By Daniel Edstrom
DTC Systems, Inc.
On July 20, 2011, the Board of Governors of the Federal Reserve System issued an Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon Consent to Wells Fargo & Company and Wells Fargo Financial, Inc.
Here is an excerpt from this Order:
WHEREAS, this Order is issued with respect to the following allegations:
A. During the period from at least January 2004 to the Reorganization (the “Relevant Period”), Financial’s business model with respect to home mortgage lending was to sell debt consolidation, cash-out refinance loans at sub-prime rates (“nonprime loans”) to customers principally through a network of more than 800 offices located throughout the United States, called “stores.” The principal marketing method was salespersonnel making outbound, unsolicited telephone calls to individuals who had some existing customer relationship with Financial. Under Financial’s underwriting process, the salespersonnel were responsible for obtaining income-related documents (such as pay stubs and W-2 forms) and forwarding them to Financial’s centralized underwriting centers. Financial typically did not require that borrowers fill out and sign loan applications that included the borrower’s representation of his or her income.
B. Under Financial’s sales performance standards and incentive compensation programs, Financial salespersonnel, called “team members,” were expected to sell (a) a minimum dollar amount of loans to avoid performance improvement plans that could result in loss of their positions with Financial, and (b) a minimum dollar amount of loans to receive incentive compensation payments above their base salary.
C. In some cases, contrary to Financial’s written policies and procedures, salespersonnel marketed these loans to customers by representing that the debt-consolidation home mortgage refinancing loans would improve or repair a consumer’s credit.
Income Document Alteration or Falsification
D. Financial’s internal controls were not adequate to detect and prevent instances when certain of its salespersonnel, in order to meet sales performance standards and receive incentive compensation, altered or falsified income documents and inflated prospective borrowers’ incomes to qualify those borrowers for loans that they would not otherwise have been qualified to receive.
E. During the Relevant Period, particular instances of customer income document alteration or falsification by individual Financial salespersonnel came to the attention of Financial’s compliance officers. The compliance officers investigated the particular instances brought to their attention and disciplinary action was taken against certain individual salespersonnel if their involvement in income document alteration or falsification was admitted or otherwise proven. In mid-2008, Financial took steps to improve its internal controls that made it more difficult for salespersonnel to alter or falsify income-related documents.
Steering Potential Prime Borrowers Into Nonprime Loans
F. In or around August 2005, in response to public and regulatory criticism, Financial initiated a process, referred to as the “A-Paper Filter,” to provide prime pricing to customers for qualifying debt consolidation cash-out refinancing mortgage loans. Initially, if a transaction “passed” the filter and a further underwriting process, the customer would be offered prime pricing from Financial. Beginning in or around February 2006, the A-Paper Filter was modified so that customers with potentially qualifying transactions instead would be referred to Financial’s affiliate, Wells Fargo Home Mortgage (“Home Mortgage”), which would determine the customer’s eligibility for prime pricing and, if eligible, originate the prime priced home mortgage loan. At approximately the same time, Financial revised its performance standards and compensation programs so that it generally was less advantageous for salespersonnel to sell a prime loan to the customer than a nonprime loan.
G. As a result of the modifications and revisions, some customers during the Relevant Period who may have qualified for a prime priced home mortgage loan at Financial or through referral to Home Mortgage were sold loans by salespersonnel priced at nonprime rates, primarily through “upselling” prospective borrowers so that the borrowers requested cash-back loans that were sufficiently large that the borrowers’ transactions no longer qualified for prime pricing. While the customers received disclosures regarding the nonprime rates they were being charged, the customers were not advised that they may have qualified for prime priced loans or that it was generally more advantageous for the salesperson to sell a nonprime, rather than a prime, loan.
H. Financial’s internal controls, including controls relating to Financial’s sales performance standards and compensation programs, were not adequate to detect and prevent incidents of evasion of the A-Paper Filter by Financial salespersonnel.
I. Deficiencies specified in paragraphs D. through H. above resulted in:
a. Unsafe or unsound banking practices;
b. Unfair or deceptive acts or practices within the meaning of section 5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. § 45(a)(1);
c. Violations of various state laws pertaining to fraud and false or misleading statements in home mortgage loan-related documents, and to unfair or deceptive acts or practices.
WHEREAS, the Board is assessing a civil money penalty of $85 million against Wells Fargo and Financial pursuant to section 8(i)(2)(B) of the FDI Act, 12 U.S.C. § 1818(i)(2)(B);
WHEREAS, Wells Fargo and Financial have agreed to make restitution to borrowers with respect to the Legacy Assets (and with respect to home mortgage loans that would be Legacy Assets except that they are no longer outstanding (“Former Legacy Assets”)) in accordance with the provisions of this Order pursuant to section 8(b)(6)(A) of the FDI Act, 12 U.S.C. § 1818(b)(6)(A). The amount of remedial compensation (in the form specified in subparagraph 5.a. below) that each eligible borrower is expected to receive ranges between $1,000 and $20,000, but some eligible borrowers may receive less than $1,000 and others may receive more than $20,000, depending on their particular circumstances. The number of eligible borrowers who may receive remedial compensation is estimated to be between about 3,700 to possibly more than 10,000;
Download this Order: http://dtc-systems.net/wp-content/uploads/2011/09/Wells_Fargo_enf20110720a1-1.pdf