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Discrimination costly to Wells Fargo
Agrees to a $175M settlement over loans to blacks, Hispanics
Question of the Day
Wells Fargo Bank, the largest residential home mortgage originator in the United States, agreed on Thursday to pay $175 million to settle allegations it discriminated against qualified black and Hispanic borrowers in its mortgage lending from 2004 through 2009, the Justice Department said.
In what is the second largest fair lending settlement in the department’s history, the agreement provides $125 million for wholesale borrowers who were steered into subprime mortgages or who paid higher fees and rates than white borrowers because of their race or national origin.
Wells Fargo also will pay $50 million in direct down payment assistance to borrowers in communities around the country where Justice identified large numbers of discrimination victims and which were hard hit by the housing crisis, the department said.
“The department’s action makes clear that we will hold financial institutions accountable, including some of the nation’s largest, for lending discrimination. An applicant’s creditworthiness, and not the color of his or her skin, should determine what loans a borrower qualifies for,” said Deputy Attorney General James M. Cole.
The settlement, which still has to be approved by a federal judge, was filed Thursday in U.S. District Court for the District of Columbia. The largest fair lending settlement ever came in December when Bank of America agreed to pay $335 million to settle allegations that its Countrywide Financial unit had discriminated against black and Hispanic borrowers.
A Justice Department complaint said that between 2004 and 2008, Wells Fargo discriminated by steering approximately 4,000 black and Hispanic wholesale borrowers, as well as additional retail borrowers, into subprime mortgages when white borrowers with similar credit profiles received prime loans. The complaint said all the borrowers who allegedly were discriminated against were qualified for Wells Fargo mortgage loans according to the bank’s own underwriting criteria.
The complaint also alleged that between 2004 and 2009, Wells Fargo discriminated by charging approximately 30,000 black and Hispanic wholesale borrowers higher fees and rates than white borrowers because of their race or national origin rather than the borrowers’ credit worthiness or other objective criteria related to borrower risk.
Assistant Attorney General Thomas E. Perez, who heads the Justice Department’s Civil Rights Division, described as “significant” that as one of the largest mortgage lenders in the country Wells Fargo had committed to conduct an internal review of its retail lending and compensate black and Hispanic retail borrowers who may have been improperly placed in subprime loans.
According to the complaint, black and Hispanic wholesale borrowers paid more than white wholesale borrowers, not based on borrower risk, but because of their race or national origin. It said the bank’s business allowed its loan officers and mortgage brokers to vary a loan’s interest rate and other fees from the price it set based on the borrower’s objective credit-related factors. It said the “subjective and unguided pricing discretion” resulted in black and Hispanic borrowers paying more.
The complaint also alleges that Wells Fargo was aware the fees and interest rates it was charging discriminated against blacks and Hispanic borrowers, but the actions it took were “insufficient and ineffective in stopping it.”
This is the second time the Justice Department has alleged and obtained relief for borrowers who were steered into loans based on race or national origin, a practice that systematically placed borrowers of color into subprime mortgage loan products while placing white borrowers with similar creditworthiness in prime loans.
By steering borrowers to subprime loans, the complaint said Wells Fargo “harmed” qualified black and Hispanic borrowers since subprime loans carried higher-cost terms, prepayment penalties and adjustable interest rates that started low and then increased significantly after two or three years.
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