WASHINGTON (CN) – Wells Fargo Bank has agreed to pay $175 million to settle allegations of discriminatory lending practices against African-American and Hispanic borrowers.
Between 2004 and 2009 Wells Fargo steered more than 4,000 wholesale mortgage borrowers into more expensive subprime loans because of their race or national origin, and charged at least another 30,000 higher fees and costs on their mortgages for the same reason according to a complaint filed in Federal court in Washington D.C. by the Department of Justice.
The complaint said well qualified African-Americans applicants for Wells Fargo residential mortgage loans were more than four times as likely to receive a subprime loan as a similarly qualified white applicant.
Hispanic borrowers were three times as likely as their white counterparts to receive a subprime loan, resulting in both African-American and Hispanic borrowers paying, on average, tens of thousands of dollars more for a Wells Fargo loan the complaint says.
“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 at press conference announcing the settlement agreement.
Under the terms of the agreement Wells Fargo will pay $125 million to borrowers who were steered into subprime mortgages or charged higher fees based on non-risk factors. The bank will provide another $50 million in direct down payment assistance to borrowers in communities around the country where the Office of the Comptroller of the Currency and the Justice Department say the discriminatory practices were concentrated.
While the settlement agreement focused on wholesale borrowers who obtained their loans from the bank through a third-party, Wells Fargo will conduct an internal review of its own retail mortgage lending practices and will compensate any minority borrowers who were place in subprime loans while similarly qualified white borrowers received prime loans. This compensation will be in addition the $125 million the bank will pay to wholesale borrowers.
Wells Fargo’s loan pricing and origination policies allowed its employees to violate the bank’s own underwriting standards by steering applicants into loan products in ways unconnected to their credit risk according to the complaint.
For example, the complaint says that Wells Fargo steered African-American and Hispanic borrowers into short-term hybrid adjustable rate mortgages, known as ARMS, even when they were qualified for cheaper standard mortgages.
ARMS offer low teaser interest rates for the first two or three years of the loan after which the rate adjusts to a higher rate every six or 12 months. Because of the initially low monthly payments ARMS offer borrowers frequently took out larger loans than they might otherwise have been able to afford.
The settlement agreement, which was filed the same day as the complaint, has to be approved by the court before any money is distributed.
“The practice of steering minority borrowers into higher-priced subprime loans is not just unacceptable, but illegal,” said Comptroller of the Currency Thomas Curry, whose office conducted a parallel investigation of Wells Fargo, Curry went on to say that the investigation and settlement agreement showed Federal regulators could work together to eradicate such practices.
Deputy Attorney General Cole agreed saying, “Put simply, there is no place for discriminatory lending in the marketplace, and it will not be tolerated by this Justice Department.”