“When I realized it was a pattern of filing false documents with the federal court, that was appalling to me, the unauthorized loan modifications really cause havoc to a debtor’s reorganization”
Wells Fargo Is Accused of Making Improper Changes to Mortgages
Even as Wells Fargo was reeling from a major scandal in its consumer bank last year, officials in the company’s mortgage business were putting through unauthorized changes to home loans held by customers in bankruptcy, a new class action and other lawsuits contend.
The changes, which surprised the customers, typically lowered their monthly loan payments, which would seem to benefit borrowers, particularly those in bankruptcy. But deep in the details was this fact: Wells Fargo’s changes would extend the terms of borrowers’ loans by decades, meaning they would have monthly payments for far longer and would ultimately owe the bank much more.
Any change to a payment plan for a person in bankruptcy is subject to approval by the court and the other parties involved. But Wells Fargo put through big changes to the home loans without such approval, according to the lawsuits.
The changes are part of a trial loan modification process from Wells Fargo. But they put borrowers in bankruptcy at risk of defaulting on the commitments they have made to the courts, and could make them vulnerable to foreclosure in the future.
A spokesman for Wells Fargo, Tom Goyda, said the bank strongly denied the claims made in the lawsuits and particularly disputed how the complaints characterized the bank’s actions. Wells Fargo contends that the borrowers and the bankruptcy courts were notified.
“Modifications help customers stay in their homes when they encounter financial challenges,” Mr. Goyda said, “and we have used them to help more than one million families since the beginning of 2009.”
According to court documents, Wells Fargo has been putting through unrequested changes to borrowers’ loans since 2015. During this period, the bank was under attack for its practice of opening unwanted bank and credit card accounts for customers to meet sales quotas.
Outrage over that activity — which the bank admitted in September 2016, when it was fined $185 million — cost John G. Stumpf, its former chief executive, his job and damaged the bank’s reputation.
It is unclear how many unsolicited loan changes Wells Fargo has put through nationwide, but seven cases describing the conduct have recently arisen in Louisiana, New Jersey, North Carolina, Pennsylvania and Texas. In the North Carolina court, Wells Fargo produced records showing it had submitted changes on at least 25 borrowers’ loans since 2015.
Bankruptcy judges in North Carolina and Pennsylvania have admonished the bank over the practice, according to the class-action lawsuit filed last week. One judge called the practice “beyond the pale of due process.”
The lawsuits contend that Wells Fargo puts through changes on borrowers’ loans using a routine form that typically records new real estate taxes or homeowners’ insurance costs that are folded into monthly mortgage payments. Upon receiving these forms, bankruptcy court workers usually put the changes into effect without questioning them.
It is unclear why the bank would put through such changes. On one hand, Wells Fargo stood to profit from the new loan terms it set forth, and, under programs designed to encourage loan modifications for troubled borrowers, the bank receives as much as $1,600 from government programs for every such loan it adjusts, the class-action lawsuit said. But submitting the changes without approval violates bankruptcy rules and puts the bank at risk of court sanctions and federal scrutiny. When a lawyer for a borrower has questioned the changes, Wells Fargo has reversed them.
Abelardo Limon Jr., a lawyer in Brownsville, Tex., who represents some of the plaintiffs, said he first thought Wells Fargo had made a clerical error. Then he saw another case.
“When I realized it was a pattern of filing false documents with the federal court, that was appalling to me,” Mr. Limon said in an interview. The unauthorized loan modifications “really cause havoc to a debtor’s reorganization,” he said.
This is not the first time Wells Fargo has been accused of wrongdoing related to payment change notices on mortgages it filed with the bankruptcy courts. Under a settlement with the Justice Department in November 2015, the bank agreed to pay $81.6 million to borrowers in bankruptcy whom it had failed to notify on time when their monthly payments shifted to reflect different real estate taxes or insurance costs.
That settlement — in which the bank also agreed to change its internal procedures to prevent future violations — affected 68,000 homeowners.
Borrowers having financial difficulties often file for personal bankruptcy to save their homes, working out payment plans with creditors and the courts to bring their loans current in a set period. If the borrowers meet their obligations over that time, they emerge from bankruptcy with clean slates and their homes intact.
Changing these payment plans without the approval of the judge and other parties can imperil borrowers’ standing with the bankruptcy courts.