Regulatory fair lending enforcement actions have been quiet lately, but that doesn’t mean there aren’t consequences for alleged violations. Just ask Wells Fargo.
The bank recently settled a suit filed by the city of Philadelphia for allegedly steering minorities into high-cost, higher-risk mortgage loans for $10 million without admitting wrongdoing. (The bank released a statement saying it “strongly disputed the allegations made by the city in the lawsuit over Fair Housing Act claims.”)
This was one of the first such suits since the Supreme Court rules in May 2017 that cities could sue banks for discriminatory mortgage lending if they could prove direct harm.
What the Lawsuit Said
In its suit, the city of Philadelphia alleges that from 2004 through 2017 Wells Fargo violated the Fair Housing Act (FHA) by steering African-American and Latino borrowers into high-cost or high-risk loans even where those borrowers’ credit permitted them to obtain better loans. It also wouldn’t allow minority borrowers in these high-cost loans to refinance when their white counterparts could.
In short, Philadelphia’s allegations come down to “reverse redlining,” or the practice of offering credit in a neighborhood only to charge much higher rates and offer much worse terms than would be offered to similar borrowers in non-minority neighborhoods.
These practices, which included both intentional discrimination and disparate impact discrimination, resulted in a large number of foreclosures, the city says.
According to the city:
- A loan in a predominantly minority neighborhood is 4.7 times more likely to result in foreclosure than is a loan in a predominantly white neighborhood.
- African-American Wells Fargo borrowers were 2.1 times more likely to receive a high-cost or high-risk loan than a white borrower.
- Latino borrowers were 1.6 times more likely to receive a high-cost or high-risk loan than a white borrower.
- The disparity remained even among borrowers with FICO credit scores above 660 as African-Americans with FICO scores greater than 660 were 2.5 times more likely to receive a high-cost or high-risk loan than a white borrower and Latino borrowers with FICO scores greater than 660 were 2.1 times more likely to receive a high-cost or high-risk loan than a white borrower.
(This is unrelated to the civil penalties the OCC has levied against eight formers Wells Fargo executives last week as a result of the account fraud scandal.)
An Unexpected Outcome
When the city of Philadelphia filed suit against Wells Fargo for allegedly steering minorities into higher-cost mortgage loans, no one knew how the suit would turn out.
Proving direct harm seemed a tall order. In 2018 a judge ruled that the city’s suit could go forward because claims of discrimination, if proven true, would violate the Fair Housing Act, but the judge said she had “serious concerns” about the city’s ability to prove direct harm.
To prove direct harm, Philadelphia argued the bank’s practices kept property values down in minority and low-income communities, thus reducing city property tax revenues. It also increased municipal service costs, such as police, fire department, code enforcement, and housing-counseling and housing-related services, according to the suit.
Were those arguments effective? We’ll never know because Wells Fargo settled the suit. It almost doesn’t matter. The end result was paying the city $10 million to go towards funding the city’s housing programs for affordable housing and beautifying vacant lots.
Trupoint Viewpoint: This whole lawsuit could have been avoided if Wells Fargo had been proactively managing discrimination risk by analyzing fair lending data. From uncovering significantly significant disparities and benchmarking performance to conducting match-pair analysis to see if economically similar borrowers are being given the same opportunities, financial institutions need to be analyzing, testing, monitoring, and risk assessing fair lending compliance risk.
It’s not just the right thing to do. It’s also the smart thing—preventing reputational damage and large legal bills.