Monday, July 25, 2011

Federal Reserve Hits Wells Fargo With $85 Million Fine for Predatory Lending

The Federal Reserve finally imposed penalties on the banking industry for its role in predatory lending practices that enabled the housing bubble to expand prior to the market crash of 2008. In particular, the Fed fined Wells Fargo $85 million for its role in writing and pushing predatory subprime loans. Further, even though Wells Fargo did not admit wrongdoing, it agreed to pay back those borrowers who were steered into expensive subprime loans, but qualified for prime loan rates.

The Fed found that between 2004 and 2008, Wells Fargo Financial, a subsidiary that went bankrupt last year, swindled as many as 10,000 borrowers. Wells Fargo employees were falsifying income statements in order to increase their own commissions, despite the fact that borrowers should not have qualified for the subprime loans written and approved by the bank. Wells Fargo will be working with the Fed to pay back those deceived homeowners, but it was quick to state that the fault came at the hands of just a few loan officers. Still, "[t]he Fed blamed compensation and sales quota policies at Wells Fargo Financial for encouraging employees to falsify documents. It also faulted the bank for having inadequate controls in place to manage risk." Wells Fargo did significant damage to each effected homeowner, with the Fed estimating that compensation for the 10,000 borrowers will range from $1,000 to $20,000 each.

While the fine of Wells Fargo represents an appropriate, albeit late, exercise of Fed power, will an $85 million fine motivate a company like Wells Fargo to forego reckless profit grabs like its predatory loan writing practice between 2004 and 2008, particularly when it made almost $4 billion in the last quarter?

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