Wells Fargo is facing a potential class action lawsuit and heightened scrutiny by federal regulators, after a Bloomberg News analysis found the lender rejected requests to refinance from Black homeowners at higher rates than other lenders at the outset of the pandemic.

Wells Fargo is facing a potential class action lawsuit and heightened scrutiny by federal regulators, after a Bloomberg News analysis found the lender rejected requests to refinance from Black homeowners at higher rates than other lenders at the outset of the pandemic.

Bloomberg’s analysis of 8 million completed refinance applications submitted in 2020 found that only 47 percent of Black homeowners were approved by Wells Fargo, compared to 72 percent of white homeowners.

While other lenders were also more likely to approve white homeowners’ requests to refinance, Wells Fargo had the biggest racial disparity among major lenders, Bloomberg reported on March 10. The report found that, overall, 70 percent of Black applicants were approved for refinancing, compared to 87 percent of white applicants. Bloomberg found that the nation’s largest lender, Rocket Mortgage, approved 79 percent of refi applications from Black homeowners, and 86 percent from white borrowers.

Wells Fargo hasn’t disputed the statistical findings of Bloomberg’s analysis of Home Mortgage Disclosure Act data. But Wells Fargo executives told Bloomberg that  “additional, legitimate, credit-related factors” — including credit scores, home appraisals, and broader inequities in the U.S. economy — were the reason for the disparities.

That response did not satisfy Sen. Sherrod Brown, the Ohio Democrat who chairs the Senate Banking Committee. In a March 17 letter, Brown and 10 Senate colleagues called on the Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB) to review Wells Fargo’s mortgage loan refinance processes for compliance with the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act.

At the outset of the pandemic, the Federal Reserve lowered short-term interest rates to close to zero percent, and bought trillions of Treasury bonds and mortgage-backed securities to make borrowing more affordable, triggering a massive mortgage refinancing boom.

When “families of color who are able to become homeowners are denied money-saving refinances at a higher rate than white homeowners, it further erodes their income and ultimately their wealth, diluting homeownership’s benefits,” said the letter signed by 11 Senate Democrats.

On Friday, Wells Fargo was named in a federal lawsuit seeking class action status to represent Black applicants who were allegedly victims of “ongoing, modern-day redlining.”

“Wells Fargo’s practices directly harmed Black Americans by forcing them to pay higher interest rates while applications were pending, by forcing them to pay higher interest rates when applications were completed, and/or by denying refinancing applications,” the March 18 complaint said. “In the absence of these policies, Black Americans would not have had to pay higher rates or face rejection in their refinancing applications.”

The lawsuit, filed in the U.S. District Court for the Northern District of California by the law firm Ellis George Cipollone O’Brien Annaguey LLP, called the disparity between Wells Fargo’s treatment of Black American applicants and non-Black American applicants “significant and shocking.”

Even when Black applicants were ultimately approved for refinancing, many faced delays caused by Wells Fargo’s use of an internal algorithm that “singled out predominantly Black neighborhoods and labeled those neighborhoods ineligible for rapid processing,” the complaint alleged.

An analysis of 2.4 million purchase loan applications by nonprofit newsroom The Markup last year concluded that mortgage lenders are more likely to turn down homebuyers of color than white applicants with similar debt-to-income and loan-to-value ratios, and that algorithms are likely to blame. Lenders who rely on artificial intelligence and algorithms to make underwriting decisions may be liable for discriminatory practices, even if they’re unintentional, under rules put in place by the Obama administration in 2013 addressing “disparate impact.”

The individual plaintiff named in the lawsuit against Wells Fargo, Aaron Braxton, is a Black playwright, performer and a math and science teacher with a Master’s degree from the University of Southern California, the complaint said.

Braxton, who purchased a home in 2000 in the South Los Angeles area with an FHA-backed Wells Fargo home mortgage, “experienced impediments by Wells Fargo in seeking to refinance his home, including processing times not experienced by non-Black applicants, enrollment in an unsolicited debt-trap deferred payment program without Braxton’s consent, and denial of his full request, finally granting him an above-market interest rate nearly a year and a half later,” Braxton’s law firm said in a statement.

Bloomberg’s analysis was limited to “applications for conventional, non-jumbo, single-family and first-lien dwellings” which “were examined because other loan types, such as FHA loans, must meet more restrictive underwriting rules” required by HUD.

A Wells Fargo spokesman told Inman that the company is “currently reviewing the filing and do not have any comment on that matter at this time.”

“In 2020, Wells Fargo helped more Black homeowners refinance their mortgage than any other large bank,” Wells Fargo spokesman Tom Goyda said in an email. “We are confident that our underwriting practices are consistently applied regardless of the customer’s race or ethnicity. Our analysis shows that additional, legitimate, credit-related factors that are not available in HMDA data were responsible for the differences in our refinance approval rate for Black homeowners.”

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Email Matt Carter

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