Caution Advised: Used unwisely, Pick-A-Pay loans can lead to trouble
4/1/2008
Source: Charlotte.com, The Charlotte Observer

Some customers and ex-employees of Wachovia are troubled by a mortgage option the bank is pitching to its customers. With good reason.

Wachovia's Pick-A-Payment loans give homeowners four payment options each month: a full interest and principal plan that pays off the loan in 30 years; higher payments to pay it off in 15 years; an interest-only payment; or a minimum payment that doesn't cover all interest, with the unpaid interest added to the loan balance.

With the housing market reeling with defaults, such a program has great potential to push some consumers into financial quicksand. How? Read this part of a Wachovia training script for loan officers selling Pick-A-Payment loans:

"If you're like us, there's more coming out than coming in some months, and we start putting more and more charges on our credit card. ... What can we do? Uncle Sam isn't going to take less. ... Or the credit card company. The children need to be cared for. You can't get along without insurance. Plus, you need to eat, and keep the lights on. That leaves your mortgage payment. ... What if you could pay a lot less on your mortgage some months when you need flexibility?"

No need to ponder who such loans would appeal to. Financially strapped consumers would flock to them. Others who aren't might find false security in them and wind up in trouble.

Wachovia says it's scrupulous with the loans. The bank analyzes the borrower's ability to repay and caps the amount the loan balance can increase. The loans aren't right for all customers and are among many loan products the bank offers, officials say. "We feel like we do it in the right way," said bank spokesman Don Vecchiarello.

But some ex-employees said loan officers are pressured to push the higher-interest Pick-A-Pay loans. An employee document dated last fall said loan officers in branches had a "minimum standard" requiring them to sell one Pick-A-Pay loan, one traditional mortgage and one other type of mortgage per month. If standards were not met, "it may lead to further corrective action up to and including termination," the document said.

Wachovia says it hasn't dismissed employees for not selling the loans, and won't. Bank officials say they don't push customers toward any products. They assess customers' needs and provide options. "The most important thing," Mr. Vecchiarello said, "is listening to the customer."

The listening shouldn't stop with customers.

Pick-A-Pay loans are showing higher delinquencies than traditional mortgages. Federal regulators have cautioned banks about such risky nontraditional loans and about "improperly" directing customers to particular loans.

Consumer advocates say Pick-A-Pay should be reserved for savvy customers. Unless borrowers "are really sophisticated and understand what they're doing, it's a recipe for disaster," said Ira Rheingold, executive director of the National Association of Consumer Advocates.

Many borrowers already have trouble paying their mortgages. Lenders should avoid practices that add to their troubles.