Fed fines Wells Fargo $85 million for pushing subprime loans

The Federal Reserve has fined Wells Fargo $85 million for steering potential homeowners to costlier subprime mortgages.

The banking regulator announced Wednesday that employees with Wells Fargo Financial — a former non-bank subsidiary of Wells Fargo — pushed borrowers that would qualify for traditional, prime mortgages into riskier, more expensive subprime loans, and also falsified income information on mortgage applications.

In addition to paying the fine — the first official action the government has taken to fight the steering practice — Wells Fargo must also compensate borrowers improperly given subprime mortgages. Given that the Fed believes as many as 10,000 borrowers could be due compensation, and that each borrower is likely to receive between $1,000 and $20,000, that order could cost the bank up to $200 million.

In its statement, the Fed said the way Wells Fargo Financial paid its employees and set sales quotas, coupled with lax oversight, encouraged employees to push pricier subprime mortgages on borrowers.

Wells Fargo agreed to the Fed's action, but did not admit to any wrongdoing. However, it agreed to beef up its anti-fraud and compliance programs, as well as to improve oversight of its compensation and performance management programs for employees that sell mortgages. Sixteen former Wells Fargo Financial employees have been barred from working in the banking industry again.