Thousands of Wells Fargo & Co. home loan customers recently received a surprise in the mail: refund checks from the big bank, along with letters saying they had paid unnecessary fees for their mortgages.
The unsolicited offers of thousands of dollars arrived with a catch — if the borrowers cash the checks, they can't later sue the No. 1 U.S. home lender. The San Francisco bank said in the letters that borrowers were put into more expensive loans when they could have qualified for cheaper ones.
Analysts said the letters sent to potentially 10,000 Wells Fargo borrowers were a way for the bank to sidestep further litigation over "steering" customers into unfavorable loans — allegations that the government has made about certain Wells Fargo operations in the past.
It's one in a long series of legal troubles for major mortgage lenders, the five largest of which agreed in February to a $25-billion settlement of accusations that they "robo-signed" foreclosure affidavits and otherwise abused distressed borrowers. Mortgage investors have barraged them with lawsuits over defaulted loans, and the government also recently filed separate complaints against banks including Wells Fargo, JPMorgan Chase & Co. and Bank of America Corp.
"It sounds like they either found some problems themselves or the regulators discovered them and told them to get things fixed," said Paul J. Miller, an analyst who follows Wells Fargo for Friedman, Billings, Ramsey & Co.
Wells Fargo's mailed refunds involve government-backed FHA mortgages made from 2009 through 2011. These loans are often made to borrowers with shaky credit or those who can't come up with the 20% down payments required for conventional loans.
Though they require as little as 3.5% down, the FHA loans are also more expensive because they require borrowers to pay steep insurance payments to protect against a default. However, in this case, the borrowers actually had the down payments or home equity needed to get a conventional loan, bank officials said.
Wells Fargo spokeswoman Vickee Adams said the problematic FHA loans turned up as the bank reviewed operations at two mortgage channels it has closed down: a subprime lending arm, Wells Fargo Financial, and a wholesale arm that made loans through independent brokers.
The bank previously paid a combined $260 million to settle Federal Reserve and Justice Department allegations that its lending, pay and sales quota practices in the home lending business caused borrowers to be placed into higher-cost mortgages. It didn't admit wrongdoing.
The loans were written as Wells Fargo surged to become the No. 1 originator of loans insured by the FHA. A bank mortgage spokesman said 528,000 Wells borrowers received FHA loans during the years 2009 through 2011, of which fewer than 2%, or 10,560, were offered refunds. He wouldn't say exactly how many refunds the bank has offered.
Mortgage professionals say banks often make more money packaging FHA loans into mortgage bonds than they do on traditional loans because of the government guarantee. And at the time in question, loan officers often made higher commissions on FHA loans.
The refunds came to light when the Los Angeles Times obtained a copy of one of the letters. The bank never announced them publicly.
Pomona resident Eric Murrillo-Angelo received a $6,676.89 check last month in a letter saying he "may have qualified for a conventional conforming mortgage" instead of the FHA loan he got in March 2010.
"I was really excited," he said, "although maybe a little leery at first."
Wells Fargo said a traditional loan would have had about the same interest rate as the FHA loan, but Murrillo-Angelo would not have been charged insurance premiums and higher appraisal and processing fees.
The refund included $4,847.50 for an upfront premium, $1,154.20 in annual premiums and $355 in increased closing costs, plus interest.
"You should understand that by cashing the enclosed check, you 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," a bold-faced paragraph read.
After thinking the offer over for about a week, Murillo-Angelo cashed the check.
Loan officers were able to earn a commission of about 2.5% of the loan amount for FHA-backed mortgages in 2009, 2010 and part of 2011, said Fred Arnold, past president of the California Assn. of Mortgage Professionals. That compares with 1.75% commissions for conventional loans, he said.
For example, a $350,000 FHA mortgage would yield an $8,750 commission compared with $6,125 for a conventional loan.
"That meant that some unethical loan officers could potentially steer borrowers to the wrong loan," said Arnold, who noted that regulatory reforms that took effect in 2011 make it impossible to pay a loan officer more for originating one type of loan rather than another.
A Wells Fargo spokeswoman declined to comment directly about the firm's compensation practices. She instead provided a general statement of the bank's policies: "We work hard to offer the appropriate loan options so that every borrower receives the appropriate loan based on his or her credit characteristics and personal circumstances and our compensation reflects that commitment," the statement said.
Meanwhile, the bank — along with others on Wall Street — packaged its loans into mortgage-backed securities for sale to investors. Loans that met certain standards received a guarantee from government-supported housing agencies Fannie Mae and Freddie Mac.
FHA loans, however, received a higher premium when packaged into bonds. They receive a guarantee by the Government National Mortgage Assn., the federal agency known as Ginnie Mae. These securities are a notch safer for investors than Fannie or Freddie bonds, and that made them more appealing for big institutional investors like sovereign wealth funds or mutual funds.
Although the federal government has not pursued criminal prosecutions of bankers at the heart of the mortgage operations that collapsed in 2007, it has stepped up civil lawsuits against the largest originators and securitizers of home loans during the boom.
This month's federal suit against Wells Fargo was filed by the U.S. attorney's office in Manhattan, which has brought six mortgage-fraud lawsuits against big banks in the last 18 months. The latest, filed Wednesday, seeks more than $1 billion from Bank of America for allegedly flawed loans that its Countrywide Financial Corp. unit sold to Fannie and Freddie.