In the latest hit to the battered bank, Wells Fargo has agreed to pay $50 million to settle a class-action lawsuit that accused the bank of overcharging hundreds of thousands of homeowners for appraisals ordered after the homeowners defaulted on their mortgage loans.
The proposed settlement calls for Wells Fargo to automatically mail checks to more than 250,000 customers whose home loans were serviced by the bank between 2005 and 2010.
The checks will typically be for $120, according to Roland Tellis, a lawyer with Baron & Budd, the law firm that represented Wells Fargo’s customers. If a judge signs off on the settlement, as expected, the checks will be distributed next year.
When a borrower falls behind on a loan, mortgage contracts typically let the lender order an appraisal of the home’s current value. The cost of that appraisal, known as a “broker price opinion,” can be passed on to the borrower, but Wells Fargo used one of its own subsidiaries to conduct appraisals and then routinely marked up the cost, according to the lawsuit.
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Borrowers would be charged $95 to $120 for a service that cost the bank $50 or less, the complaint said. The charges were then listed cryptically on mortgage statements, with vague descriptions like “other charges” or “other fees.”
“People who are behind on their loans are the people who can least afford to be charged marked-up fees, but unfortunately, that’s exactly what happened,” Tellis said.
Several homeowners filed suit against Wells Fargo in 2012 in a Northern California federal court. Last year, a judge granted class-action status to a portion of the claims related to racketeering charges.
Wells Fargo said it disagreed with the claims but agreed to settle the case to avoid further litigation.
Tom Goyda, a company spokesman, said the bank had changed its practices in 2010 on how it handled broker price opinions. He declined to provide details on the changes, or on Wells Fargo’s current practices.
The $50 million settlement is a drop in the bucket for a bank that earned a profit of $5.6 billion last quarter, but the bank is reeling from a scandal over its sales tactics. Bank employees created as many as two million bank card and credit card accounts that were not authorized by customers.
Wells Fargo’s actions provoked outrage among customers, some of whom moved their accounts elsewhere in protest, and from prosecutors and lawmakers, who continued to investigate.
Sen. Elizabeth Warren, D-Mass., one of the bank’s fiercest critics, is also casting a skeptical eye on the role played by KPMG, Wells Fargo’s independent auditor.
The accounting firm’s failure to uncover the bank’s illegal activities “raises questions about the quality of your audits,” Warren and three of her colleagues wrote last week in a letter to KPMG’s chief executive.
Wells Fargo could lose $99 billion in deposits and $4 billion in revenue over the next year or so as a direct result of the sham-accounts scandal, according to an estimate from the advisory firm CG42. The company surveyed 1,000 Wells Fargo customers and reported that 14 percent of them had decided to switch to another bank.
Wells Fargo’s new chief executive, Tim Sloan – who took over the top spot after John Stumpf retired abruptly under intense criticism – acknowledged that the bank had significant work to do to rebuild its reputation, and that further fallout was likely.
“We’re prepared for things to get worse before they get better,” Sloan told analysts in a conference call last month.