The city of Philadelphia filed a federal lawsuit against Wells Fargo on Monday, accusing the $2 trillion-asset bank of violating the Fair Housing Act by targeting minority borrowers with high-cost and high-risk loans. The city filed the suit in the U.S. District Court for the Eastern District of Pennsylvania just two weeks after the U.S. Supreme Court ruled that cities have standing to sue lenders under the Fair Housing Act.
In the complaint, the city alleged that from 2004 and on, Wells Fargo steered African-American and Latino borrowers into high-cost or high-risk loans even when their credit would have qualified them for more advantageous loans. The city based its suit in part on an analysis of available loan data that revealed 23.3% of loans to minority borrowers fell into this category, while just 7.6% of loans to white borrowers did.
“The practices of Wells Fargo disproportionately affected minority borrowers here in Philadelphia,” Mayor Jim Kenney said in a press release. “And because many of these loans resulted in foreclosures, all neighborhoods throughout the city suffered the harm."
“The City of Philadelphia’s investigation revealed that both the resources of the City and the lives of Philadelphia’s citizens have been negatively affected by Wells Fargo’s discriminatory lending practices,” City Solicitor Sozi Pedro Tulante said in the news release. “The Law Department must take action in light of this evidence and halt these discriminatory practices on behalf of the citizens of Philadelphia.”
The city said in its complaint that Wells Fargo was aware of and even offered incentives to employees for marketing high-cost and high-risk loans to minorities. Those loans included “lender credit” loans in which the bank paid the borrower’s closing costs in exchange for a higher interest rate, which the borrower continues to pay well after the “lender credits” have been repaid. The city said those loans generated additional revenue for the bank with no additional benefits for the borrower.
The U.S. Department of Justice and the cities of Miami, Baltimore, Memphis, Miami Gardens, Los Angeles and Oakland have all filed similar lawsuits against Wells Fargo.
In 2013, the city of Miami sued Wells, