Under terms of the settlement announced Wednesday by Attorney General Paula Dow, Wells Fargo Home Mortgage also will pay the state nearly $4 million.
The allegations involve three companies acquired by Wells Fargo in 1998: Wachovia Corp., Golden West and World Savings.
Officials say the companies failed to warn borrowers that choosing a minimum payment option on their "Pick-a-Payment" mortgages could fail to cover the interest, leading to greater debt.
San Francisco-based Wells Fargo projects it will modify loans for 900 or more eligible homebuyers.