On July 12th, the Department of Justice reached a significant settlement, totaling at least $175 million, with Wells Fargo Bank. The DOJ alleged that Wells Fargo Bank systemically discriminated against more than 34,000 African American and Hispanic borrowers in the operation of its residential mortgage lending from at least 2004 to 2009 in 82 markets and across 36 states. Since 2008, Wells Fargo has been the largest residential home mortgage originator in the United States (estimated to originate one out of every four mortgages in the country).
The DOJ allegations included claims that 4,000 qualified African-American and Hispanic wholesale borrowers, who received Wells Fargo loans through mortgage brokers, were steered towards subprime loans rather than prime loans because of their race or national origin. In addition, 30,000 African-American and Hispanic wholesale borrowers paid Wells Fargo higher fees and costs for their home mortgages than white borrowers. Wells Fargo’s policies allowed its loan originators both to set the loan prices charged to borrowers and to place borrowers into loan products in ways that were not connected to a borrower’s creditworthiness or other objective criteria related to borrower risk. In addition, the allegations stated that Wells Fargo created financial incentives for its employees and mortgage brokers by sharing increased revenues with them (e.g. higher compensation caps were offered for subprime loans). According to the filed case, the compensation structure afforded loan originators, combined with the discretion afforded, resulted in discrimination on the basis of race and national origin.
Assistant Attorney General Thomas Perez stated at the press conference, “If you were African-American or Latino, you were more likely to be placed in a subprime loan or pay more for your mortgage loan, even though you were qualified and deserved better treatment.”
In cases like these, there are always things we can learn and use to help our clients succeed. When we review the details associated with this particular complaint, there are five fair lending risks that are worth highlighting:
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Third-Party Risk (management and monitoring of third-party brokers)
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Subjective Pricing Discretion Risk (loan originators afforded discretion)
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Steering Risk (loan officer ability to direct consumer product choices)
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Monitoring Risk (failure to adequately monitor and fully remedy the effects of racial and ethnic disparities)
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Compensation Risk (higher lender compensation for sub-prime products and higher priced products)
By way of example, using discretion is not necessarily illegal. However, when these types of practices go unmonitored and/or unmanaged, they do create a fair lending risk.
Wells Fargo, did not admit guilt, stating in a news release that the bank is “settling this matter solely for the purpose of avoiding contested litigation with the DOJ, and to instead devote its resources to continue to provide fair credit services and choices to eligible consumers, and important and meaningful assistance to borrowers in distressed U.S. real estate markets.” Both Mr. Perez and Deputy Attorney General, James M. Cole, acknowledged Wells Fargo’s cooperation and commitment to implementing stronger fair lending policies and controls.
It is apparent that the government really focused on loans made on behalf of Wells by third-party brokers who had "discretion to request exceptions" to underwriting guidelines. Wells Fargo announced that, on its own volition, it will discontinue funding mortgages that are originated, priced and sold by independent mortgage brokers through its mortgage wholesale channel. The company stopped accepting new applications for loans originated by independent mortgage brokers on July 13th, 2012.
The Bottom Line: This is another high profile case where both discretion and significant disparities existed and these disparities disfavored African-Americans and Hispanics. The “Double D” (Disparities and Discretion) continues to get the attention of the regulators. When these two variables exist in tandem, they provide ample incentive for lenders to proactively monitor and manage their lending patterns. To quote Mr. Perez again, “the best policing is often policing that comes from within. That work is vital to ensuring fair and equal treatment for borrowers.” In today's regulatory environment, the need to monitor and manage risk is a priority, regardless of the size of the financial institution.
TRUPOINT Partners can help you monitor and manage your fair lending risk.
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CFPB Provides Fair Lending Road Map with 8 Success Elements
