The U.S. Department of Justice (DOJ) has filed the second largest fair lending settlement in the Department’s history to resolve allegations that Wells Fargo Bank engaged in a pattern or practice of discrimination against qualified African-American 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 sub-prime mortgages or who paid higher fees and rates than White borrowers due to their race or national origin. Wells Fargo will also provide $50 million in direct downpayment 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.
"Wells Fargo is settling this matter solely for the purpose of avoiding contested litigation with the DOJ, and to instead devote its resources to continuing to provide fair credit services and choices to eligible consumers, and important and meaningful assistance to borrowers in distressed U.S. real estate markets," said an official statement from Wells Fargo.
Additionally, Wells Fargo 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 sub-prime 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, 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 July 12 in the U.S. District Court for the District of Columbia in conjunction with the Department’s complaint, which alleges that between 2004-2008, Wells Fargo discriminated by steering approximately 4,000 African-American and Hispanic wholesale borrowers, as well as additional retail borrowers, into sub-prime 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 U.S. also alleges that, between 2004-2009, Wells Fargo discriminated by charging approximately 30,000 African-American 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.
“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 and costly legal fight, and to instead devote our resources to continuing to contribute to the country’s housing recovery,” said Mike Heid, president of Wells Fargo Home Mortgage. “Wells Fargo takes pride in serving the home ownership needs of all of our customers, and we are fully committed to fair and responsible lending."
The complaint alleges that African-American 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 African-American and Hispanic borrowers paying more. The complaint alleges that Wells Fargo was aware the fees and interest rates it was charging discriminated against African-American and Hispanic borrowers, but the actions it took were insufficient and ineffective in stopping it.
The complaint also alleges that, as a result of Wells Fargo’s policies and practices, qualified African-American 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 sub-prime 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.
“Our commitment to our customers and to turning the housing market around is stronger than ever,” Heid said. “We will continue to offer education and meaningful choices through our retail and correspondent mortgage lending operations, including an important emphasis on providing assistance to communities affected most by the economic downturn.”
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 Federal Housing Administration (FHA) and the Equal Credit Opportunity Act (ECOA).
