Wells Fargo Bank has reached a settlement with the U.S. Department of Justice to resolve allegations that the bank systematically discriminated against African American and Hispanic borrowers.
The Justice Department claims that Wells Fargo — the largest home mortgage originator in the U.S. — steered about 34,000 African American and Hispanic borrowers into riskier and more expensive subprime loans between 2004 and 2009, or charged them higher rates and fees than white borrowers.
Wells Fargo, which denies the claims, will pay $125 million to wholesale borrowers the Justice Department believes were victims of discrimination due to their race or national origin.
Wells Fargo will also pay $50 million to seven metro areas the justice department has determined to have a high number of impacted borrowers and were hard-hit by the housing crisis: Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va.; Chicago-Naperville-Joliet, Ill.-Ind.-Wis.; Philadelphia-Camden-Wilmington, Pa.-N.J.-Del.-Md.; San Francisco-Oakland-Fremont, Calif.; New York-Northern New Jersey-Long Island, N.Y.-N.J.-Pa.; Cleveland-Elyria-Mentor, Ohio; and Riverside-San Bernardino-Ontario, Calif.
In addition, Wells Fargo has agreed to conduct an internal review of subprime loans made to Hispanic and African American borrowers through its retail lending division between 2004 and 2008. Any compensation paid out to victims of discrimination identified by the retail review will be in addition to the $125 million set aside for wholesale borrowers.
"The department’s action makes clear that we will hold financial institutions accountable, including some of the nation’s largest, for lending discrimination," said Deputy Attorney General James M. Cole in a statement.
"An applicant’s creditworthiness, and not the color of his or her skin, should determine what loans a borrower qualifies for. With today’s settlement, the federal government will ensure that African-American and Hispanic borrowers who were discriminated against will be entitled to compensation and borrowers in communities hit hard by this housing crisis will have an opportunity to access homeownership."
In an announcement, Wells Fargo noted that "the claims primarily relate to mortgages priced and sold to consumers by independent mortgage brokers" in its wholesale mortgage program. Wells Fargo said it cannot "set loan prices for independent mortgage brokers nor control the combined effect of the negotiations that thousands of these independent mortgage brokers conduct with their customers."
The company also announced that it was voluntarily discontinuing its mortgage wholesale program, which currently makes up 5 percent of the company’s mortgage loan volume.
After July 13, Wells Fargo will no longer accept new applications for loans originated by independent mortgage brokers through its wholesale channel, but will work to ensure existing applications are processed and closed, the company said.
In a statement, Mike Heid, president of Wells Fargo Home Mortgage, said the bank was settling "to avoid a long and costly legal fight, and to instead devote our resources to continuing to contribute to the country’s housing recovery."
"Wells Fargo takes pride in serving the home ownership needs of all of our customers, and we are fully committed to fair and responsible lending. Through our separate decision to no longer fund mortgages through independent mortgage brokers, we can control how that commitment is met on every mortgage that Wells Fargo makes," Heid said.
In a statement, the Center for Responsible Lending called the settlement "welcome news."
"The impact of discriminatory pricing on African-American and Latino communities has been severe and will take generations to remedy. We commend DOJ for pursuing this and other cases to address pricing discrimination and the steering of borrowers into bad home loans," the organization said.
This is the second-largest fair lending settlement in the history of the Department of Justice. The largest was a $335 million settlement reached last December with Bank of America to settle charges that Countrywide Financial Corp. and its subsidiary discriminated against more than 200,000 African-American and Hispanic borrowers by charging them higher fees and interest rates on mortgage loans made from 2004 through 2008.