Watchdog sues Wells Fargo over mortgage practices

(MoneyWatch) New York Attorney General Eric Schneiderman took aim at Wells Fargo (WFC) on Wednesday, suing the bank for allegedly failing to help homeowners lower their mortgage payments and flouting the terms of an earlier federal foreclosure settlement.

In a deal with the government last year, five large U.S. financial firms agreed last year to cease foreclosure proceedings if homeowners were trying to negotiate loan modifications. Banks were supposed to provide borrowers with written acknowledgement of their refinancing applications within three days, explain which documents were missing from their applications within five days and make a final decision whether to modify a loan within 30 days.

At the same time Schneiderman announced he was taking on Wells Fargo, he also said he had chosen not to go after Bank of America (BAC). While his office had readied a suit against that bank too, he said BofA had agreed to a series of reforms that he hoped would become a model nationwide.

"While we have brought much needed relief to thousands of New Yorkers, too many homeowners in our state are facing unnecessary challenges as they fight to keep their homes," Schneiderman said in a statement.

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Wells Fargo, the country's largest loan originator, was accused after the financial crisis of being a predatory and racist lender. In a response today to Schneiderman's suit, the bank said it is committed to being an upright mortgage servicer.

"We are continuously implementing additional customer-focused measures based on the constructive feedback we receive from our customers, the monitoring committee and individual states," Wells Fargo said in a statement. "We have has been a leader in preventing foreclosures and helping families maintain home ownership with more than 880,000 modifications nationwide."

"While Bank of America has chosen to work with us to take the steps required to adhere to their commitments, Wells Fargo has taken a different path," he said. "Both of these cases should send a strong message that the big banks must comply with the legally binding servicing standards negotiated in the National Mortgage Settlement, or face the consequences."

Schneiderman said his office documented more than 200 violations of the servicing standards by Wells Fargo. He said such violations increase the likelihood that distressed homeowners will lose their homes, since the longer modifications are delayed, the deeper they fall behind because of additional fees, penalties and interest accrue during periods of delay. That often makes securing lower mortgage payments more difficult and pushes homeowners closer to the brink of foreclosure.

"Despite all the best efforts by many well meaning people, compliance with the settlement remains spotty at best," said Diane Thompson, a lawyer at the National Consumer Law Center. "More pressure needs to be brought to get [the major mortgage servicers] to do decent servicing. I think continued monitoring will need to go on." 

Schneiderman's action came as Joseph Smith, Jr., the national monitor of the mortgage settlement, announced that he had instituted new tests to determine if mortgage servicers are complying with the deal.

"I have met with attorneys general, counselors, other advocates and distressed borrowers in 10 states over the past year," he said. "Time and time again, I have heard their ongoing frustrations with the loan modification process, single points of contact, and billing and account statement issues."