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Wells Fargo is Making Big Money off of Loans That Got Them in Trouble


Wells Fargo recently reported that it made a lot of money off of the same kind of loan product that in part helped decimate the economy, got the bank in legal trouble, and drove consumers into foreclosure. To understand how outrageous this is, it helps to understand the history of the “pick-a-payment” loan program.

Pick a Payment Loans

In 2010, Wells Fargo was sued by the federal and New Jersey state governments, and eventually settled, for allegedly defrauding consumers with what are called “pick-a-payment” loans (to be fair, most of these loans were made by Wachovia bank, which Wells Fargo purchased, and were not originated by Wells Fargo).

As the name implies, these are loans where the borrower has a choice of three different payment options.

The highest payment would be about what a normal mortgage payment should be. However, very few borrowers voluntarily pay the most expensive payment. Rather, many picked the lowest or least expensive payment option. However, this option resulted in negative amortization. In other words, the payment was too small to pay off the loan in 30 years; although the borrower was paying the payment dutifully every month, the balance of the loan (including interest) was going up.

As the balance owed on the loan went up, so did the payment options. As the borrower continued to pick the smallest payment, and the balance increased, the lowest payment option eventually became too expensive for the borrower to afford, leading to foreclosure.

The lawsuit alleged that it was almost always the lowest payment that was advertised, and that borrowers were not told about the ramifications of picking the smallest payment option.

The Settlement

As a result of the 2010 settlement, Wells Fargo agreed that it would actively solicit and help borrowers get into loan modification programs, and in some cases it would write down principle. Wells Fargo also agreed to waive other fees, like modification fees or prepayment penalties.

In 2015, just 5 years after the settlement agreement, consumer lawyers argued that Wells Fargo had failed to honor the assurances in the 2010 agreement. Lawyers for both sides appeared in federal court, where attorneys argued that Wells Fargo had not properly evaluated borrowers for loan modifications under the settlement. Lawyers said that Wells Fargo was not properly evaluating whether borrowers were at risk of default and that the bank was using improper or inaccurate methods to determine whether homeowners were having financial hardship.

The court agreed with consumer lawyers that Wells Fargo’s standards for evaluation were “evolving” and “ill-defined.”

Loans Continue to be Sold

It has now been reported that despite all of these shenanigans, Wells Fargo is still profiting from these pick-a-payment loans. The bank recently reported that they sold $1.9 billion in pick-a-payment loans last quarter, earning it a “huge profit.”

Contact Jacobs Legal to speak with one of our Miami consumer rights attorneys today if you need help with a defaulted home loan.


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