Wells Fargo faces new allegations that it breached a multimillion-dollar legal settlement by denying loan modifications to eligible homeowners.
Wells denies the charges, which were brought in a suit filed by a Woodland Hills, Calif., law firm. The San Francisco-based bank says the suit is riddled with factual inaccuracies and other errors.
The dispute involves Pick-a-Payment mortgages originated between 2003 and 2008 by World Savings Bank. World Savings Bank, once an arm of Golden West Financial, was acquired in 2006 by Wachovia, which was bought two years later by Wells Fargo.
The original class-action lawsuit alleged that borrowers were inadequately informed that their total outstanding balance could rise if they chose a low monthly payment option. Interest rates on the mortgages rose sharply after the initial teaser period ended.
Under the terms of an out-of-court settlement that became effective last year, Wells agreed to pay $50 million to affected borrowers and to make a loan modification program available to those who still had their Pick-a-Payment mortgages.
But in a new federal suit filed Friday, lawyers for the plaintiffs alleged that Wells Fargo has been improperly denying applications for loan modifications. The plaintiffs are asking for an immediate halt on foreclosures of affected homeowners, pending the outcome of a review of the applications that were denied.
"We’re asking the judge to give people time to have people look at the files, which Wells has refused to produce," said Jeffrey Weiss, a partner at Berns Weiss, the firm that filed the suit.
The suit argues that Wells Fargo is using an unreliable system to value applicants’ homes, and then using the faulty valuations as a basis for denying applications.
"Sometimes the bank will even tell a borrower who is already in default that their loan modification application has been denied because they are not at risk of falling into default," Lee Weiss, a partner at Berns Weiss said in a news release.
In a court filing, the plaintiffs allege that between April 2011 and September 2012, only 3% of the class members who applied for a loan modification under the program, or a total of 1,746 borrowers, actually received one.
Wells Fargo fired back at the plaintiffs’ lawyers in a sharply worded statement. "We are surprised that the plaintiff’s attorney, who enjoyed a $25 million fee from a $75 million settlement, pursued this new filing after what we viewed as a very productive litigation work flow to address any concerns that our customers and his clients faced," the statement reads.
Wells Fargo said that it continues to work to meet both the letter and the spirit of the settlement, noting that it has provided modifications for nearly 110,000 homeowners with Pick-a-Payment loans.
"That means that more than a third of all Pick-a-Pay loans—including those covered by the settlement and those not included—have been modified since the beginning of 2009," Wells Fargo said in the statement.
The settlement agreement at issue is separate from agreements involving Pick-a-Payment mortgages that have been reached between Wells Fargo and the attorneys general in several states, including California.
Wells is not the first bank to face charges that it failed to live up to the terms of an out-of-court settlement in which it promised to modify bubble-era mortgages.
In 2011, Nevada attorney general Catherine Cortez Masto alleged that Bank of America had failed to live up to certain promises it made regarding modifications of Countrywide mortgages. Those charges were settled earlier this year.