Wells Fargo story updated with company statement.

  • Wells Fargo fined $85 million by the Federal Reserve.
  • The Fed order states that Well Fargo "steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications."
  • The fine is the largest assessed in a "consumer-protection enforcement action," the Fed says, and the first formal enforcement action taken to address steering of borrowers into "high-cost, subprime loans."

NEW YORK ( TheStreet) - The Federal Reserve fined Wells Fargo ( WFC - Get Report) $85 million in its first formal consumer-protection enforcement action to address the alleged "steering of borrowers into high-cost, sub-prime loans."

The regulator on Wednesday issued a cease and desist order that alleged that sales personnel of Wells Fargo Financial- the once-active, non-bank subsidiary of the San-Francisco based bank- steered borrowers who were potentially eligible for prime rates into loans with higher, sub-prime rates.

The order also that between January 2004 and June 2008, alleges that the employees falsified the income information of borrowers to make them appear qualified for loans, when in fact they weren't.

According to the order, the practices were fostered by Wells Fargo Financial's incentive compensation and sales quota programs and lack of adequate controls to manage risk resulting from the program. According to the order, Financial, in 2006, revised its performance standards and compensation programs so that it generally was "less advantageous for sales personnel to sell a prime loan to the customer than a nonprime loan."

In settling, Wells Fargo neither accepts nor denies the charges.

The order requires the bank to compensate borrowers for these practices. The number of borrowers who may receive compensation is estimated to be between 3,700 and possibly more than 10,000, with the amount of compensation ranging between $1,000 and $20,000 on an average, according to the Fed.

In addition, Wells Fargo is required to improve oversight of its anti-fraud and compliance programs and incentive compensation and performance management policies for personnel who sell and underwrite home mortgage loans.

The Fed also issued consent orders against 16 former Wells Fargo Financial sales personnel prohibiting them from becoming employed in the banking industry an order against another former Wells Fargo Financial sales person prohibiting future improper conduct.

"The alleged actions committed by a relatively small group of team members are not what we stand for at Wells Fargo," said Chairman and CEO John Stumpf in a statement. "Fair and responsible lending practices have been at the core of our culture, and they will continue to guide us as we work closely with the Federal Reserve to provide restitution to customers who may have been harmed, and to reinforce our internal controls so they further reflect Wells Fargo's commitment to helping customers succeed financially."

The bank said that before and during the Fed's investigation, it voluntarily provided restitution, such as reduced interest rates and cash refunds, to approximately 600 Wells Fargo Financial customers pursuant to its own internal investigation. It also terminated the individuals involved.

Wells Fargo will submit plans to the Federal Reserve that will outline its oversight of its mortgage lending practices regarding certain compliance and incentive compensation programs.

Wells Fargo closed its Wells Fargo Financial division in July 2010, including its 638 stores across the U.S., a move that also resulted in the company exiting the origination of non-prime portfolio mortgage loans. By the first quarter of 2010, less than 2 percent of Wells Fargo's real estate loans were originated in Wells Fargo Financial stores, the bank said.

The company also said that it has accounted for the matter in its reserves.

--Written by Shanthi Bharatwaj in New York

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