CHARLOTTE, N.C. -- When she stopped by a Wachovia branch in Charlotte last month, Marilyn O'Connor asked about refinancing her townhome. Instead, she got a pitch for a "Pick-A-Payment" mortgage that offered flexible payment options but a higher interest rate.

O'Connor said she initially agreed to apply for a Pick-A-Payment loan until she learned the interest rate. The full principal and interest payment option had a rate of 6.85 percent, higher than the 6.75 percent rate on her existing mortgage. A regular 30-year fixed rate at the time had a 5.5 percent rate, according to her loan documents.

"I said, `Are you crazy?' " O'Connor, 66, said. "I'm not going to spend that much on interest. It was very disheartening."

Since buying Pick-A-Payment specialist Golden West Financial in 2006, the Charlotte-based bank has been rolling out these nontraditional loans at branches and mortgage offices around the country. But the push has become a sore spot with some customers and employees. Loan officers say they have faced intense pressure from the company to persuade borrowers to use the loans.

Wachovia has required its loan officers to sell a minimum number of Pick-A-Payment, traditional and other loans or face discipline, including termination, according to interviews and documents. A training script obtained by the Observer tells loan officers, known as mortgage consultants, how to sell Pick-A-Payment loans, including empathizing with customers' cash flow problems.

An excerpt: Do you have any credit card debt? [Wait for acknowledgement.] I know I certainly have my share. And we're paying 13 to 29 percent.

The bank said it has sales goals like any company. Spokesman Don Vecchiarello declined to provide details on past targets but on Friday said the bank no longer has a "specific Pick-A-Payment goal at this time for employees to sell."

While Wachovia dismisses employees from time to time for underperformance, "we have not terminated anyone for not selling enough Pick-A-Pay loans and will not in the future," Vecchiarello said.

The loans can be more profitable for the bank because they carry a higher interest rate than traditional mortgages and because the bank keeps them in its own portfolio, instead of selling them off to investors. Consumer advocates contend they should be reserved for savvy customers who understand a complex product that can increase a borrower's loan balance instead of decreasing it.

Analysts also are worried because Pick-A-Payment loans are showing higher delinquencies than traditional mortgages amid the U.S. housing crisis, particularly in tough housing markets such as California. The bank's stock is down more than 56 percent since agreeing to buy Golden West, which also gave Wachovia new West Coast branches. The shares closed Friday at $25.99, down $1.08.

The bank, which has burnished a strong customer service reputation in recent years, acknowledges the loans aren't right for all customers but argues they offer flexibility to borrowers who need extra cash for savings or to pay down other debt. The bank says the loans come with numerous protections, including a cap on the amount the loan balance can increase. It also analyzes the borrower's ability to repay based on the full interest rate, not a low introductory rate.

Pick-A-Payment loans are "one of the many products we're able to offer," Vecchiarello said. "We feel like we do it in the right way."

Monthly options

The Pick-A-Payment, or Pick-A-Pay, loan gets its name because it comes with four monthly payment options. Homeowners each month can make one of four payments:

• Full interest and principal payment that pays off the loan in 30 years.

• A higher payment that would pay off the loan in 15 years.

• An interest-only payment.

• A minimum payment that doesn't cover all of the necessary interest, with the unpaid interest added to the loan balance.

The loan comes in adjustable-rate and fixed-rate versions.

Wachovia has expanded into these mortgages at a time when others are pulling back. Charlotte-based Bank of America, for example, stopped making the loans last year.

Since buying Golden West, Wachovia has been promoting Pick-A-Pay loans with a TV commercial, in-branch brochures and information on its Web site. The push comes as Wachovia and other banks are trying to improve profits as they wrestle with bigger loan losses and a slowing economy. Wachovia faces particular scrutiny because it bought Golden West for $24 billion at the peak of the housing boom.

The Observer in January reported that employees receive higher incentive pay for selling Pick-A-Pay and some other loans. The bank says it pays the extra compensation because the loans take longer to explain to customers. Consumer advocates worry that could encourage employees to sell inappropriate loans to customers.

The bank has three main ways to sell mortgages: call centers that handle phone calls and Web site inquiries; loan officers who work in mortgage offices; and loan officers who work in bank branches. The Observer has heard from employees in all three areas who say they have faced mandates to sell more Pick-A-Pay loans.

A former Wachovia mortgage consultant in Texas told the Observer he was supposed to sell two Pick-A-Pay loans per month, a requirement he didn't meet. The consultant, who spoke on condition of anonymity because he didn't want to jeopardize his career, said he felt the loans were proper for only a limited number of customers. In particular, he didn't think they were right for first-time homebuyers who might not understand their loan balance could increase.

