Wells Fargo Agrees to Pay $175 Million to Mortgage-Bias Victims

By Frederick H. Lowe
Wells Fargo Bank, N.A., the nation's largest residential mortgage originator, has agreed to pay $125 million to African-American and Hispanic mortgage borrowers who were steered into higher-interest subprime mortgages or who paid higher fees because of their race or ethnic origin even when  their credit reports qualified them for lower-priced prime loans, the U.S. Department of Justice announced on Thursday.

In addition to the $125 million settlement, Wells Fargo will provide $50 million in direct-down payment assistance to metropolitan statistical areas in seven cities. These areas include Baltimore, Washington, D.C., Chicago, Philadelphia, San Francisco, New York, Cleveland and Riverside, Calif., where victims of mortgage discrimination were hit particularly hard by the housing crisis, Justice Department officials said in a statement.

As part of the $50 million, Wells Fargo will pay Baltimore $7.5 million out of the amount so city officials will drop a 2008 lawsuit filed against the financial institution. Wells Fargo will provide $4.5 million to Baltimore for community improvement programs and $3 million for priority housing and foreclosure-related initiatives.  Wells Fargo also has set a five-year home-mortgage lending goal for the Baltimore area.

Although Wells Fargo denied the allegations, the bank's settlement with the Justice Department also resolves pending litigation filed in 2009 by Illinois on behalf of borrowers in the Land of Lincoln, as well as an investigative complaint filed in 2010 by the Pennsylvania Human Relations Commission.

In a statement published on its website, San Francisco-based Wells Fargo said it settled the litigation to avoid a fight with the Department of Justice.

“Wells Fargo is settling this matter because we believe it is in the best interest of our team members, customers, communities and investors to avoid a long costly fight, and instead devote our resources to continuing to contribute to the country's housing recovery,” said Mike Heid, president of Wells Fargo Home Mortgage.

The Center for Responsible Lending, a Durham, N.C.-based nonprofit, nonpartisan research and policy organization, praised the settlement.

“The Department of Justice fair lending settlement with Wells Fargo is welcome news, and highlights the benefits of new mortgage rules to combat predatory lending,” officials of CRL said. “We commend DOJ for pursuing this and other cases to address pricing discrimination and steering borrowers into bad home loans."

The Department of Justice and Wells Fargo filed the settlement with U.S. District Court for the District of Columbia, which must approve the agreement.

A Department of Justice investigation alleges that from 2004 to 2008, Wells Fargo discriminated against 4,000 African American and Hispanic borrowers by steering them into high interest subprime mortgages, when non-Hispanic, white borrowers with similar credit profiles received prime loans.

The federal government charged that  from 2004 to 2009, Wells Fargo discriminated  by charging approximately 30,000 African Americans and Hispanic borrowers, because of their race and national origin, higher fees and rates than it did non-Hispanic white borrowers.

The borrowers will share the $125 million settlement.

The DOJ complaint alleges that mortgage brokers who worked with Wells Fargo were given discretion by the bank to place African-American and Hispanic mortgage borrowers in the higher-priced subprime loans, although applicants qualified for prime loans.

“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 Justice Department said.

Subprime loans generally carried higher-cost terms, such as prepayment penalties and adjustable interest rates that started with low-initial teaser rates and then increased significantly after two or three years, often making  the payments unaffordable and leaving the borrowers at a much higher risk of default or foreclosure, DOJ said.

Wells Fargo claims that it stopped making subprime loans through independent mortgage brokers in 2007 and stopped all subprime lending in 2008. On July 13, the bank discontinued funding mortgages that were originated, priced and sold by independent mortgage brokers through its wholesale channel.

The Justice Department's Fair Lending Unit prosecuted in the Civil Rights Division's Housing and Civil Enforcement Section in conjunction with the U.S. Attorney's Office for the District of Columbia.

“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.”