It has been fined £840,000 by the Financial Services Authority (FSA) and will have to pay £1.5m in compensation to up to nearly 8,000 borrowers.
The FSA said the bank had been guilty of "irresponsible lending practices and unfair treatment of customers in arrears".
The bank said it would contact the borrowers and arrange payments.
The FSA said that the bank's staff:failed to check if some customers would be able to afford their mortgage repayments if their loan lasted into retirementfailed to offer cheaper mortgages to some customers who asked for self-certified mortgagesfailed to check if some customers had considered where they would live if they planned to sell their homes to pay off their interest-only mortgages.Arrears
Deutsche bank's home loans had been sold exclusively through mortgage brokers to people with a poor credit history, in 2006 and 2007.
The FSA said 7,967 mortgages were arranged by the bank during this time, of which 4,211 are still on its books.
When some of the mortgage customers fell into arrears, Deutsche Bank repeatedly hit some of them with unfair charges which bore no relation to the actual cost of administering their account, the FSA said.
"This is the first time that we have taken enforcement action against a firm for irresponsible mortgage lending," said Margaret Cole of the FSA.
"Firms which fail in their obligations to customers should expect not only a substantial fine but also that they will have to pay back customers who have been disadvantaged by their failings," she added.
Deutsche Bank explained that it stopped lending mortgages in 2008.
"Following the identification of the issues raised by the FSA in an industry-wide review started in 2008, DB mortgages immediately commissioned a third-party review into its lending and arrears collection processes," said a bank spokesman.
"As a consequence, DB mortgages has improved its oversight of mortgage servicing activities."
The bank is the fourth lender since the autumn of 2009 to be fined by the FSA for mistreating mortgage customers in arrears.
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