Wells Fargo, the nation’s largest home
mortgage lender, has agreed to pay at least $175 million to settle accusations
that its independent brokers discriminated against black and Hispanic borrowers
during the housing boom, the Justice Department announced on Thursday. If
approved by a federal judge, it would be the second-largest residential
fair-lending settlement in the department’s history.
An investigation by the department’s civil
rights division found that mortgage brokers working with Wells Fargo had
charged higher fees and rates to more than 30,000 minority borrowers across the
country than they had to white borrowers who posed the same credit risk,
according to a complaint filed on Thursday along with the proposed settlement.
Wells Fargo brokers also steered more than
4,000 minority borrowers into costlier subprime mortgages when white borrowers
with similar credit risk profiles had received regular loans, a Justice
Department complaint found. The deal covers the subprime bubble years of 2004
to 2009.
Thomas Perez, the assistant attorney
general for the civil rights division, said the practices amounted to a “racial
surtax,” adding: “All too frequently, Wells Fargo’s African-American and Latino
borrowers had no idea they could have gotten a better deal — no idea
that white borrowers with similar credit would pay less.”
Wells Fargo admitted no wrongdoing as part
of the settlement. In a statement, the bank also announced that it would no
longer finance mortgages through independent brokers, and noted that it had
ceased making subprime loans in 2008.
“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.
The bank agreed to pay $125 million to
compensate individual borrowers. The Justice Department estimated that the
minority borrowers who had been steered into costly subprime loans would
receive an average of $15,000, while the victims who had been charged more
costly fees would receive $1,000 to $3,500.
In addition, the bank has agreed to give
$50 million to a program that assists people in making down payments or
improving their homes in eight metropolitan areas: Baltimore, Chicago,
Cleveland, an area east of Los Angeles, New York, Oakland/San Francisco Bay
Area, Philadelphia and Washington.
Lending data showed, for example, that in
2007 customers in the Chicago area who borrowed $300,000 from Wells Fargo
through an independent broker had paid an average of $2,937 more in broker fees
if African-American, and $2,187 more if Hispanic, compared with white borrowers
with a similar credit risk, the complaint said.
Similarly, it said, the data showed that
nationwide, an African-American borrower who had qualified for a regular loan
was 2.9 times more likely to be steered into a subprime loan, and a Hispanic
borrower was 1.8 times more likely, than were similarly creditworthy white
borrowers. Subprime loans, which are intended for riskier borrowers, carry higher
interest rates.
Wells Fargo was also facing lawsuits by
several entities beyond the Justice Department, including the city of
Baltimore, the state of Illinois and the Pennsylvania Human Rights Commission.
It settled with all of them as part of the deal, putting to rest its
fair-lending cases from the bubble years.
The focus of the settlement is Wells
Fargo’s failure to police the behavior of its independent loan brokers. The
complaint said that the bank had set basic credit guidelines but then had
allowed the brokers discretion to charge higher rates or steer people into less
attractive loans without ensuring there was no discrimination based on race or
national origin
Wells Fargo and the Justice Department were
unable to agree on whether the data had showed any evidence of discrimination
in the lending practices of the bank’s in-house “retail” mortgage agents.
Instead, they agreed to a methodology to evaluate that data further. If it
finds evidence of discrimination, the victims would receive similar compensation
on top of the $175 million Wells Fargo has already agreed to pay.
Under federal civil rights laws, a lending
practice is illegal if it has a disparate impact on minority borrowers, even
without evidence of discriminatory intent.
During the housing boom, Wall Street firms
developed a huge demand for subprime loans that they purchased and bundled into
securities for sale to investors, creating financial incentives for lenders to
make such loans. In early 2010, the Obama administration set up a unit in the
civil rights division to focus on lending bias amid the fallout from the wave
of foreclosures that had set off the financial crisis.
In December, the division settled a similar
lawsuit with Bank of America for $335 million over loan discrimination by its
Countrywide Financial unit. In May, SunTrust Mortgage agreed to pay $21 million
in a similar case.
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