State Wins a Round Against Wells

State regulators won a round Thursday in their effort to revoke Wells Fargo & Co.’s license to make home loans in California.

A federal judge in Sacramento denied a request by the San Francisco-based bank to put the state’s threatened action on hold while Wells presses its case that it and its huge mortgage subsidiary are governed by federal -- not state -- regulations.

Judge Garland E. Burrell Jr.’s decision was the latest twist in a high-stakes showdown between state officials and Wells Fargo, a fixture in California for 150 years and the state’s second-largest mortgage lender.

Burrell is hearing a lawsuit Wells filed against the state in which Wells claims that as a federally regulated bank, it is exempt from a state law barring lenders from charging interest until the day before a mortgage is recorded -- something that could cost Wells millions of dollars in lost interest charges.

In asking Burrell to issue a temporary restraining order, Wells said it feared that California would revoke the license of Wells Fargo Home Mortgage Inc. on Wednesday “or even sooner,” which Wells contended would cause “irreparable harm” to it, its customers and the California economy.

Officials at the state Department of Corporations, headed by Demetrios Boutris, said they have no intention of revoking the license that quickly.

On Monday, Burrell is scheduled to consider another request from Wells that he halt the state’s revocation efforts.

Should he again refuse, an administrative law judge would consider the state’s move to revoke the license in a hearing beginning on Tuesday.

Deputy Corporations Commissioner Andre Pineda said his agency, while continuing to pursue revocation, would wait for a decision by the administrative law judge, which could take weeks. “We’re still a long way from revoking,” he said.

In interviews after Burrell’s ruling Thursday, bank officials sought to reassure borrowers.

Though Wells’ lawsuit raised questions about its future as a mortgage lender in California, spokeswoman Mary Trigg denied it would shut down that business here.

With the backing of the U.S. Office of the Comptroller of the Currency, Wells would continue making mortgages in California even without a state license, Trigg said. “Our customers do not need to worry,” she added.

Bob Garsson, a spokesman for the Office of the Comptroller of the Currency, said that “from our perspective, the bank and its operating subsidiaries don’t need state permission to make loans, so consumers have nothing to fear.”

The state doesn’t totally agree. Pineda said the Department of Corporations would try to stop Wells from making new mortgages in California -- and force it to sell its existing loans to another lender -- if Wells no longer had a state license.

Pineda noted, however, that if Wells’ license is revoked, consumers with loans already in the pipeline would have the option of sticking with Wells or getting their money back and looking elsewhere for a loan.

In its lawsuit, Wells said it is operating in accordance with federal rules that allow interest charges to begin when loans are funded.

It can be days or even weeks in some California counties before a loan is officially recorded, and Wells says it’s unfair to keep it from collecting interest during that period.

Sorting out the legal issues of state versus federal jurisdiction could take months or years.

One potential complication: Although courts repeatedly have upheld the OCC’s sole authority over national banks, the extent of its power over subsidiaries such as Wells’ mortgage unit is less clear.

In his ruling, Burrell said Wells created its own predicament by refusing to comply with the state’s lending law and had put itself in a “paradoxical position” by trying to block the state from yanking a license the bank contends it doesn’t need.

Wells Fargo Home Mortgage “could have avoided the harm it contends it will suffer had it chosen to comply with the requirements of the California licenses it possesses,” Burrell wrote.