Wells Fargo Bank has agreed to pay $23.7 million to eight states and modify consumers' mortgages to settle deceptive marketing allegations over risky "pick-a-payment" home loans.
The home loans were sold by Wachovia Corp. and Golden West Corp., which did business as World Savings Bank. But Wells Fargo bought out those companies in 2008 and became responsible for the loans. Under the settlement announced today, Wells Fargo admits no liability or wrongdoing.
The money going to the states will be used for restitution for consumers who have lost their homes because of the pick-a-payment mortgages, informing consumers and creating state programs to fight mortgage and loan fraud.
"In light of the unprecedented changes in our economy, Wells Fargo will continue to work with leaders across the nation on steps to help stabilize communities," said Mike Heid, co-president of Wells Fargo Home Mortgage in a statement sent to Consumer Ally. The statement also said the settlement has been factored into the company's financial projections and it expects the agreement will have no impact on its third-quarter financial results.
Attorneys general in eight states -- Arizona, Illinois, Florida, Colorado, New Jersey, Washington, Texas and Nevada -- had claimed the pick-a-payment loans broke consumer protection laws because they exposed borrowers to high risks that weren't properly disclosed. The way the loans work is that borrowers chose one of four payment options: a minimum payment that doesn't cover the loan interest due, an interest-only payment, a 15-year amortizing payment or a 30-year amortizing payment.
According to the Washington attorney general's office, most borrowers picked the first option. The states alleged the companies didn't fully explain that the minimum payment option set into place in the first years of a loan failed to cover the full amount of accrued interest, which was then tacked on to their loan balances. Consumers then faced higher monthly payments and larger loan balances. While risky, such loan terms weren't as big of a deal when home prices were increasing, before the housing industry collapsed at the start of the great recession.
"Borrowers were encouraged to believe their home values would continue to appreciate, making it easy to refinance or sell the home at a gain," Assistant Attorney General Dave Huey said in a statement. "As we know, the bubble burst."
A total of 8,715 consumers are eligible for loan modifications in the eight states. Wells Fargo said that it will contact eligible customers by Dec. 18 and any consumers who originally took out mortgages through Wachovia or Golden West can call (888) 565-1422. The loan modification program will begin Dec. 18 and be available through June 30, 2013.
Wells Fargo said the agreement expands its existing home preservation program and that through August, at-risk Wachovia pick-a-payment customers already had been given about $3.4 billion in principal forgiveness.
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