Wells Fargo Implements Borrower Protections

Under fire for its mortgage lending practices, Wells Fargo & Co. outlined a set of safeguards Tuesday that it said would ensure a fair deal for borrowers who can’t qualify for the best home-loan rates.

The San Francisco company’s practices in the “sub-prime” mortgage market for people with bad credit, limited income or other issues had been criticized by fair-lending advocates such as the Assn. of Community Organizations for Reform Now, or ACORN, which had organized protests and filed lawsuits against the company.

Wells, the largest California-based banking company, said it had updated its lending code as “part of our continuing efforts to respond to our customers’ evolving needs,” not in response to ACORN. It said market conditions, competition and community input also were factors.

The measures announced by the company include more clearly defining and limiting upfront fees, easing penalties for borrowers who refinance or pay off loans early, and eliminating mandatory arbitration of disputes.

“Wells Fargo is firmly committed to helping the millions of Americans who, for whatever reasons, have not been able to qualify for traditional prime real estate loans,” Mark Oman, senior executive vice president for Wells Fargo’s Home & Consumer Finance Group, said in a statement.

Officials at the Assn. of Community Organizations for Reform Now said that Wells Fargo has gradually been adopting policies that the group has advocated. In a statement, ACORN said the changes announced Tuesday “continue that process and reflect the ongoing fear the company has of legal liabilities for its lending practices.”

“ACORN members around the country who have been fighting Wells Fargo’s predatory lending practices are glad that the company has finally acknowledged the damage that their practices have been causing and have agreed to change them,” ACORN President Maude Hurd said in a statement. “However, Wells still needs to compensate the families and communities its predatory lending has hurt.”

Oman could not be reached for comment, and a Wells spokeswoman declined to respond to ACORN’s comments.

“Our sales practices are among the best in the industry,” Wells said in its statement. “We do not tolerate any attempt to sell a customer any product or service unless the terms are fully disclosed.”

Sub-prime lenders charge higher fees and interest rates to compensate for the risks posed by customers who are financially stressed or can’t document their income. Critics contend that the industry too often strays into predatory lending: targeting minorities for high-cost loans, charging more than necessary to offset risks, employing “bait and switch” tactics, and “steering” unwitting customers eligible for prime loans into higher-cost sub-prime mortgages.

The new safeguards, to be phased in by the end of the year, will apply to Wells Fargo Financial Inc., a finance company subsidiary, and to Home Credit Solutions & Alternative Lending, which are sub-prime units of Wells Fargo Home Mortgage, the nation’s second-largest home lender.

The measures include:

* Ensuring that borrowers who qualify for lower-cost prime loans will get them, even if they apply through sub-prime channels like Wells Fargo Financial.

* Origination fees will be capped at $1,500 for loans Wells makes directly to customers (as opposed to loans through independent mortgage brokers). Borrowers might still pay additional “third-party” fees for appraisals and other services, and would be offered the choice to “buy down” the interest rates on their loans by paying so-called discount points. Wells said the consequences of all options would be clearly explained.

* Certain features that have drawn strong criticism will no longer be offered, including single-premium credit insurance, a costly policy that is supposed to pay the mortgage if tragedy strikes the borrower, and provisions that allow the balance owed on the loan to increase in return for lower payments.

* Prepayment penalties on sub-prime mortgages would be limited to the first three years of loans, and these penalties will not exceed 3% of the balance during the first year, 2% of the balance during the second year and 1% of the balance during the third year.

Prime loans rarely have prepayment penalties.