In its latest victory for consumers affected by predatory lending, The U.S. Department of Justice (DOJ) held Wells Fargo Bank accountable for engaging in discriminatory lending against African-American and Hispanic borrowers. Wells Fargo gave bad loan products to African-American and Hispanic borrowers even though they were qualified for quality, prime loans. The financial damage from this subprime lending will last for a long time. Unfortunately Wells Fargo wasn’t the only one. This form of biased and predatory lending against minority borrowers was widespread and many other major financial institutions have settled fair lending claims over the past year. Taken together, these practices contributed to the housing crash by spreading unsustainable subprime mortgages and destroying a generation of wealth in minority communities.
According to the United States’ complaint, between 2004 and 2009, Wells Fargo, the nation’s largest residential home mortgage originator placed African-American and Hispanic wholesale and retail borrowers into subprime mortgages, even when they qualified for prime loans, while offering similarly-qualified non-Hispanic white borrowers prime loans. This practice, also known in the industry as “steering”, violates the Fair Housing Act (FHA). The complaint also alleges that Wells Fargo charged approximately 30,000 African American and Hispanic wholesale borrowers higher rates and fees by allowing its loan officers and mortgage brokers to vary a loan’s interest rate, fees, and request exemptions to their own underwriting guidelines based on race and national origin, rather than objective criteria related to borrower risk violating the Equal Credit Opportunity Act (ECOA).
Wells Fargo offered a $175 million dollar settlement to resolve these claims. The settlement provides $125 million in compensation for wholesale borrowers, and $50 million in direct down payment assistance to borrowers in communities around the country which were hard hit by the housing crisis. In addition, Wells Fargo has agreed to conduct an internal review of its retail mortgage lending practices and will compensate those identified through that process in an additional settlement.
Discriminatory lending practices are not unique to Wells Fargo. The Justice Department and the Financial Fraud Enforcement Task Force (FFETF) are waging an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. SunTrust Mortgage, the mortgage subsidiary of the nation’s 11th largest commercial bank, also recently settled to resolve similar violations of the FHA and ECOA targeting African-American and Hispanic borrowers. In December 2011, the DOJ filed a $335 million settlement – its largest residential fair lending settlement in history – to resolve allegations that Countrywide Financial Corporation (and its subsidiaries) engaged in a widespread pattern or practice of discrimination against qualified African-American and Hispanic borrowers.
While these three settlements are encouraging, they do very little to reverse the economic impact of these discriminatory practices on African-American and Hispanic communities. The Pew Research Center’s analysis of government data from 2009 found that, in percentage terms, the housing crisis took a far greater toll on the wealth of minorities than whites. From 2005 to 2009, inflation-adjusted median wealth fell by 66% among Hispanic households and 53% among black households, compared with just 16% among white households. Compliance Tech, a fair lending consulting firm in Arlington, VA, conducted a study of loan information that banks submit to the federal government and found that mortgage lending to African-Americans and Hispanics has plunged by more than 60% since 2009. When African-Americans and Hispanics can gain access to loans, higher rates and fees, prepayment penalties, and balloon payments associated with subprime loans lead to a higher foreclosure rate than that of prime loans.
These foreclosures not only affect the homeowner, but decrease the value of all property owners in their area. Foreclosures also restrict access to future credit, contributing to greater disparities in home ownership and personal wealth. Higher rates and fees also lead to less household income for other necessities and lower opportunities to advance education and build wealth. With these systemic challenges in the mortgage lending industry and the wealth gap growing, HOME’s mission is clear: ensuring equal access to housing for all people.
This is a guest post by Wanda Porter. Wanda is a graduate of Virginia Commonwealth University’s School of Mass Communications. Before arriving at HOME, she worked for a small ad agency as Director of Client Services and as a freelancer in the film industry.