Harney: Wells Fargo and interest rate ‘locks’

Rate locks guarantee interest rates quoted to borrowers for specific time periods, typically ranging from 30 to 90 days, although some can be as short as 15 days or as long as 120. During the covered time period, the lender cannot raise the rate, even if market interest rates have spiked. When a loan is not closed within the lock period, the guarantee expires and the borrower must request an extension.

In Wells Fargo’s case, according to the suit, the company assured clients that they would not have to pay for lock extensions if the delay causing the expiration was the bank’s fault. If the delay was attributable to the borrower, the borrower would have to pay an extension fee, which could be significant if the loan amount was large.

The plaintiff in the new class action, Victor Muniz, says he decided to buy a home in Sandy Valley, Nev., near his parents, and turned to Wells Fargo for his mortgage. Wells offered a rate lock on the loan commitment, but when the closing was delayed — not by Muniz, according to the suit, but by an appraiser who was out of the country — Wells charged him a fee of $287.50. This was despite assurances to Muniz by a bank employee that he would not be charged anything.

Though Muniz’s extension fee was relatively modest, consumer agencies around the country have received complaints about Wells Fargo’s rate lock extension practices, where fees sometimes exceeded $1,000 and ranged as high as $4,500. “We ended up paying a rate lock extension of $4,500 purely because our rate was great and the cost of not getting that rate was far worse,” the suit quotes a complainant to one unnamed consumer agency. Another consumer complained about being charged $500 extra even though “I did not cause any delay.”

A whistleblower letter from a former Wells Fargo employee sent to congressional committees in the House and Senate estimated that the company’s practices have led to overcharges in the Los Angeles area alone amounting to “millions of dollars.” The suit quotes a former Wells Fargo branch officer as having told ProPublica, the nonprofit investigative news group, that Wells Fargo’s approach to rate lock expirations amounted to “just stealing from people.”

Muniz’s suit claims the rate lock policy was overseen by regional and area managers, who routinely turned down local branch requests to exempt clients who had not caused any delay to processing from having to pay the extra fees. One former bank official quoted in the suit said that “99 percent of the time our requests [were] denied” at the regional level. If a borrower refused to pay the fee, “we just canceled the loan,” the former employee said.

Muniz’s suit, filed in U.S. District Court in San Francisco, claims violations of the Real Estate Settlement Procedures Act, which prohibits receipt of unearned fees in mortgage transactions, among other statutes. The proposed class of victims could involve thousands of borrowers.

The takeaway here: Whatever the ultimate judgment by the courts in Muniz’s litigation, when you are obtaining a rate lock on a mortgage, focus on the details. Ask whether the lender has specific policies on fees for rate lock extensions. If they require you to pay money for all extensions — even when the lender screws up the process — is that fair to you as a consumer?

Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.