Wells Fargo & Co agreed to pay a $85 million civil penalty to the Federal Reserve Board for allegedly steering borrowers into costly subprime mortgages, the largest fine the Fed has ever imposed in a consumer-enforcement case.

San Francisco-based Wells Fargo will also compensate borrowers in connection with sales practices at a Wells subsidiary, according to a cease and desist order issued by the Fed on Wednesday. Those costs have a potential to reach $200 million.

Banks continue to suffer fallout from the subprime mortgage crisis. Last month, Bank of America said it would pay $8.5 billion to settle lawsuits from mortgage bond investors and take more than $14 billion of other home loan-related charges.

A Fed spokeswoman on Wednesday said the Wells Fargo penalties were not part of a broader deal between federal regulators and mortgage servicing companies announced in April to settle mortgage fraud allegations.

She also declined to say whether the Fed was pursuing similar penalties against other mortgage lenders for underwriting abuses.

Politicians and consumer advocates have long criticized banks for enticing borrowers into subprime loans when they could have qualified for more affordable prime mortgages.

Wells Fargo did not admit any wrongdoing in agreeing to the cease and desist order.

The alleged actions committed by a relatively small group of team members are not what we stand for at Wells Fargo, said Chief Executive John Stumpf in a statement.

Wells Fargo might have to pay between $1,000 and $20,000 in restitution to borrowers affected by the alleged faulty mortgage practices, the order said. The number of borrowers who may be compensated is estimated to be between 3,700 and possibly more than 10,000, meaning the potential exposure could reach $200 million.

The company has accounted for this matter in its reserves, according to a Wells statement.

The cease and desist order also addresses allegations that Wells Fargo sales personnel falsified information to make it appear that borrowers qualified for loans, when they would not have qualified based on their actual incomes.

The company terminated the individuals involved, and closed its Wells Fargo Financial division in July 2010, it said in a statement.

The order provides for Wells to submit a fraud prevention and detection plan within 90 days. Wells is also required to modify its compensation and performance management programs for sales personnel in mortgage lending, to make them consistent with the company's overall practices.

Those performance incentives should encourage sales staff to fully implement anti-fraud measures, the order says.

The Fed said it has issued orders against 16 former Wells Fargo Financial sales personnel prohibiting them from becoming employed in the banking industry.

(Reporting by Dan Levine, David Lawder, David Henry and Margaret Chadbourn; editing by Carol Bishopric, Bernard Orr)

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