Wells Fargo & Co., the largest U.S. mortgage lender, will pay $125 million and set up a $50 million assistance fund to settle U.S. allegations that it discriminated against minority borrowers.
The bank will also stop using outside brokers to create mortgages, according to a statement today from Wells Fargo. The accord settles U.S. accusations in court filings that the bank put creditworthy Hispanic and African-American borrowers into more expensive subprime loans from 2004 to 2007, and that mortgage brokers through 2009 added charges that caused minority borrowers to pay higher fees, costs and interest than similar white borrowers.
“Wells Fargo’s internal documents reveal that senior officials were aware of the numerous tactics that subprime originators employed to keep loans in the subprime division,” when they could have qualified for prime loans, the Justice Department alleged in a complaint filed with the settlement in Washington.
The San Francisco-based bank, which controls about a third of the market for all new home loans, denied it engaged in illegal discrimination and said it agreed to settle solely to avoid litigation, according to a proposed consent order. The company reported a $15.9 billion profit last year.
“Wells Fargo asserts that throughout the period of time at issue in this proceeding and to the present, it has treated all customers fairly and without regard to impermissible factors such as race and national origin,” the bank said in the consent order, which must be approved by a federal judge.
In a separate statement, Wells Fargo said it will stop funding loans through independent mortgage brokers and after tomorrow won’t accept new applications from them. The lender will still process and close existing applications, and the decision to stop dealing with brokers, known as wholesale lending, was made “on its own volition,” according to the statement.
The Obama administration has increased scrutiny of banks to discourage loan discrimination as the housing bust fuels loan defaults. The settlement with Wells Fargo is the second largest fair-lending accord reached by the Justice Department after a record $335 million extracted from Bank of America Corp. in a deal announced in December. Countrywide, acquired by Bank of America in 2008, assessed higher fees and interest rates on more than 200,000 black and Hispanic borrowers, the Justice Department said at the time.
The Justice Department investigation of Wells Fargo uncovered “systemic discrimination” in the bank’s lending practices, Deputy Attorney General James Cole said today at a press conference in Washington. About 34,000 borrowers in total were affected, according to the complaint.
In some cases, Wells Fargo steered many borrowers into adjustable-rate mortgages with so-called teaser rates when they qualified for more standard loans, such as those with 30-year fixed rates, the U.S. said in its complaint. The bank created financial incentives by sharing the higher revenue with employees and brokers, the U.S. said.
The settlement ends litigation filed in Illinois and a complaint from Pennsylvania, according to the bank. Wells Fargo also agreed to commit $50 million in direct payments for down-payment assistance in eight U.S. regions where the U.S. alleges the discrimination practices had a significant impact. Those areas include Washington, New York City, Chicago, the Oakland-San Francisco area and Baltimore.
The company said it reached a separate agreement with Baltimore in which the city will end a lawsuit filed in January 2008.
As part of the accord, Wells Fargo agreed to review some subprime loans made in its retail channel between 2004 and 2008 to see if borrowers might have qualified for prime loans. Wells Fargo will compensate those borrowers if it finds they could have gotten cheaper loans, Assistant Attorney General Thomas Perez said today.
The Comptroller of the Currency and the Justice Department began parallel investigations into the bank’s lending practices in 2009. The OCC referred its findings to the Justice Department in 2010, Thomas Curry, the agency’s head, said today.
An administrator, who has yet to be named, will oversee the settlement agreement.
Wells Fargo settled Federal Reserve claims last July that it steered reliable borrowers into subprime loans and falsified information in mortgage documents. In that case, Wells Fargo agreed to pay an $85 million fine, the largest assessed by the Fed in a consumer-protection enforcement case at the time, and to compensate clients. The firm didn’t admit wrongdoing in agreeing to settle.
Shares of Wells Fargo fell 0.9 percent to $32.98 at 1:27 p.m. in New York after dropping as much as 1.9 percent. The company had said in a May regulatory filing that the Justice Department might bring claims. The bank is scheduled to report quarterly results tomorrow.
“Our commitment to our customers and to turning the housing market around is stronger than ever,” Mike Heid, head of the mortgage business, said in the statement. “We will continue to offer education and meaningful choices through our retail and correspondent mortgage-lending operations.”
The company made $7.4 billion of mortgages through brokers in the first quarter, the most of any lender and 21 percent of the industrywide total, according to Inside Mortgage Finance, a trade publication. The loans made up about 5 percent of the company’s total, the bank said. Wells Fargo accounted for 34 percent of U.S. home loans in the first quarter, the biggest market share ever recorded, according to Inside Mortgage Finance.
The case is U.S. v. Wells Fargo Bank NA, 12-cv-01150, U.S. District Court, District of Columbia (Washington).