Jun 30, 2008 8:00 pm US/Pacific
Wachovia Gives Up Controversial Loan Program
(CBS 5)
CBS 5 Investigates has been reporting on problems with a controversial loan offering from Wachovia, called "Pick-a-Payment." On Monday, the bank announced it was changing the loan program.
The loans were first offered by Oakland-based World Savings now owned by Wachovia, one of the nation's largest banks. But consumers and advocates told CBS 5 Investigates that many people who got the loans from World are now having trouble making their payments, or are losing their homes entirely.
Wachovia announced it will no longer offer the loan option that many homebuyers say got them into trouble. The change means Wachovia will drop a key provision of its Pick-a-Payment option ARM loans. As a result, the bank will no longer offer a "minimum payment" option that advocates say put many consumers' finances, and homes, at risk.
Willie Bryant of San Leandro took out one of those Pick-a-Payment loans because it offered a low minimum payment. "It sounded great," he told CBS 5 Investigates.
But what Bryant didn't realize was that by paying the minimum, he was actually paying less than the interest charge each month, and no principal at all. His loan balance was actually rising: a process called negative amortization.
"The reality is with option ARM Pick-a-Payment loan, the vast majority of borrowers pick the smallest payment, which makes sense," said Kevin Stein of the California Reinvestment Coalition. "But that smallest payment means that borrowers are actually, they call in a negatively amortizing or deferred interest situation, where they are paying so little on their loan that the loan amount increases every month."
"They should have said, 'By just making the minimum payment you know your principle is going to go up,'" Bryant said.
"And you never heard anybody say that?" CBS 5 Investigates asked him. "No," responded Bryant.
Wachovia said it will stop offering loans that have that minimum payment feature entirely and will also waive prepayment fees associated with the Pick-a-Payment loans. The company said it wants to help borrowers during "these challenging times". But it still may not be enough help for some.
"We have people now who are stuck with looking at very high increases in payment with loans that they probably never should have been given," Stein said.
Wachovia started selling the loans with that minimum payment option after it bought World Savings in mid-2006. The portfolio of those Pick-a-Payment loans now stands at $120 billion.
(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)
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