Wells Fargo 2012 Annual Report Download - page 80

Risk Management – Credit Risk Management (continued)
remedies could include indemnification or repurchase of an
affected mortgage loan.
Consent Orders and Settlement Agreements for
Mortgage Servicing and Foreclosure Practices
In April 2011, the FRB and the Office of the Comptroller of
the Currency (OCC) issued Consent Orders that require us to
correct deficiencies in our residential mortgage loan servicing
and foreclosure practices that were identified by federal banking
regulators in their fourth quarter 2010 review. The Consent
Orders also require that we improve our servicing and
foreclosure practices. We have implemented all of the
operational changes that resulted from the expanded servicing
responsibilities outlined in the Consent Orders.
On February 9, 2012, a federal/state settlement was
announced among the DOJ, HUD, the Department of the
Treasury, the Department of Veterans Affairs, the Federal Trade
Commission (FTC), the Executive Office of the U.S. Trustee, the
Consumer Financial Protection Bureau, a task force of Attorneys
General representing 49 states, Wells Fargo, and four other
servicers related to investigations of mortgage industry servicing
and foreclosure practices. While Oklahoma did not participate in
the larger settlement, it settled separately with the five servicers
under a simplified agreement. Under the terms of the larger
settlement, which will remain in effect for three and a half years
(subject to a trailing review period) we have agreed to the
following programmatic commitments, consisting of three
components totaling approximately $5.3 billion:
x Consumer Relief Program commitment of $3.4 billion
x Refinance Program commitment of $900 million
x Foreclosure Assistance Program of $1 billion
Additionally and simultaneously, the OCC and FRB
announced the imposition of civil money penalties of
$83 million and $87 million, respectively, pursuant to the
Consent Orders. While still subject to FRB confirmation, Wells
Fargo believes the civil money obligations were satisfied through
payments made under the Foreclosure Assistance Program to
the federal government and participating states for their use to
address the impact of foreclosure challenges as they determine
and which may include direct payments to consumers.
We are in the process of successfully executing activities
under both the Consumer Relief and the Refinance Programs in
accordance with the terms of our commitments. In our
February 14, 2013, submission to the Monitor of the National
Mortgage Settlement, we reported $1.9 billion of earned credits
toward our Consumer Relief commitment and $1.1 billion of
earned credits toward our Refinance Program commitment.
Refinance Program earned credits in excess of our required
commitment of $900 million can be applied towards our
Consumer Relief commitment obligations, subject to a limit of
$343 million of earned credits. Our earned credits are subject to
review and approval by the Monitor.
Consumer Relief Program
We began conducting creditable activities towards
satisfaction of the requirements of the Consumer Relief Program
on March 1, 2012. We can also receive an additional 25% credit
for first or second lien principal reduction taken within one year
from March 1, 2012. Because we will not receive dollar-for-dollar
credit for the relief provided in some circumstances, the actual
relief we provide to borrowers will likely exceed our
commitment. The terms also require that we satisfy 75% of the
commitments under the Consumer Relief Program within two
years from March 1, 2012. If we do not meet this two-year
requirement and also do not meet the entire commitment within
three years, we are required to pay an amount equal to 140% of
the unmet commitment amount. If we meet the two-year
commitment target, but do not meet the entire commitment
amount within the three years, we are required to pay an amount
equal to 125% of the unmet commitment amount. We expect that
we will be able to meet our commitment (and state-level sub-
commitments) on the Consumer Relief Program within the
required timeframes, primarily through our first and second lien
modification and short sale and other deficiency balance waiver
programs. Given the types of relief provided, we consider these
loan modifications to be TDRs. We have evaluated our
commitment along with the menu of credits and believe that
fulfilling our commitment under the Consumer Relief Program
has been appropriately considered in our estimation for the
allowance for loan losses as well as our cash flow projections to
evaluate the nonaccretable difference for our PCI portfolios at
December 31, 2012.
Refinance Program
We have started receiving credit under the Refinance
Program for activities taken on or after March 1, 2012. The
Refinance Program allows for an additional 25% credit for all
refinance credits earned in the first 12 months of the program.
As of December 31, 2012, subject to the Monitor of the National
Mortgage Settlement review and approval, we have completed
the number of refinances necessary to satisfy our commitment
under the Refinance Program. Upon completion of the Refinance
Program we estimate our total calculated credit will be
approximately $1.7 billion to $1.9 billion, although we can only
receive earned credits for this program of $1.2 billion due to
certain limits within the agreement.
Including refinances that are still in the process of
completion, we expect that we will refinance approximately
31,000 to 34,000 borrowers with an unpaid principal balance of
approximately $6.7 billion to $7.4 billion under the Refinance
Program. Based on the mix of loans we have refinanced and are
in the process of completion, we estimate their weighted average
note rate will be reduced by approximately 260 basis points and
that their weighted average estimated remaining life will be
approximately 10 years. The impact of fulfilling our commitment
under the Refinance Program will be recognized over a period of
years in the form of lower interest income as qualified borrowers
benefit from reduced interest rates on loans refinanced under
the Refinance Program. We expect the future reduction in
interest income to be approximately $1.7 billion to $1.9 billion or
$173 million to $191 million annually. As a result of refinancings
under the Refinance Program, we will be forgoing interest that
we may not otherwise have agreed to forgo. No loss was
recognized in our consolidated financial statements for this
estimated forgone interest income at the time of the settlement
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