- According to sources, Wells Fargo received a formal notice from the Consumer Financial Protection Bureau about problems with its use of mortgage interest discounts.
- Wells Fargo hired a law firm to outsmart mortgage lenders whose sales included steep discounts, the sources said.
- Several banks received MRAs on lending practices last year, the CFPB said, without naming the institutions.
- In its industry review, regulators found “statistically significant differences” in rates where black and female borrowers received price waivers compared to other customers.
People walk past a Wells Fargo bank on May 17, 2023 in New York City.
Spencer Platt | Getty Images
Wells Fargo was embroiled in an industry-wide investigation last year into mortgage bankers’ use of loan discounts, CNBC has learned.
The discounts, known as price exceptions, are used by mortgage agents to close deals in competitive markets. At Wells Fargo, for example, bankers could apply for pricing waivers that typically lowered a customer’s APR by 25 to 75 basis points.
The practice, which has been used in the real estate lending industry for decades, has in recent years sparked regulators’ interest in possible violations of U.S. fair lending laws. The Consumer Financial Protection Bureau found that black and female borrowers received fewer price waivers than other customers.
“As long as there are price exceptions, there will be price differences,” said Ken Perry, founder of a Washington-based mortgage industry compliance firm. “They are the easiest way to discriminate against a customer.”
Wells Fargo has received an official notice called MRA (Matter Requiring Attention) from the CFPB about problems with its rebates, people familiar with the situation said. It’s unclear whether regulators accused the bank of discrimination or sloppy supervision. The bank’s internal investigation into the matter extended into the end of this year, the people said.
Wells Fargo, until recently the largest provider of U.S. mortgages, has repeatedly felt the wrath of regulators over missteps in home loans. In 2012, the company paid more than $184 million to settle federal claims that it charged minorities higher fees and wrongfully funneled them into subprime loans. In 2021, the company was fined $250 million for failing to address problems in its mortgage business, and more recently it paid $3.7 billion for consumer abuse in products such as home loans.
The previously unreported behind-the-scenes actions by Wells Fargo regulators occurred in the months before the company announced it would restrict its mortgage business. One reason for this step was the tightened control of lenders since the 2008 financial crisis.
Wells Fargo later hired law firm Winston & Strawn to outsmart mortgage lenders whose sales included steep discounts, said the people, who declined to be identified discussing confidential matters.
In response to this article, a company spokeswoman said:
“Like many in the industry, we consider competitors’ pricing offers when working with our customers to obtain a mortgage,” she said. “As part of our renewed focus on supporting underserved communities through our special lending program, we spent more than $100 million last year to help more minority families achieve and maintain homeownership, including providing significant discounts on mortgage rates.”
Wells Fargo is “proud to be the largest bank lender to minority families,” she added.
The bank issued this additional statement later Monday: “While we cannot comment on regulatory matters, we do not discriminate on the basis of race, gender or age, or any other protected basis.”
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Regulators have recently stepped up their crackdown on fair lending violations, and other lenders besides Wells Fargo have been implicated. The CFPB opened 32 fair lending investigations last year, more than doubling the investigations opened since 2020.
Several banks received MRAs on lending practices last year, the agency said, without naming the institutions. The CFPB declined to comment for this article.
The problem with pricing waivers is that by failing to properly track and manage their usage, lenders have violated the Equal Credit Opportunity Act (ECOA) and a related anti-discrimination rule called Regulation B.
“Auditors found that mortgage lenders violated ECOA and Regulation B by discriminating against African-American and female borrowers in granting pricing waivers,” the CFPB said in a 2021 report.
The agency found “statistically significant disparities” in rates where black and female borrowers received rate waivers compared to other customers.
After initial findings, the CFPB conducted further investigations and said in a follow-up report this year that the problems persisted.
“The institutions did not effectively monitor interactions between loan officers and consumers to ensure that policies were followed and that the loan officer did not train certain consumers and others on the competitive process,” the agency said.
In other cases, mortgage employees failed to explain who initiated the pricing exception or to request documents proving that there were, in fact, competitive offers, the CFPB said.
This is reflected in the accounts of several current and former Wells Fargo employees, who likened the process to an “honor system” as the bank rarely checked whether competitors’ offers were genuine.
“You used to be able to get half a percent off, no questions asked,” said a former loan officer who worked in the Midwest. “To get another quarter point discount, you would have to go to a market manager and plead your case.”
Price waivers are most common in expensive residential areas in California and New York, according to a former Wells Fargo market manager who said he approved thousands of them over two decades at the company. During the years when the bank sought maximum market share, top producers pursued loan growth using price exceptions, this person said.
In an apparent response to regulatory pressure, Wells Fargo adjusted its policies earlier this year to require rigorous documentation of competitive offers, the people said. The move coincided with the bank’s decision to focus on offering home loans only to existing customers and borrowers in minority communities.
Many lenders have made it harder for loan officers to get pricing waivers and improved the documentation of the process, although the discounts haven’t gone away, according to Perry.
JPMorgan Chase, Bank of America and Citigroup declined to comment when asked whether they had received MRAs or changed their internal policies regarding discounts.
With reporting by CNBC’s Christina Wilkie