Fighting a ‘Subprime’ Lender

In the 34 years since she left Mexico, Aurora Cortazar found much of what she wanted in the United States: an escape from poverty, an education for her three children and title to her own home.

Yet on the path to her American dream, the Lynwood resident also found something that she didn’t bargain for: a mortgage and debt-consolidation loan from Wells Fargo & Co. that charged 8.9% interest and $19,635 in origination charges, plus the threat of a $5,000-plus penalty if she paid it off early. It wasn’t until she discussed refinancing that $188,000 loan with another lender that she learned of those steep fees, she said this week.

“We went to Wells Fargo with the hope that they would help us out,” Cortazar, a 50-year-old hairdresser, said in Spanish. “But they made us victims instead.”

Wells Fargo is fighting a suit by the Cortazars and others challenging its lending practices. “The allegations in this particular lawsuit -- that there’s a pattern of deceptive behavior -- are false,” said Mary Trigg, spokeswoman for San Francisco-based Wells Fargo.

Despite that contention, Wells Fargo has been targeted by the Assn. of Community Organizations for Reform Now, or ACORN, as one of the worst lenders in the country. ACORN, which is holding its national meeting at UCLA this weekend, based its finding on Wells Fargo’s record of “subprime” lending, or loans to people who are considered high credit risks.

Cortazar and her husband, Innocente, a drugstore janitor, typify a large class of lower-income people who get stuck with undisclosed and unjustifiably onerous loan terms, said Lisa Donner, director of ACORN’s Financial Justice Center.

“We have hundreds of Wells customers from around the country telling us their loans have higher interest rates than they were promised, or saying, ‘Oh my God, they didn’t tell me about the prepayment penalty,’ ” Donner said.

In an ACORN-sponsored lawsuit filed in December in San Francisco County Superior Court, the Cortazars sought damages for themselves and thousands of other alleged victims of unfair business practices, plus punitive damages against Wells Fargo.

The suit claimed that Wells Fargo’s subprime lending unit, Wells Fargo Financial, systematically misled borrowers about loan terms. The suit also said Wells Fargo Financial created incentives for its loan officers to conceal above-market interest rates and exorbitant fees in its loans.

Wells replied with a lengthy denial and successfully moved to transfer the case to federal court, where it is considered tougher to win certification as a class action representing a large number of borrowers.

Donner said ACORN intended to counter with another state court suit Monday in which the group itself would act as the plaintiff representing Wells Fargo Financial borrowers. ACORN also plans a public protest against Wells in downtown Los Angeles that day.

Wells spokeswoman Trigg declined to discuss specifics of Cortazar’s loan, citing confidentiality provisions.

But Trigg said the company’s disclosures were among the industry’s best. She noted that Wells Fargo Financial, in keeping with general practice in the subprime industry, two years ago cut the origination fees known as points from a maximum of 10% of the loan value to about half that much.

What’s more, Trigg said, Wells recently began giving borrowers a clearer, simplified disclosure sheet, “not because we were required to or because of ACORN, but because we thought it benefited our customers.”

The dispute is part of a broader debate over whether big banks have created a two-tiered system of consumer finance. This “new form of redlining,” as California Reinvestment Coalition executive director Alan Fisher puts it, allegedly involves pushing lower-income clients to the finance company subsidiaries that charge higher rates, even when they could qualify for prime loans at affiliated banks.

“We still see a lot of deceptive paperwork,” Fisher said. “What banks have said for years is we want whoever comes in to get the best deals they can get. But when get down to the specifics involving their subprime arms, none of them want to integrate that.”

ACORN cited the Cortazars as an example. The couple had made regular payments on their home for 14 years, and ACORN said their excellent payment history should have qualified them for an “A” loan in 2002, when they applied to consolidate $141,000 from two home loans along with more than $21,000 in bank, retail and credit card debt.

The going rate for prime loans for customers with good credit was about 7% at the time. But Wells Fargo Financial insisted that the couple would qualify only for a loan at 9% or 10% interest, Aurora Cortazar said. She said that her husband had been missing work at an airplane parts factory because of a foot injury and that she had been forced to cut her work hours because of diabetes.

Wells Fargo sent them several soliciting e-mails and called them, promising lower interest rates and financial relief, Cortazar said. “They said we could refinance the house for $168,000,” she said. “They told us that would cover all of our costs.”

She said she complained repeatedly that 9% or 10% interest was too high, but Wells Fargo said their debts were so high that “the bank couldn’t give us a low interest rate.”

Most loan seekers might have considered shopping other financial institutions for a better deal, something Cortazar did not do. Unable to speak English, she said she continued her talks in Spanish with a persistent Wells employee who pitched the loan from several angles.

After several calls, the loan officer stopped mentioning interest rates at all, instead asking if the Cortazars could afford to pay $1,500 a month -- at which point she said they agreed to the deal. “It was still 9%,” she said. “But out of my own ignorance, I agreed to pay $1,500 because at the time we could afford that.”

She said she believed the loan amount was $168,000 and was shocked to find out 18 months later, while seeking to refinance through Citigroup Inc., that it had been inflated to about $188,000 because of lender fees.

They refinanced despite the prepayment penalty, which ACORN said could be up to $6,500 -- six months’ interest on 80% of the paid-off portion of the loan, the maximum the law allowed.

“I cried a lot,” Aurora Cortazar said. But “I didn’t want to stay with them. I didn’t want to continue giving them my money.”

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The allegations

The advocacy group ACORN accuses Wells Fargo & Co. of abusive practices in “subprime” loans, aimed at people who pose a high credit risk. Among the allegations:

* Charging higher rates and fees than initially promised.

* Failing to adequately disclose loan terms.

* “Flipping” borrowers from one high-cost loan to another.

* Erecting barriers to customers refinancing with rivals.

Wells spokeswoman Mary Trigg said that the company’s disclosures were among the industry’s best and that allegations about a pattern of deceptive behavior were “entirely false.”