Wells Fargo's mortgage business under fire

San Francisco-based Wells contends mortgages are primarily governed by federal laws that empower the bank to begin collecting interest earlier than California's rules.

Federal law allows lenders to impose finance charges when customers receive the mortgage amount. California's rules forbid interest charges until the day before the loan is officially recorded.

The time difference is costing Wells Fargo customers a significant sum, California regulators allege.

Based on a review of Wells mortgages made during 2000 and 2001, the Department of Corporations estimates that the bank is overcharging customers by an average of about $150 on loans that violate the state regulations.

Regulators also say Wells has made a habit of understating how much it will cost to close a loan. The estimates that violated fair disclosure laws were lowballed by an average of $613, according to the Department of Corporations.

"It's almost like a bait and switch," said Deputy Corporations Commission Andre Pineda.

Wednesday's threat escalated the tensions between Wells and the Department of Corporations. Last month, the agency filed a lawsuit alleging another division of the bank had overcharged about 15,000 customers for personal loans.

In their latest dispute with the bank, regulators are demanding that Wells make more accurate disclosures and refund the interest charges that broke state laws.

Wells so far has refused, citing its belief that it has followed federal laws that take precedence over the state law.

"We want to assure our customers that it's business as usual," Wells spokeswoman Julian Tunis said.

Unless Wells agrees to customer refunds and conducts an internal audit of its mortgage portfolio, the Department of Corporations could pull the bank's California mortgage license by the end of this month, said Pineda said.

Wells' suit, filed in a Sacramento federal court, is seeking an injunction to prevent California from revoking its license. It's a high-stakes battle for Wells, the largest bank headquartered West of the Mississippi.

Boosted by the lowest interest rates in 40 years, Wells' mortgage business has been booming, helping to fatten the bank's 2002 profit to $5.4 billion.

Wells touts itself as the nation's largest mortgage lender. Although the bank hasn't provided specific figures about its California mortgage volume, management have said the state ranks as its biggest market.

The bank says it ended 2002 with an 18 percent share of California's home equity loan market.

California's regulatory threats didn't go over well on Wall Street. Wells shares' fell $1.41 Wednesday to close at $45.32 on the New York Stock Exchange.

If Wells doesn't prevail in its federal lawsuit, the bank probably will settle with California, predicted industry analyst Joseph Morford of RBC Capital Markets. "The market doesn't like to have uncertainty like this," Morford said, "but at the end of the day, it's hard to believe Wells will let its mortgage license lapse in California."<