Wells Fargo Settles Federal Fair Lending Case
The settlement means more than $175 million in relief for homeowners
Sunday, July 15, 2012
The second largest fair lending settlement in Department of Justice history has been filed, resolving allegations that Wells Fargo Bank engaged in a pattern or practice of discrimination against qualified black and Hispanic borrowers in its mortgage lending from 2004 through 2009.
The settlement provides $125 million in compensation 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, the largest residential home mortgage originator in the United States, will also provide $50 million in direct down payment assistance to borrowers in communities around the country where the department identified large numbers of discrimination victims and which were hard hit by the housing crisis.
Additionally, the bank has agreed to conduct an internal review of its retail mortgage lending and will compensate African-American and Hispanic retail borrowers who were placed into subprime loans when similarly qualified white retail borrowers received prime loans.
Compensation paid to any retail borrowers identified in the review process will be in addition to the $125 million to compensate wholesale borrowers who were victims of discrimination.
“The department’s action makes clear that we will hold financial institutions accountable, including some of the nation’s largest, for lending discrimination,” said Deputy Attorney General James M. Cole. “An applicant’s creditworthiness, and not the color of his or her skin, should determine what loans a borrower qualifies for.
“With today’s settlement,”, he continued, “the federal government will ensure that African-American and Hispanic borrowers who were discriminated against will be entitled to compensation and borrowers in communities hit hard by this housing crisis will have an opportunity to access homeownership.”
The settlement, which is subject to court approval, was filed in the U.S. District Court for the District of Columbia in conjunction with the department’s complaint, which alleges 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 non-Hispanic white borrowers with similar credit profiles received prime loans.
All the borrowers who were allegedly discriminated against were qualified for Wells Fargo mortgage loans according to Well Fargo’s own underwriting criteria.
The government also alleges that, between 2004 and 2009, Wells Fargo discriminated by charging approximately 30,000 black and Hispanic wholesale borrowers higher fees and rates than non-Hispanic white borrowers because of their race or national origin rather than the borrowers’ credit worthiness or other objective criteria related to borrower risk.
“By reaching a settlement in this case, African-American and Hispanic wholesale borrowers who received subprime loans when they should have received prime loans or who paid more for their loans will get swift and meaningful relief,” said Thomas E. Perez, Assistant Attorney General for the Civil Rights Division. “As one of the largest mortgage lenders in the country, Wells Fargo’s commitment to conduct an internal review of its retail lending and compensate African American and Hispanic retail borrowers who may have been improperly placed in subprime loans is significant. We will continue to work aggressively to ensure that all qualified borrowers have access to credit on an equal basis.”
Race a factor
The United States’ complaint alleges that black and Hispanic wholesale borrowers paid more than non-Hispanic white wholesale borrowers, not based on borrower risk, but because of their race or national origin. Wells Fargo’s business practice 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.
This 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 black and Hispanic borrowers, but the actions it took were insufficient and ineffective in stopping it.
In addition, the complaint contends that, as a result of Wells Fargo’s policies and practices, qualified black and Hispanic wholesale borrowers were placed in subprime loans rather than prime loans even when similarly-qualified non-Hispanic white borrowers were placed in prime loans.
The discriminatory placement of wholesale borrowers in subprime loans, also known as “steering,” occurred because it was the bank’s business practice to allow mortgage brokers and employees to place a loan applicant in a subprime loan even when the applicant qualified for a prime loan .
In addition, Wells Fargo gave mortgage brokers discretion to request exceptions to the underwriting guidelines, and Wells Fargo’s employees had discretion to grant these exceptions.
The department began its investigation into Wells Fargo’s lending practices in 2009 and received a referral in 2010 from the Office of the Comptroller of the Currency (OCC) which conducted its own parallel investigation of Wells Fargo’s lending practices in the Baltimore and Washington, D.C. metropolitan areas.
The OCC found that there was reason to believe that Wells Fargo engaged in a pattern or practice of discrimination in these metro areas on the basis of race or color, in violation of the FHA and ECOA.