The Baltimore Sun

15 July 2012

Baltimore`s effort to recover millions of dollars in lost revenue stemming from the wave of home foreclosures that followed the collapse of the housing market in 2007 was vindicated Thursday when Wells Fargo Bank, the nation`s largest mortgage lender, agreed to pay at least $175 million to settle claims that it discriminated against African-American and Hispanic borrowers by steering them into high-cost, subprime mortgage loans. Baltimore will receive $7.5 million, and seven other communities—Chicago, Cleveland, Los Angeles, New York, Philadelphia, the San Francisco Bay Area and Washington—will benefit as well.

The Justice Department, which announced the agreement, said it is the second largest fair-lending settlement in its history. Its investigators found a pervasive pattern of predatory lending in which outside mortgage brokers originating Wells Fargo loans consistently charged black borrowers higher fees and interest rates than whites and targeted minorities with more expensive subprime mortgages even when they qualified for regular loans.

Depositions taken by attorneys for Baltimore City included statements by former Wells Fargo employees that described a company culture which encouraged brokers to offer minority borrowers loans at rates they knew they couldn`t afford, leading to widespread defaults. Thomas Perez, who heads the Justice Department`s Civil Rights Division, said an African-American seeking a $300,000 loan paid an average of nearly $3,000 more in fees than a similarly qualified white applicant, which he described as amounting to a racial surtax.

The outcome of the case, which the city initially filed in 2008, was long in doubt. The city argued that when Wells Fargo foreclosed on more than 400 subprime mortgages that were, in effect, designed from the start to fail, the impact on already struggling neighborhoods was devastating. When families were pushed out of their homes because they could no longer afford the payments, they left behind vacant properties all over the city that drove down the value of surrounding homes and caused a spike in costs for police and fire protection. The double-whammy of lower property tax revenues and higher service costs strained the city budget and forced the closure of neighborhood fire stations and rec centers, the city claimed.

But the company countered that only about half the foreclosed homes purchased through its subprime mortgages were ever vacant, and that in any case the city already had more than 30,000 vacant properties before the housing bubble burst. That inventory was far more destabilizing to neighborhoods than the relatively small number of vacancies that came about as a result of foreclosed Wells Fargo mortgages, it said, and therefore it was impossible to attribute the city`s budget problems to them. Moreover, the company denied ever discriminating against minority borrowers.

In agreeing to settle with the Department of Justice, the company stuck to that position, saying it was doing so only to avoid further litigation. It follows other recent cases in which large lenders have settled similar lawsuits without admitting guilt. In December, Bank of America agreed to pay $335 million to settle charges of discrimination by its Countrywide Financial unit, and it May SunTrust Mortgage paid out $21 million to settle a similar case.

In its agreement with Baltimore, Wells Fargo will pay $4.5 million for community improvement programs in the city and an additional $3 million for local housing and foreclosure-related programs. It also set a five-year lending goal for home mortgages in the city.

This is not an ideal resolution to this case. About 1,000 city residents will receive some cash compensation for having been pushed into subprime mortgages or charged higher rates and fees because of their race. But it won`t help their neighbors whose properties are now worth less than they owe on them, and it will be small comfort indeed for those who lost their homes to foreclosure and are now struggling to recover from the impact on their personal finances. Moreover, the $7.5 million plus commitments for additional lending in Baltimore won`t begin to undo the damage of the subprime mortgage crisis here. But at least the city will get back some of the money it lost because of Wells Fargo`s unethical business practices, and if the best thing that comes out of this case is that the company lives up to its promise not to discriminate in future against people because of their race or ethnicity it will have been well worth it.

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Bank Accused of Pushing Mortgage Deals on Blacks

Michael Powell, The New York Times

6 June 2009

As she describes it, Beth Jacobson and her fellow loan officers at Wells Fargo Bank “rode the stagecoach from hell” for a decade, systematically singling out blacks in Baltimore and suburban Maryland for high-interest subprime mortgages.

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These loans, Baltimore officials have claimed in a federal lawsuit against Wells Fargo, tipped hundreds of homeowners into foreclosure and cost the city tens of millions of dollars in taxes and city services.

Wells Fargo, Ms. Jacobson said in an interview, saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages. Another loan officer stated in an affidavit filed last week that employees had referred to blacks as “mud people” and to subprime lending as “ghetto loans.”

“We just went right after them,” said Ms. Jacobson, who is white and said she was once the bank’s top-producing subprime loan officer nationally. “Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches, because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans.”

Ms. Jacobson’s account and that of the other loan officer who gave an affidavit, Tony Paschal, both of whom have left Wells Fargo, provide the first detailed accusations of deliberate racial steering into subprimes by one of the nation’s top banks.

