Wells Fargo to settle lawsuit over pick-a-payment loans

* Settlement includes a $50 million fund

* Up to $600 million to be available for loan mods-Wells

* Deal covers hundreds of thousands of borrowers

SAN FRANCISCO, Dec 14 (Reuters) - Wells Fargo WFC.N has agreed to settle a class-action lawsuit for at least $50 million involving so-called 'pick-a-payment' home loans issued by its Wachovia unit, according to a court document.

Pick-a-payment loans, which grew in popularity in the housing boom, offered borrowers the option to pay less than the interest due on the their loan. Any unpaid interest was then added to the balance of the loan.

Plaintiffs argued this product violated federal truth in lending laws because the loan documents failed to adequately disclose the potential for the loan balance to actually increase over time.

The proposed settlement, outlined in a California federal court filing last week, would cover “hundreds of thousands of borrowers” who entered into pick-a-payment mortgages with Wachovia and World Savings Bank from August 2003 through 2008.

Wachovia bought World Savings in 2006 and was itself acquired by Wells Fargo at the end of 2008.

The settlement does not include any admission of wrongdoing, Wells Fargo said in a statement on Tuesday.

“Since our merger, we have been actively working with Wachovia pick-a-payment customers on modification options,” said Mike Heid, co-president of Wells Fargo Home Mortgage, the bank’s home loan unit.

In addition to the $50 million settlement fund, Wells Fargo has agreed to offer loan modifications to some pick-a-payment borrowers who still reside in their homes and are in default, and others who are in imminent default.

Wells Fargo estimates that as much as $600 million in modification benefits may be made available to pick-a-payment customers, which has already been figured into the bank’s third-quarter results, it said.

The bank has already forgiven $3.5 billion in principal for pick-a-payment customers through Sept. 30, it said.

Plaintiff attorney Jeffrey Berns said the settlement provides “real recovery of cash” plus the loan modification benefits.

Plaintiff attorneys may receive up to $25 million in fees, not to be taken from the settlement fund, according to the filing.

Wells Fargo concluded a separate agreement in October with eight states over the pick-a-payment loans.

A hearing on preliminary approval of the settlement is currently scheduled for Thursday before U.S. District Judge Jeremy Fogel in San Jose, California.

The case in U.S. District Court, Northern District of California is Wachovia Corp “Pick-a-Payment” Mortgage Marketing and Sales Practices Litigation, 09-md-2015. (Editing by Steve Orlofsky)