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Wells Fargo

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is playing it smart with state attorneys general: It's been aggressive about reaching mortgage settlements early on.

On Monday, the San Francisco-based lender and California's attorney general announced a settlement in which Wells will provide up to $2 billion worth of principal forgiveness and other loan modifications to nearly 15,000 California homeowners. The bank will also pay $32 million to thousands of other borrowers who lost their homes through foreclosure and contribute to the state's efforts to prevent foreclosures through customer outreach.

The deal comes in addition to agreements Wells has already forged with nine other state AGs and as battles between state officials and large mortgage servicers have heated up.

Ohio State Attorney General Richard Cordray was the first to take aggressive action against a lender this year, suing GMAC in October over the practice of "robosigning," or allegedly allowing employees to sign off on thousands of foreclosure affidavits without having verified the underlying information. Last week, Nevada and Arizona followed up by suing

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over its loan-modification practices. And on Monday, a New Jersey judge ordered six large mortgage servicers - Bank of America, Wells Fargo, GMAC,

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and OneWest - to prove that foreclosures should not be suspended, following allegations of robosigning in that state.

Wells undoubtedly has battles ahead - Cordray, for instance, has warned that the lender is next in his crosshairs, following the exposure of depositions in which employees said they had engaged in robosigning as well. Federal officials are also performing broad investigations of servicer practices and it's unclear what the outcome of those probes will be.

Still, the bank has made significant progress in dealmaking with state officials. It has also refused to halt foreclosure proceedings -- as several large competitors had -- insisting that its official policies on foreclosure proceedings are above-board.

In Wells' agreement with California Attorney General Jerry Brown, at-risk borrowers in California that are part of its "Pick-A-Pay" portfolio will be eligible to earn principal forgiveness by making payments on time. Wells took on that troubled book of loans when it acquired Wachovia in 2008.

The "Pick-A-Pay" program is just what its moniker indicated: Borrowers were initially allowed to make whatever payments they chose - even if the they didn't cover the monthly interest owed, with the unpaid interest tacked onto the loan balance. Years later, the payments ballooned into unaffordable sums, a situation exacerbated as home values plummeted and unemployment surged .

"Customers were offered adjustable-rate loans with payments that mushroomed to amounts that ultimately thousands of borrowers could not afford," Brown said in a statement. "Recognizing the harm caused by these loans, Wells Fargo accepted responsibility and entered into this settlement with my office."

Over the past two years, Wells Fargo says it has extended "significant home payment relief" to 50,000 Pick-A-Pay borrowers, including $2.9 billion in principal forgiveness. Between now and June 30, 2013, when its workout agreement ends, the bank estimates that it could extend another $2.4 billion to borrowers, depending on the economy and individual borrower circumstances.

"The majority of Wachovia's Pick-a-Payment customers reside in California," said Mike Heid, co-president of Wells Fargo Home Mortgage. "We're pleased that going forward the attorney general's office will assist with outreach, so that we can continue to work with as many customers as possible on the options available to them to prevent foreclosures."

Wells estimates that another 14,900 Californians are eligible for its special modification program. It will also pay $32 million in restitution to over 12,000 Pick-A-Pay borrowers in California who lost their homes through foreclosure, along with another $1.8 million in costs to the state. In addition to California, Wells Fargo has entered similar agreements with Arizona, Colorado, Kansas, Florida, Illinois, Nevada, New Jersey, Texas and Washington.

-- Written by Lauren Tara LaCapra in New York


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