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Wells Fargo Must Face RICO, Fraud Claims

(CN) - A federal judge in San Francisco refused to dismiss a class action accusing Wells Fargo of charging homebuyers who go into default inflated fees and interest rates.

In a lawsuit filed in February 2012, lead plaintiffs Latara Bias, Eric Breaux and Nan White-Price claimed Wells Fargo and J.P Morgan Chase marked up default-related fees charged by third-party vendors -- often by 100 percent or more -- and then passed the inflated bill to borrowers.

The plaintiffs said their mortgage contracts never disclosed that the lenders could mark up the actual cost of default-related services to make a profit.

Wells Fargo routinely assessed these inflated fees "even when they [were] unnecessary and inappropriate," the 2012 lawsuit states.

"Employing this strategy, defendants are able to quietly profit from default-related service fees at the expense of struggling consumers," the plaintiffs claimed. "Indeed, in the fourth quarter of 2011 alone, defendant Wells Fargo & Co. saw a 20 percent increase in profits."

They sued for RICO violations, conspiracy to violate RICO, fraud and violations of California's business code.

The claims against J.P Morgan Chase were severed into a separate action.

In its motion to dismiss, Wells Fargo argued that Louisiana law should apply, not California law, because the plaintiffs bought homes in Louisiana.

But U.S. District Judge Yvonne Gonzalez Rogers said the allegations go further up the chain.

"[D]rawing all reasonable inferences in favor of plaintiffs, the totality of plaintiffs' allegations sufficiently state that the scheme was initiated and perpetrated by executives in California," Rogers wrote.

She added that further discovery is needed to determine if the claim "is ultimately tied to California solely by a California headquarters."

That determination "is better suited for the class certification stage," she said.

Judge Rogers also rejected Wells Fargo's claim that the plaintiffs failed to plead "with particularity" their fraudulent business practices claim.

"Plaintiffs have alleged numerous instances where omitted information could have been revealed - namely, in the mortgage agreements themselves, in the mortgage statements reflecting the marked-up fees, or during communications with Wells Fargo where it told plaintiffs that the fees were in accordance with their mortgage agreements," Rogers wrote.

Similarly, she rejected the bank's claim that the RICO claims should be dismissed for lack of standing.

"Plaintiffs allege they paid marked-up fees. Wells Fargo's argument that no 'injury in fact' exists where the charges assessed were within the market rate is not persuasive," she wrote. "A consumer who has been overcharged can claim injury to property under RICO based on a wrongful deprivation of money, which is a form of property."

Rogers continued, "As alleged, the fraud is equally about the failure to disclose material information as it is that the amounts demanded on mortgage statements were false because they did not correspond to the actual amounts owed pursuant to the mortgage agreements relied upon by defendants."

She also rejected the lender's bid to have the unjust enrichment claim tossed.

"Plaintiffs have pled sufficient facts to support a claim for unjust enrichment," Rogers concluded. "Whether there was legal justification for Wells Fargo's conduct such that it was 'unjust' is another factual issue that should proceed beyond the pleadings."

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