Wells Fargo Bank, the nation’s largest originator of mortgages, agreed Thursday to a $175 million settlement with the Justice Department, which alleged the bank steered minorities into more expensive subprime loans with higher interest rates when they qualified for lower ones.
The settlement with the department’s Civil Rights Division still requires court approval, but it would be the second largest ever, falling short only of the $335 million settlement with Countrywide, a mortgage lender that was swallowed up by Bank of America.
In a consent order unveiled Thursday, the government alleged that bank regulators in 2009 determined that “there was reason to believe that Wells Fargo placed African-American applicants in the subprime mortgage lending channel . . . more frequently than similarly situated white applicants during the period from 2004 to 2008.”
Those dates correspond to the boom in subprime lending, where loans were given to the least creditworthy borrowers, often in the form of adjustable-rate mortgages that began with low teaser rates but later jumped to much higher rates, often to double digits. The change in rates greatly increased monthly payments for homeowners.
These loans were then pooled together by Wall Street investment banks into complex bonds, which were given top investment-grade ratings by complicit ratings agencies such as Moody’s Investors Service and sold as safe bets to unsuspecting buyers. That house of cards fell apart in 2008 as homeowners began to default, taking down two giant banks, bringing about a housing crisis that exploded into a full-blown financial crisis and the deepest economic downturn since the Great Depression.
The Justice Department began its own probe in May 2009 into the lender’s practices, bringing suit in 2010. The agency alleges that the lender gave its officers and third-party mortgage brokers in the Mid-Atlantic region wide berth to steer African-American and Hispanic borrowers into higher-rate loans. The practices were alleged to have occurred in Maryland, Virginia, West Virginia and the District of Columbia, and affected about 4,000 borrowers.
“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,” Deputy Attorney General James Cole said in announcing the settlement.
Wells Fargo, in the joint consent order, said it had done nothing wrong but was willing to pay upward of $175 million to avoid further litigation. It will provide $125 million to compensate affected borrowers and contribute another $50 million to a program that helps borrowers make down payments in eight metro areas: Baltimore, Chicago, Cleveland, Los Angeles, New York, Oakland/San Francisco, Philadelphia and Washington.
“Wells Fargo asserts that throughout the period of time at issue in this proceeding and to the present, it has treated all of its customers fairly and without regard to impermissible factors such as race and national origin,” the consent order said, adding that the bank had “industry-leading procedures to identify subprime loan applicants.”
The settlement is important because it puts to rest a narrative spun in some conservative circles that the housing crisis was brought about by government-sponsored mortgage giants Fannie Mae and Freddie Mac, which forced banks to lend to minorities. The allegations raised by the Justice Department suggest minorities were sought out and put into higher-cost loans than similarly situated white borrowers in the four jurisdictions covered in the complaint.
Minorities were often steered into unsuitable subprime mortgages, the consent order said, by mortgage brokers who were compensated by lenders for getting them into mortgages with a higher interest rate when they qualified for a prime rate, or an Alt-A mortgage, both of which carried lower interest rates. Brokers had no fiduciary duty to the borrower, though few borrowers knew that.
This form of legalized kickback was called a yield-spread premium, and the practice was largely banned in April 2011 when the Federal Reserve, which implements the Truth in Lending Act, changed the way brokers are compensated for steering loans to lenders.
“The troubling patterns – the steering and overpricing – these patterns have been out there,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a Durham, N.C.-based advocacy group. “And regulators could have, and should have, been looking into this years sooner. We applaud the DOJ for doing this.”
In an interview, Oscar Suris, a Charlotte, N.C.-based Wells Fargo spokesman, said the lender had little control over third parties.
“This action is principally focused on transactions originated by independent mortgage brokers,” said Suris, noting that the bank did not dictate pricing or customer experience in the affected mortgages and maintains it did nothing wrong. “We don’t agree with the claims (from the Justice Department). We stand by our commitment to fair, responsible lending.”
Actions taken by the Justice Department are often viewed through a political prism or are subject to political skirmishes in Washington. But the claims made by Justice against Wells Fargo carry more weight because the origin of the probe is with the Office of the Comptroller of the Currency, a little-known government agency. It regulates big national banks and has been criticized for being too close to them.