Wells Fargo Pays $24M to End Probe – Analyst Blog

The time is out of joint for Wells Fargo & Co. (WFC). The company has agreed to pay up $24 million to settle a probe by eight states about a mortgage marketing practice of its acquired company, Wachovia.

 

The states alleged a lack of transparency in the loan payment options of Wachovia Corp. and a California company it bought, World Savings Bank. They claimed that the mortgage marketing practices that were adopted did not disclose the risks associated with them. 

 

The loans, known as option adjustable rate loans or “pick-a-payment” mortgages, had a significantly low payment option, which resulted in the mounting of debt as many a time, even the monthly interest was not covered. These interest payments were then added to the principal amount, resulting in an increase in overall debt. The lack of sufficient information ultimately led to defaults and foreclosures.

 

Wells Fargo reached this agreement with the attorneys general in eight states – Arizona, Colorado, Florida, Illinois, Nevada, New Jersey, Texas and Washington – but did not admit of any wrongdoing on its part. Under the agreement, Wells Fargo will provide loan assistance to more than 8,700 borrowers for loans worth over $770 million through June 2013. The states will use the $24 million that Wells Fargo is paying to reach out to the customers who availed such loans. Nevertheless, the company no significant impact on its third quarter financial results from this.

 

 

Lending practices have become a subject of scrutiny following the recent financial crisis. However, the recent legislative actions aim at helping out the customers through several provisions. The Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law by President Barack Obama on July 21, 2010, aims at fair play practices in the overall financial system and seek to lessen the massive defaults and foreclosures that the economy have suffered.

 

To protect unsuspecting borrowers against abusive lending and mortgage practices, the reform bill establishes government agencies to monitor banking practices and the oversight of troubled financial institutions.

 

This legislation establishes a Consumer Financial Protection Bureau, changes the base for deposit insurance assessments, introduces regulatory rate-setting for interchange fees charged to merchants for debit card transactions, and excludes certain instruments currently included in determining the Tier 1 regulatory capital ratio. However, this could result in a loss of revenues, change of certain business practices, debarring of certain business opportunities, increase in capital requirements and additional assessments and costs.

 

As a result, besides Wells Fargo, several other biggies have both their top and bottom lines threatened. These include Citigroup Inc. (C), JPMorgan & Chase Co. (JPM), Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and US Bancorp (USB). Nevertheless, the improvement of the overall economy, albeit sluggish, is encouraging.