Judge Blocks State Bid to Bar Wells Practices

A federal judge has dealt a setback to the state’s efforts to regulate Wells Fargo & Co.’s mortgage unit and prevent the institution from operating in California because of allegedly unlawful lending practices.

U.S. District Judge Garland Burrell Jr. issued a preliminary injunction in Sacramento late Monday, saying the California Department of Corporations apparently lacks regulatory jurisdiction over the San Francisco-based bank’s mortgage lending activities.

That authority, the judge said, seems to reside in the federal government’s Office of the Comptroller of the Currency, which regulates national banks.

Burrell wrote that the comptroller appears to have sole power over the bank and its mortgage subsidiary. This includes the right to examine the books and order that problems be corrected.

In his ruling, Burrell said Wells was likely to prevail in its lawsuit against the state, in which the bank contends that it is subject only to federal rules.

Comptroller spokesman Bob Garsson said Tuesday that federal regulations provide “a plethora of protections for consumers.”

Wells, the largest funder of mortgages in the nation, said it was “very satisfied” with the preliminary ruling and soon would file a motion asking the court for a final judgment in favor of the bank.

State Corporations Commissioner Demetrios Boutris has accused Wells Fargo Home Mortgage Inc. of violating California lending laws and has been seeking to revoke its license to make home loans in the state.

After several examinations of Wells’ books, the agency said that it found interest charges that exceeded those allowed by state law and that the bank had provided inadequate disclosure of finance charges under the federal Truth in Lending Act.

When Wells refused a state order to audit its 2001 and 2002 mortgages and make refunds to customers -- the bank said the audit alone would cost it $18 million -- Boutris acted to revoke its license.

Pete Wissinger, chief executive of Wells Fargo Home Mortgage, offered to surrender its California licenses to the Department of Corporations. But given Monday’s judicial decision, that gesture would be unlikely to have any effect on the bank’s lending operations.

The federal court ruling is the latest in a series of setbacks for consumer groups and state officials who say tough state and local banking laws should supplement federal rules.

In one high-profile California case, for example, Wells helped dismantle ordinances in Santa Monica and San Francisco that banned automated teller machine fees.

“This problem is much larger than just Wells,” said Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group.

He said the comptroller’s “preemption doctrine is a scorched-earth strategy.”

In a small victory for the Department of Corporations, Burrell ruled that it does have the authority to revoke Wells’ state licenses, even though the practical effect may be minimal.

At a revocation hearing Tuesday in Sacramento, Wells lawyers tried to surrender the licenses, but department officials refused to accept them and proceeded with the hearing. Deputy Corporations Commissioner Andre Pineda said Wells’ refusal to audit itself and refund overcharges makes it appropriate to employ the punitive measure of revocation.

The department still wants the refunds made, even if it has to ask the comptroller to order them, Pineda said. The comptroller said it would investigate the alleged overcharges if requested.

Wells Fargo’s lawyers presented no evidence at the revocation hearing, only entering objections as the Department of Corporations proceeded with the case.

The administrative law judge who oversaw Tuesday’s revocation hearing has not yet issued a ruling.