As
Federal
Reserve Fines Wells Fargo, It's Too Little, Too Late, Focus Turns to
Just-Filed
Capital One - ING Application
By
Matthew
R. Lee
SOUTH
BRONX,
July 21 -- After being presented with evidence of Wells
Fargo's predatory lending for years, but nevertheless approving all
of Wells Fargo's merger applications, the Federal Reserve this week
belatedly imposed
a $85 million fine for abuses by Wells Fargo
Financial.
The
response by
Bronx-based Fair Finance Watch, which provided the Fed with
testimony
for whistleblowing employees of Wells Fargo Financial, was too
little, too late.
At Wells,
subprime lending has already been
shifted into other of the bank's units.
In 2010, the
sixth year in
which the Home Mortgage Disclosure Act data distinguishes which loans
are higher cost, over a federally-defined rate spread of 1.5 percent
over Treasury bill yields, the data show that the largest of Wells
Fargo's many HMDA data reporters confined African Americans to
higher-cost loans 2.56 times more frequently than whites.
Predatory
lending
already triggered the global financial meltdown. The Fed, it seems,
is merely saving face.
But
what can be
learned for the future? Also this week, the Fed published notice of
the proposal by another much-maligned lender, Capital One, to acquire
the Internet bank ING Direct, stating that the public has only until
August 18 to comment on the application. It is the middle of summer;
the deal would create the nation's fifth largest bank.
One
can
imagine
the Fed trying to haul off and approve Capital One's application,
and
then some years later impose some sort of fine. That makes no sense,
particularly after the Fed's implicit recognition that it miss the
boat for years with Wells Fargo. So let it be different this time.
Here is a
complaint from inside Wells Fargo Financial that Inner City Press
published
in 2008.
Fair Finance
Watch submitted to the Fed:
Subj:
Attention
Inner City Press
Date: 5/2/2008 2:10:09 P.M. Eastern
Daylight Time
From: [Name withheld upon request]
To: Inner City
Press
I've
been
with Wells Fargo Financial since [redacted to preserve
confidentiality of whistleblower]. I am an assistant branch manager. I
have two points of interest that I would like to let you in on to
see what your opinion is about the situation.
Point
number
1: New Performance Improvement Plan process (The PIP process
as it is referred to here regarding the process of terminating a team
member)
The
process
used to be that if you did not book 100k of new money lent
over a 2 month period you were given a month to do at least 50k and
over the next three months to book 150k total of new money to get off
of the PIP. If you did not reach this, the company could recommend
termination. It has only happened to two team members since I have
been with the company.
The
new
pip process is as follows, if you have one month without doing
50k of new money you can be recommended for termination. You have
the following month to do 50k and if you do not you are out
basically.
Point
Number
2: Sub-Prime loans and Prime loans or (A-Paper Loans)
Our
business
model is confused. We are supposed to be subprime lenders,
we sell to customers with 620 or below FICO scores, that is our
target market. Our lead base is mainly retail sales finance accounts
(ex: tractor supplies financing, heating and cooling, carpet,
furniture stores etc.) Most of these customers usually finance with
12 months same as cash periods or 24 months same as cash periods etc.
Lately things are tight you basically have to have at least somewhat
decent credit to get approved for this financing. Somewhat decent
credit is above 620 fico score. Most of these retail sales accounts
are 700 credit score customers and so forth. Our job is to call
these customers and service those accounts and cross sell, credit
cards, auto loan refinancing to pay off credit cards, and most
importantly real estate restructuring. Taking the equity you have in
your home to combo other bills to put them into one ultimate loan
with a lower payment and hopefully an overall lower total payback
(which is rare).
Most
of
these customers could go to their bank and do the same thing at a
much lower interest rate. Our company doesn't want us selling prime
loans because we don't make money on these loans. If we book a loan
and it ends up going prime we do not receive credit for it as a unit
or a loan. We do get paid 175 bucks for each prime loan we book but
if you do nothing but prime loans you will show no new money credit
for these loans and zero units thus making it look like you didn't do
anything. As a result you would be pipped and begin the process of
termination. There is a way for us to keep a prime customer from
going prime, if we can convince the credit grade A, no matter what
the fico score it could be and 850, to take a loan over 91% of the
total loan value (example 100k home value, 91k loan amount) it will
not go prime.
The
tricky
part is this, we as team members do not know what rate the
customer will qualify for, we have a matrix, every customer falls
into a certain pricing non-prime grade meaning a 720 credit score can
come up and it will show up as a 10% rate but if you go below 91% ltv
it will show that it can be recommended for prime pricing.
Let
me
give you a recent example: I
had a 736 fico customer coming in wanting to do a 124k total loan on
a home he just had appraised about 6 months ago for 137k. The
appraisal itself was done by a friend of the customers to
purposefully bring it down because the loan he was trying to complete
was the result of a divorce. I still took the chance and put in the
total value as 137k. At a 124k total loan his total interest rate
quoted was 9.38%. He had no choice, because of the way he was paid
the bank would not cash flow him but we are very conservative as well
but we were able to legitamitly cash flow him for the loan. (wells
fargo doesn't mess around when it comes to cash flowing loans, we get
heavy documentation) We got an appraisal done (wells fargo also
doesn't mess around when it comes to appraisals, we have absolutely
no contact with the appraisers, we have a separate company that we
pay to have the contact) the appraisal came back for 185k.
So
obviously
at this point, it would be tough for me to get this loan up
to 91% ltv. For me it was simple, i want to do the right thing but
at the same time i have to book loans, they put pressure on you to
book it subprime, i tried like hell to sell 91% loan and nearly
succeeded. The customer ended up only taking an extra 15k which
still kept it below the 91% required to keep it from going prime. Still
at this point i am not able to disclose to the customer that
all he had to simply do was take any loan under 91% and he would
simply sign the final pricing disclosure showing a 9.38% rate but
after a final review it will come back and give him a 5.5% -7% loan. I
still had to sell with the customer having the intentions he would
be getting a 9.38% rate. We sent up the final pricing disclosure it
was recognized as prime and the customer ended up with a 5.5% fixed
rate for 30 years to his surprise and glee.
That
turned out great,
of course it looks like I never booked a loan. Second scenario would
have been if the customer had agreed to take an extra 60k out putting
him over the 91% ltv mark and thus keeping the loan at 9.38% for a
720 fico customer. We can never inform them of this until after they
agree to a higher rate like that is what they are getting and they
get a prime loan. If i would have booked this loan subprime in that
particular month i would have received over 1k in total bonus money.
Instead, I didn't hit the mark required for bonus money and only
received the 175k for booking a prime loan.
This
is
of course a CYA scenario for Wells Fargo but believe me, it is not
a good thing to book a prime loan, i had my district manager yelling
at me for not being able to sell the extra 60k because once it is
prime it doesn't count for the branches records, or the districts
record or the regions record. No one gets credit.
That
is
my fundamental reason for wanting to leave Wells Fargo Financial. I
know we are in business to make money, but not at the expense of
humanity.
And
more than
three years later, the Fed belated imposed a fine. Too little, too
late -- but a lesson for the future, starting with Capital One's
application to acquire ING Direct.
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