WASHINGTON — Wells Fargo & Co. will pay an $85 million civil penalty for misleading borrowers into taking out costly subprime loans and approving loans they were not eligible to receive, the Federal Reserve Board said Wednesday.
It is the largest penalty the central bank has ever issued against a bank holding company related to consumer-protection violations.
The agency's allegations against the San Francisco-based holding company include the claim that sales personnel at its subsidiary, Wells Fargo Financial, were "steering" borrowers who could have been eligible for prime interest rate loans into more expensive loans with higher subprime rates. Company employees also falsified borrowers' incomes so that they would qualify for loans that they otherwise would not have received, the Fed claims.
Personnel were allegedly encouraged to undertake such practices as a result of programs that included incentive pay and sales quotas. There were also inadequate controls in place to mitigate risk resulting from such of programs, according to the Board's notice.
In agreeing to the civil penalty, Wells Fargo admitted no wrongdoing, according to the Fed's notice.
This is the first enforcement action undertaken by a regulatory agency involving claims of such mortgage-related wrongdoing.
As part of its agreement with the Board, Wells will be required to identify cases in which its employees steered to expensive loans "prime-eligible borrowers with cash-out refinancing" and to offer them compensation.
Such reimbursements will be extended to between 3,700 and more than 10,000 borrowers, the Board estimates. Each is likely to receive between $1,000 and $20,000, although final figures could come in higher or lower, the Fed said.
The amount borrowers receive will be based on a number of factors, such as the "difference between what they paid and what they should have paid in terms of origination points, interest payments, fees, and penalties," the Board's notice stated. The Fed must approve all compensation plans.
In screening for improper steering, Wells will be required to reevaluate the qualifications of all borrowers who took out subprime loans between January 2006 and June 2008.
Under the agreement, the company will also be required to set up a system whereby borrowers can show what their actual income was at the time their mortgages were originated to verify whether they would have qualified for lower-cost loans than those they received.
All borrowers who received cash-out refinancing loans between January 2004 and June 2008 at offices where there was evidence employees tampered with income information will be notified by Wells.