Wells Fargo entangled in a wide-ranging investigation

Wells Fargo, one of the largest players in the U.S. mortgage industry, found itself entangled in a wide-ranging investigation last year.

The probe centered around the use of loan discounts by mortgage bankers, known as pricing exceptions, to secure deals in competitive markets. These pricing exceptions typically reduced a customer's APR by 25 to 75 basis points.

While the practice of using pricing exceptions has been common in the home loan industry for decades, it has come under scrutiny in recent years for potential violations of fair lending laws. The Consumer Financial Protection Bureau (CFPB) discovered that black and female borrowers received fewer pricing exceptions compared to other customers, raising concerns of discrimination.

Ken Perry, founder of a compliance firm for the mortgage industry, highlighted the issue, stating, "As long as pricing exceptions exist, pricing disparities exist. They're the easiest way to discriminate against a client."

Wells Fargo received an official notice from the CFPB, called a Matter Requiring Attention (MRA), regarding problems with its use of discounts. The nature of the accusations, whether discrimination or oversight, remains unclear. The bank conducted an internal investigation that extended into the present year.

This is not the first time Wells Fargo has faced regulatory action related to its mortgage business. In 2012, the bank paid over $184 million to settle claims of charging minorities higher fees and unfairly placing them in subprime loans. It was also fined $250 million in 2021 for not addressing issues in its mortgage operations and recently paid $3.7 billion for consumer abuses related to various products, including home loans.

The actions taken by regulators behind the scenes at Wells Fargo, which were previously unreported, occurred just before the company announced its decision to scale back its mortgage business. The increased scrutiny on lenders since the 2008 financial crisis was one of the reasons for this move.

To address the concerns surrounding pricing exceptions, Wells Fargo enlisted the help of law firm Winston & Strawn to interview mortgage bankers who had utilized high levels of discounts. The bank's response to the article emphasized its consideration of competitor pricing offers and its efforts to support underserved communities through its Special Purpose Credit Program.

Wells Fargo stated that it has spent over $100 million in the past year to assist minority families in achieving and maintaining homeownership, including offering significant discounts on mortgage rates. The bank also asserted that it does not discriminate based on race, gender, age, or any other protected basis.

Regulators have intensified their crackdown on fair lending violations, and other lenders besides Wells Fargo have also been involved. The CFPB initiated 32 fair lending probes in the past year, more than double the number since 2020.

The issue with pricing exceptions arises from lenders' failure to adequately track and manage their use, leading to violations of the Equal Credit Opportunity Act (ECOA) and Regulation B, an anti-discrimination rule. The CFPB found statistically significant disparities in the granting of pricing exceptions to African American and female borrowers compared to other customers.

The agency's reports highlighted shortcomings in monitoring interactions between loan officers and consumers to ensure compliance with policies. In some cases, mortgage personnel did not clarify who initiated the pricing exception or request documentation proving the existence of competitive bids.

Former Wells Fargo employees likened the process to an "honor system" because the bank rarely verified the authenticity of competitive quotes. Changes in policy have been implemented, including stricter requirements for documentation of competitive bids, in response to regulatory pressure. Wells Fargo now focuses on offering home loans only to existing customers and borrowers in minority communities.

While many lenders have made it more challenging for loan officers to obtain pricing exceptions and improved documentation of the process, these discounts still exist.