State Sues to Void ‘Instant Loans’ by Wells Fargo Unit

Accusing Wells Fargo & Co. of knowingly overcharging about 15,000 Californians on “instant loans,” state regulators said Thursday that they have sued the banking company’s consumer finance unit, seeking to invalidate the loans and impose as much as $38.8 million in fines.

The unsecured personal loans, made by mailing unsolicited offers, were for $1,000 to $3,000, according to the California Department of Corporations, which filed the suit last week in Superior Court in Sacramento.

If the state succeeds in voiding the loan contracts, the borrowers -- who took out the loans by signing check-like drafts -- wouldn’t have to repay any of the money, which regulators said totaled about $24 million.

The lawsuit was served on San Francisco-based Wells Fargo on Thursday. Wells Fargo spokeswoman Mary Trigg said the company was studying the suit but had no immediate comment on it.

State officials said California law allows them to cancel loans when a lender “willfully” charges more than the contract states.

The overcharges first turned up in a July 2001 audit by the Department of Corporations. Wells Fargo subsequently refunded $533,000 to borrowers and in January 2002 promised regulators it had fixed the problem, according to the lawsuit. But state officials said a second audit last spring showed that Wells Fargo continued overcharging the same customers on the same loans last year. Wells Fargo then agreed to refund an additional $338,000.

Department of Corporations Commissioner Demetrios A. Boutris said his staff unanimously recommended filing the suit because it seemed clear that the overcharges were made knowingly.

Wells Fargo, the nation’s fifth-largest banking concern, “did this for a second time after they promised to rectify the situation,” Boutris said. “It’s a repeated pattern of nickel and diming large numbers of Californians.”

The defendant in the suit is Wells Fargo Financial California Inc., part of Wells Fargo’s consumer finance unit. The Des Moines-based finance company operates nationally, providing auto loans, home-equity loans, personal loans, credit cards and insurance -- all key parts of the parent firm’s efforts to cross-sell customers numerous financial products.

Instant loans come in official-looking envelopes with letters telling recipients that all they have to do is sign the “live checks” to turn them into “instant cash.”

Consumer groups have complained that unwary consumers, especially the elderly, have deposited them thinking they were benefits or reimbursements, and that their purpose is to hook people on high-cost debt they often can’t afford to repay.

In 2001, Rep. John J. LaFalce (D-N.Y.) proposed legislation banning the use of instant-cash checks unless consumers have made prior requests for credit.

A state law restricting the use of live checks by banks and credit card issuers was signed by Gov. Gray Davis last September. But a bill to ban companies from sending them out unless customers request them died in committee last year.

Instant loans are one way predatory lenders “get their claws into a borrower,” said David Swanson, communications coordinator for the Assn. of Community Organizations for Reform Now.

“I’ve spoken to many victims of predatory loans whose first contact with the lender was through a live check,” Swanson said. “People who cash these checks are quickly pressured to lower the rate, consolidate other debt and take cash out, all with a loan secured against their house.”

Kam Coveyou, a spokeswoman for Boutris, said the interest rates on the Wells Fargo instant checks were supposed to range from 11.16% to 32.76%. On the loans that are the subject of the lawsuit, the actual interest rates were higher -- 16.22% and 18.2% in the case of the supposedly 11.16% loans, for example, Coveyou said.

If the suit succeeds, Wells Fargo would be forced to return all the money consumers paid on the loans as well as forfeit the principal -- perhaps $30 million in all, Coveyou said. The $38.8 million in fines represents the maximum $2,500 penalty allowed for each overcharge.