"That's all we heard about was Pick-A-Pay," said the consultant, who said he was dismissed for "production reasons." "If you sold a 30-year fixed (rate mortgage), they'd say, `Why didn't you sell a Pick-A-Pay?' "

Another former loan officer, who also spoke on condition of anonymity to protect her career, told the Observer she left last year because of the pressure. She said she didn't want customers to owe more money on their loan when they went to sell their home. "I want them to have 10 percent down for their next home," she said.

According to an employee document dated last fall, 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. A higher "performance goal" called for selling two Pick-A-Pay loans per month, plus six other loans. If standards were not met, "it may lead to further corrective action up to and including termination," the document said.

Vecchiarello, the bank spokesman, said the company's sales goals have been changing in a rapidly shifting mortgage environment. The company, he said, wants its employees to sell a mix of loans, including traditional mortgages that can be sold to investors as well as Pick-A-Pay and other mortgages that it keeps in its portfolio.

Ira Rheingold, executive director of the National Association of Consumer Advocates, said pressure on employees to sell Pick-A-Pay mortgages worries him "enormously" because the loans aren't suitable for most borrowers.

"Employees are caught in the middle trying to hold onto their jobs," he said. "Unless (borrowers) are really sophisticated and understand what they're doing, it's a recipe for disaster."

Additional scrutiny

In the past couple of years, nontraditional mortgages have gained more scrutiny from regulators because of concerns about their complexity and the risk they can present lenders.

In 2006, regulators issued guidance to banks that included a caution against employee incentive plans that could lead to a heavier concentration of these loans in financial institutions' books. "Attention should be paid...to using compensation programs that do not improperly encourage lending personnel to direct consumers to particular products," the guidance, signed off on by five regulatory agencies, said.

The Office of the Comptroller of the Currency and the Office of Thrift Supervision, two regulators that monitor Wachovia, declined to comment on the bank's policies.

Vecchiarello said Wachovia's goal is to listen to customers, assess their needs and provide them with options. "That's the beauty of our model," he said.

In the case of O'Connor, the Charlotte customer, a Wachovia loan officer outlined a sample Pick-A-Pay loan that had four monthly payment options, ranging from $917.18 to $442.63, according to materials she received.

O'Connor, who works part time in home health care, said she didn't want flexibility at the expense of a higher interest rate. "Listen, I pay my mortgage no matter what," she said. "If something comes up, that's why I have savings."

After turning down the Pick-A-Pay loan, she initially chose to refinance her home through Wachovia with a traditional 30-year fixed-rate mortgage at an estimated rate of 5.5 percent. Then she and her husband, Michael, decided to hold off on refinancing all together. She lost a $75 application fee.

Vecchiarello, the bank spokesman, said the bank's loan officer appears to have acted appropriately by giving a customer options. The Pick-A-Pay loan "is a valuable product to offer to customers," he said. "It's not right for everyone."

Selling Pick-A-Payment mortgages

A training script obtained by the Observer gives Wachovia loan officers a sample pitch for selling Pick-A-Payment loans, which offer customers flexible payment options but can increase a borrower's loan balance.In the 14-page document, the first two pages emphasize the variety of products the bank offers but the rest is mostly about Pick-A-Pay loans and how "savvy homeowners can turn their mortgages into smart financial planning tools" in today's economy.

From the presentation:

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 car company. 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?

The script instructs loan officers to tell customers that choosing the minimum payment option adds to the customer's loan balance. But the focus is on the extra "cashflow" customers can get by paying less per month.

Wachovia has training programs for everything the bank does as it tries to help its salespeople be the "best they can be," bank spokesman Don Vecchiarello said. "The most important thing," he said, "is listening to the customer."

Wachovia No. 2 in option ARMs

According to Inside Mortgage Finance, Wachovia in 2007 was the second biggest provider of option adjustable rate mortgages, or option ARMs -- the category that includes Pick-A-Payment loans.

Seattle-based Washington Mutual was No. 1 with $23.67 billion in loans, ahead of Wachovia's $22.81 billion. About one-fourth of Wachovia's $97 billion in mortgage volume last year was in option ARMs.

Over the last six months, about 11 percent of loans made in the Carolinas were Pick-A-Pay loans, the bank said.

One of the key features of an option ARM is that borrowers can make a minimum payment that doesn't cover all of the interest. When this occurs, the total loan balance grows, instead of shrinks.

Wachovia calls the amount added to the loan balance "deferred interest."

At the end of December, Wachovia borrowers had accumulated $3.1 billion in deferred interest, nearly double the balance at the end of 2006. The amount, though, was a small part of the bank's $227 billion consumer real estate portfolio, which includes mortgages and home-equity loans.