Wells Fargo, the controversy-battered big bank, has a new problem — this one directly affecting mortgage applicants. Last week, a first-time home buyer filed a class-action suit against the company, alleging widespread abuse of a procedure well known to most mortgage borrowers: interest-rate locks.
The suit alleges that Wells Fargo engaged in "a systematic effort" to charge unwarranted rate-lock extension fees — sometimes costing thousands of dollars each — to borrowers who should not have been required to pay them.
The Consumer Financial Protection Bureau is investigating the same practices, according to Wells Fargo's most recent quarterly filing with the Securities and Exchange Commission. The CFPB generally does not confirm or discuss ongoing investigations and declined to do so for this column.
A Wells Fargo spokesman, Tom Goyda, said the company could not comment on the suit, but he added that "we are reviewing the complaint in detail" and that "our current processes are designed to ensure that our rate-lock extension-fee policy is interpreted and applied consistently."
Rate locks guarantee interest rates quoted to borrowers for specific periods, typically ranging from 30 to 90 days, although some can be as short as 15 days or as long as 120. During the covered period, the lender cannot raise the rate, even if market interest rates have spiked. When a loan is not closed within the lock period, the guarantee expires and the borrower must request an extension.
In Wells Fargo's case, according to the suit, the company assured clients that they would not have to pay for lock extensions if a delay causing an expiration was the bank's fault. If the delay was attributable to the borrower, the borrower would have to pay an extension fee, which could be significant if the loan amount was large.
The plaintiff in the new class action, Victor Muniz, says he decided to buy a home in Sandy Valley, Nev., near his parents, and turned to Wells Fargo for his mortgage. Wells offered a rate lock on the loan commitment, but when the closing was delayed — not by Muniz, according to the suit, but by an appraiser who was out of the country — Wells charged him a fee of $287.50. This was despite assurances to Muniz by a bank employee that he would not be charged anything.
Although Muniz's extension fee was relatively modest, consumer agencies around the country have received complaints about Wells Fargo's rate-lock extension practices, with some fees exceeding $1,000 and ranging as high as $4,500. "We ended up paying a rate lock extension of $4,500 purely because our rate was great and the cost of not getting that rate was far worse," the suit quotes a complainant to one consumer agency. Another borrower complained about being charged $500 extra even though "I did not cause any delay."
A whistleblower letter sent to congressional committees by a former Wells Fargo employee estimated that the company's practices have led to overcharges amounting to "millions of dollars" in the Los Angeles area alone. The suit quotes a former Wells Fargo branch officer as having told ProPublica, the nonprofit investigative news group, that the bank's approach to rate-lock expirations amounted to "just stealing from people."
Muniz's suit claims the rate-lock policy was overseen by regional and area managers, who routinely turned down local branch requests to exempt from the extra fees clients who had not caused delays. One former bank official quoted in the suit said that "99 percent of the time, our requests [were] denied" at the regional level. If a borrower refused to pay the fee, "we just canceled the loan," the former employee said.
Filed in U.S. District Court in San Francisco, Muniz's suit claims violations of, among other statutes, the Real Estate Settlement Procedures Act, which prohibits receipt of unearned fees in mortgage transactions. The proposed class of victims could involve thousands of borrowers.
The takeaway here: Whatever the ultimate judgment by the courts in Muniz's litigation, when you are obtaining a rate lock on a mortgage, focus on the details. Ask whether the lender has specific policies on fees for rate-lock extensions. If you are required to pay money for all extensions — even when the lender screws up the process — is that fair to you as a consumer?
Ken Harney's email address is firstname.lastname@example.org.