People pass by a Wells Fargo bank on May 17, 2023 in New York City.
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Wells Fargo was ensnared last year in an industry-wide investigation into mortgage bankers' use of credit discounts, CNBC has learned.
The discounts, known as price exceptions, are used by mortgage professionals to secure deals in competitive markets. At Wells Fargo, for example, bankers could request price exceptions that typically lowered a customer's APR by 25 to 75 basis points.
The practice, which has been in the home lending industry for decades, has drawn interest from regulators in recent years over possible violations of U.S. fair lending laws. Black and female borrowers received fewer price exceptions than other customers, the Consumer Financial Protection Bureau has found.
“As long as price exceptions exist, price differences exist,” says Ken Perry, founder of a Washington-based mortgage industry compliance firm. “They are the easiest way to discriminate against a client.”
Wells Fargo received an official notice from the CFPB, called an MRA, or Matter Requiring Attention, about problems with the rebates, people with knowledge of the situation said. It is unclear whether regulators accuse the bank of discrimination or sloppy supervision. The bank's internal investigation into the matter continued until the end of this year, the people said.
Wells Fargo, until recently the largest player in U.S. mortgages, has repeatedly felt the wrath of regulators over missteps in home lending. In 2012, it paid more than $184 million to settle federal claims that it charged minorities higher fees and improperly placed them in subprime loans. The company was fined $250 million in 2021 for failing to address problems in its mortgage business, and more recently paid $3.7 billion for consumer abuses across products including home loans.
The behind-the-scenes actions by Wells Fargo regulators, which had not previously been reported, occurred in the months before the company announced it would curb its mortgage business. One reason for this move was the increased supervision of lenders since the 2008 financial crisis.
Wells Fargo later hired law firm Winston & Strawn to question mortgage bankers whose sales included deep discounts, said the people, who declined to be identified talking about confidential matters.
'Proud' bank
In response to this article, a company spokeswoman had this statement:
“Like many in the industry, we take competitor pricing offers into account when working with our customers to secure a mortgage,” she said. “As part of our renewed focus on supporting underserved communities through our Special Purpose Credit Program, we spent more than $100 million last year to help more minority families achieve and maintain homeownership, including offering deep discounts on the mortgage interest.”
Wells Fargo was “proud to be the largest bank lender to minority families,” she added.
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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 launched 32 fair lending investigations last year, more than doubling the number of investigations it has launched since 2020.
Several banks received MRAs over lending practices last year, the agency said, without naming any of the institutions. The CFPB declined to comment for this article.
'Statistically significant'
The problem with pricing exceptions is that by failing to properly track and manage their use, lenders are violating the Equal Credit Opportunity Act (ECOA) and a related anti-discrimination rule called Regulation B.
“Examiners determined that mortgage lenders violated ECOA and Regulation B by discriminating against African American and female borrowers in granting price exceptions,” the CFPB said in a 2021 report.
The agency found “statistically significant differences” in rates in which Black and female borrowers received price exceptions compared to other customers.
After the initial findings, the CFPB conducted more investigations and said in a follow-up report this year that the problems persisted.
“Institutions did not effectively monitor interactions between loan officers and consumers to ensure that policies were followed and that the loan officer did not coach certain consumers and others regarding the competitive matching process,” the agency said.
Honor system
In other cases, mortgage staff failed to explain who initiated the price exception or to request documents proving that competitive bids actually existed, the CFPB said.
That matches accounts from several current and former Wells Fargo employees, who compared the process to an “honor system” because the bank rarely checked whether competing quotes were realistic.
“You used to be able to get half a percent down with no questions asked,” said a former loan officer who operated in the Midwest. “To get an extra quarter point discount, you have to go to a market manager and plead your case.”
Price exceptions were most common in expensive housing regions of California and New York, according to an ex-Wells Fargo market executive who said he had approved thousands of them with the company over the past two decades. During the years when the bank reached maximum market share, top originators chased loan growth using price exceptions, this person said.
Change of policy
In an apparent response to the regulatory burden, Wells Fargo changed its policy early this year, requiring hard documentation of competing bids, the people said. This 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 to get pricing exceptions for loan officers and improved documentation of the process, though the discounts haven't gone away, Perry said.
JPMorgan Chase, bank of America And Citi Group declined to comment on whether they had received MRAs or changed their internal policies regarding rate discounts.
With reporting from CNBC's Christina Wilkie