Is This Any Way to Run a Bank?

WaMu's alleged blunders have it fending off lawsuits and complaints

When Sherry Colby decided to pay off the mortgage on her Houston house with some of the money she had collected from her insurance company for mold damage, she thought her troubles were over. Instead, she merely traded one nightmare for another. In February, she fowarded two insurance company checks for nearly $35,000 to her mortgage company, Washington Mutual (WM ). The money went into an escrow account, and she continued to make monthly payments through July. And although she sent in the balance of the mortgage in August, by Labor Day, Colby received threatening calls from debt collectors saying she had fallen behind on her payments.

What happened? In August, Colby claims, the funds somehow vanished as they moved from the escrow account to the payoff department. Says the 44-year-old CPA: "They've lost the money."

WaMu says privacy issues prevent it from discussing the case. But Colby is just one of scores of disgruntled customers from around the country. The fast growing, Seattle-based Washington Mutual Inc. has been fending off lawsuits and complaints in states ranging from Minnesota to Washington and California.

As the problems in Texas pile up -- since mid-2002, some 200 individual consumer complaints have been filed against WaMu -- BusinessWeek has learned that Texas' Attorney General's Office has launched an investigation into WaMu's mortgage business practices. The AG's office is looking into allegations of everything from lost mortgage payments to improper foreclosures. Fay L. Chapman, WaMu general counsel, acknowledges the bank may have made some mistakes and is reviewing each complaint individually. "We have been working cooperatively with the Attorney General's office," she says.

The dustups with customers come as WaMu execs work to turn a once little-known regional thrift into a kind of Wal-Mart of consumer banking. Since 1991, WaMu has been on a massive expansion tear as it seeks to acquire millions of new retail and home loan customers. Acquiring its way into such big markets as Texas, California, and New York, WaMu now ranks as the nation's top thrift and mortgage lender, serving 12.3 million households, with $283 billion in assets and 2,650 offices coast to coast.

ILLEGAL FEES? Yet as the bank has grown, so has its stable of unhappy customers around the country. Last month, Minnesota District Court Judge Steven Z. Lange granted national class action status to a January, 2003, suit that alleged WaMu charged "illegal prepayment penalty fees" to borrowers paying off their mortgage loans. WaMu concedes it has overcharged some customers in Minnesota. In August, the bank settled a Seattle lawsuit alleging that WaMu had lost mortgage payments, posted payments late or improperly, charged erroneous fees, and filed inaccurate reports to credit agencies. As part of the settlement, the bank agreed to review complaints from more than 1,000 customers. In July, a separate Seattle suit was certified as a class action covering some 150,000 customers in five Western states. It alleged WaMu "improperly collected" reconveyance, statement, and other fees when customers paid off their home loans. WaMu disputes those charges and says it will "defend these claims vigorously."

The problems have left WaMu scrambling to improve its customer service and processing systems. As a result, direct complaints to WaMu have declined 35% in the first six months of 2003, and misapplied mortgage payments from April to August fell 33%, according to John Rostas, WaMu's senior vice-president of operational excellence. Still, if Sherry Colby is any indication, WaMu has a ways to go.

By Stephanie Anderson Forest in Dallas

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