimum 580 FICO score and down payments can be as low as 3.5% — but they come with higher insurance premiums cover the cost of potential defaults.
"This is just a result of actively monitoring the portfolio, conducting internal reviews, and during our review there were a small number of borrowers that went to FHA when they could have gotten conventional financing," Adams says. "We're always committed to fair and responsible lending and this was something we discovered and decided to remedy it."
Wells already exited the two mortgage channels responsible for originating the loans: Wells Fargo Financial, its subprime lending unit, and its wholesale lending channel that funded loans originated by independent mortgage brokers.
The problematic loans were a surprise to some because Wells has long been considered to have better controls and lower delinquencies than other lenders.
"The fact that they did a review, found it, and are taking action, is what regulators want the banks to do," Pinto says. "Regulators want lenders to be reviewing this stuff and acting on it.