WASHINGTON — The $175 million fair-lending settlement that federal authorities announced Thursday with Wells Fargo (WFC) offered both sides the chance to claim some measure of victory and move past a three-year-long investigation.
With the settlement, Wells Fargo was able to deny — contrary to the allegations of the Justice Department — that it unlawfully discriminated against minority borrowers related to mortgages originated during the housing boom. But at the same time, the Justice Department, which has been pursuing fair-lending cases more energetically during the Obama Administration, was able to claim its second-largest prize following a $335 million settlement with Countrywide last year.
"All too frequently, Wells Fargo's African-American and Latino borrowers had no idea whatsoever that they could have gotten a better deal," Assistant Attorney General Thomas Perez said at a press conference in Washington. "No idea that white borrowers with similar credit would pay less. That is discrimination with a smile."
Much of the alleged wrongdoing involved the bank's wholesale lending channel, which utilizes outside mortgage brokers, and Wells suggested in a press release that any bad conduct was beyond the bank's control because mortgage brokers operate as independent businesses.
"Wells Fargo 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 bank stated.
Wells separately announced that it is closing the wholesale mortgage channel, which currently represents about 5% of its residential mortgage volume. The San Francisco bank had already closed its wholesale nonprime division five years ago, and it stopped making retail nonprime loans more than four years ago.
The settlement also frees up resources inside the Justice Department, and in particular in the Civil Rights Division's Fair Lending Unit, to pursue similar cases against other banks.
Perez would not comment Thursday on other specific probes, but did say: "We have other investigations pending."
Anand Raman, a lawyer at Skadden Arps who often represents banks, said, "The Justice Department sees as part of its mission going after big settlements, and I would not be surprised if this is not the last such resolution."
When pressed on why the Justice Department agreed to settle a case involving what it alleged was a racial surtax on loans, rather than going to court, Perez said: "There are real people affected, and we were able to reach a resolution with Wells now to provide assistance for people."
"When you have protracted litigation, that can take years," Perez added. "There's obvious mutual litigation risk on everyone's side. And our goal here is to help people, and to come to a resolution that can in fact help ensure equal credit opportunity."
Like many recent fair-lending cases, the government's case against Wells Fargo did not allege that the bank, or the mortgage brokers with whom it did business, discriminated against minority borrowers intentionally.
Instead, the Justice Department relied on statistical analysis to show that minority borrowers were far more likely than whites to be steered into subprime loans even though they qualified for prime mortgages, and that minorities were also more likely to pay higher rates and fees.
"It meant that an African-American wholesale customer in the Chicago area in 2007 seeking a $300,000 loan paid on average $2,937 more in fees than a similarly qualified white applicant," Perez said.
This kind of statistical analysis — which prosecutors use to support claims that lending practices have a "disparate impact" on minorities, even if minorities were not intentionally targeted — is controversial at banks.
But Perez insisted that discrimination took place, and he rejected Wells Fargo's suggestion that the problem could be blamed on mortgage brokers.
"The complaint alleges that individual originators, whether they were retail or wholesale, were given discretion which wasn't properly monitored, to go beyond the terms and conditions that were based on objective indicia of a person's creditworthiness," he said.
As part of the settlement, Wells Fargo agreed to provide $125 million to the roughly 34,000 alleged victims, and also committed another $50 million to community improvement programs in Washington DC, Chicago, Baltimore, Philadelphia, Oakland-San Francisco, New York, Cleveland and southern California's Inland Empire.
The bank will also conduct an internal review of certain retail subprime loans that it originated between 2004 and 2008 to identify and provide compensation to minorities who were improperly steered into subprime loans.
Perez estimated that between 3,000-4,000 borrowers will be identified through that process, and he said that payments to them will be in addition to the $175 million committed under the settlement.
The Wells Fargo case was referred to the Justice Department by the Office of the Comptroller of the Currency in 2010, prior to the start of Comptroller Thomas Curry's tenure.
While Justice Department officials spoke Thursday about a reinvigoration of fair-lending enforcement, Curry was careful not to suggest that anything has changed with regard to his agency's handling of such cases.
"In terms of fair lending, we've had a long-standing practice that goes way back and prior to my becoming the comptroller of referring of businesses of credible complaints," Curry said. "So this is a continuation of the long-standing practice and tradition of the Comptroller's Office."