Mortgage

Wells Fargo reveals software error wrongly denied much-needed mortgage modifications

Big bank sets aside $8 million for remediation

It seems that the bank that was once the shining example of how a big bank should be run now can’t go two days without another scandal erupting.

Wells Fargo revealed Friday that an error in its mortgage underwriting software led to hundreds of improperly denied mortgage modifications for borrowers facing foreclosure over a five-year period.

The disclosure was made in the bank’s 10-Q quarterly filing with the Securities and Exchange Commission, and the contents of the filing were first reported by Reuters.

As the Reuters report notes, Wells Fargo disclosed in the SEC filing that a review of its use of a mortgage modification underwriting tool found a “calculation error” that affected certain mortgages that were in the foreclosure process between April 13, 2010 and Oct. 20, 2015.

According to Wells Fargo, the error caused an automated miscalculation of attorneys’ fees that were used to then determine whether a borrower qualified for a loan modification with Fannie Mae or Freddie Mac, or under the terms of the government’s Home Affordable Modification Program.

In the SEC filing, Wells Fargo said that the borrowers were not actually charged the attorneys’ fees in question.

As a result of the error, approximately 625 customers were incorrectly denied a mortgage modification or were not offered one in cases where they would have qualified if not for the error.

And of those roughly 625 customers, approximately 400 of them were foreclosed upon after the loan modification was incorrectly denied or not offered as a result of the underwriting software error.

To repeat, approximately 400 borrowers who needed and deserved mortgage modifications did not get them, in part, because of Wells Fargo’s software error, and then they lost their homes.

According to the bank, it has “substantially” completed its internal review of the matter and set aside $8 million during the second quarter to be used to remediate the customers whose modification decisions “may have been affected by the calculation error.”

And while that figure ($8 million) might seem like a lot, if divided equally among the 625 borrowers that were affected by this software error, each borrower will receive approximately $12,800.

“To the extent issues are identified, we will continue to assess any customer harm and provide remediation as appropriate,” the bank said in the SEC filing. “This effort to identify other instances in which customers may have experienced harm is ongoing, and it is possible that we may identify other areas of potential concern.”

As the Reuters article also notes, Wells Fargo also disclosed that it now facing inquiries from unnamed government agencies about its use of the low-income housing tax credit.

“Federal government agencies have undertaken formal or informal inquiries or investigations regarding the manner in which the Company purchased, and negotiated the purchase of, certain federal low income housing tax credits in connection with the financing of low income housing developments,” the bank said.

The reveals come just two days after the bank agreed to pay more than $2 billion for allegedly lying about the quality of subprime and Alt-A mortgages that backed residential mortgage-backed securities in the run-up to the housing crisis.

And that settlement continues a lengthy string of payouts for the bank.

Most recently, the bank agreed to pay $480 million to shareholders to settle class action suit over the bank’s fake account scandal.

That settlement stems from actions originally taken in 2016 by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the city and county of Los Angeles to fine the bank $150 million for more than 5,000 of the bank’s former employees opening as many as 2 million fake accounts in order to get sales bonuses.

And in April, the CFPB and the OCC announced a $1 billion fine for the bank over auto insurance and mortgage abuses.

Last year, Wells Fargo revealed that it was preparing to hand out $80 million in remediation for potentially wrongfully force-placing auto insurance on as many as 570,000 customers.

The bank later disclosed that it agreed to pay $108 million to the federal government to settle allegations that the bank overcharged military veterans for refinances.

And now, it’s going to pay out more for improperly denying mortgage modifications to borrowers who should have gotten them.

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