The toll taken by such policies, Baltimore officials argue, is terrible. Data released by the city as part of the suit last week show that more than half the properties subject to foreclosure on a Wells Fargo loan from 2005 to 2008 now stand vacant. And 71 percent of those are in predominantly black neighborhoods.

Judge Benson E. Legg of Federal District Court had asked the city to file the additional paperwork and has not decided whether the lawsuit can go forward.

Wells Fargo officials have declined detailed interviews since Baltimore filed suit in January 2008. In an e-mail statement on Friday, a spokesman said that only 1 percent of the city’s 33,000 foreclosures have come on Wells Fargo mortgages.

“We have worked extremely hard to make homeownership possible for more African-American borrowers,” wrote Kevin Waetke, a spokesman for Wells Fargo Home Mortgage. “We absolutely do not tolerate team members treating our customers or others disrespectfully or unfairly, or who violate our ethics and lending practices.”

City and state officials across the nation have investigated and sometimes sued Wells Fargo over its practices. The Illinois attorney general has investigated whether Wells Fargo Financial violated fair lending and civil rights laws by steering black and Latino homeowners into high-interest loans. New York’s attorney general, Andrew M. Cuomo, raised similar questions about the lending practices of Wells Fargo, JPMorgan Chase and Citigroup, among other banks.

The N.A.A.C.P. has filed a class-action lawsuit charging systematic racial discrimination by more than a dozen banks, including Wells Fargo.

At the heart of such charges is reverse redlining, specifically marketing the most expensive and onerous loan products to black customers.

The New York Times, in a recent analysis of mortgage lending in New York City, found that black households making more than $68,000 a year were nearly five times as likely to hold high-interest subprime mortgages as whites of similar or even lower incomes. (The disparity was greater for Wells Fargo borrowers, as 2 percent of whites in that income group hold subprime loans and 16.1 percent of blacks.)

“We’ve known that African-Americans and Latinos are getting subprime loans while whites of the same credit profile are getting the lower-cost loans,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending. “The question has been why, and the gory details of this complaint may provide an answer.”

The affidavits of the two loan officers seem to bolster Baltimore’s lawsuit. Mr. Paschal, who is black and worked as a loan officer in Wells Fargo’s office in Annandale, Va., from 1997 to 2007, offers a sort of primer on Wells Fargo’s subprime marketing strategy by race.

In 2001, he states in his affidavit, Wells Fargo created a unit in the mid-Atlantic region to push expensive refinancing loans on black customers, particularly those living in Baltimore, southeast Washington and Prince George’s County, Md.

“They referred to subprime loans made in minority communities as ghetto loans and minority customers as ‘those people have bad credit’, ‘those people don’t pay their bills’ and ‘mud people,’ ” Mr. Paschal said in his affidavit.

He said a bank office in Silver Spring, Md., had an “affinity group marketing” section, which hired blacks to call on African-American churches.

“The company put ‘bounties’ on minority borrowers,” Mr. Paschal said. “By this I mean that loan officers received cash incentives to aggressively market subprime loans in minority communities.”

Both loan officers said the bank had given bonuses to loan officers who referred borrowers who should have qualified for a prime loan to the subprime division. Ms. Jacobson said that she made $700,000 one year and that the company flew her and other subprime officers to resorts across the country.

“I used to joke that ‘I’ll pay for your kids to go to private school if you give me clients,’ ” Ms. Jacobson said in the interview.

Loan officers employed other methods to steer clients into subprime loans, according to the affidavits. Some officers told the underwriting department that their clients, even those with good credit scores, had not wanted to provide income documentation.

“By doing this, the loan flipped from prime to subprime,” Ms. Jacobson said. “But there was no need for that; many of these clients had W2 forms.”

Other times, she said, loan officers cut and pasted credit reports from one applicant onto the application of another customer.

These practices took a great toll on customers. For a homeowner taking out a $165,000 mortgage, a difference of three percentage points in the loan rate—a typical spread between conventional and subprime loans—adds more than $100,000 in interest payments.

The accusations contained in the affidavits, which were given to Relman & Dane, a civil rights law firm working with the City of Baltimore, have not drawn a specific response from Wells Fargo. But city officials say the conclusion is clear.

“They confirm our worst fears: that this is not just a case based on a review of numbers and a statistical analysis,” said the city solicitor, George Nilson. “You don’t have to scratch your head and wonder if maybe this was just an accident. The behavior is pretty explicit.”

Both sides expect to appear in court at a hearing in the case in late June.

Janet Roberts contributed reporting.

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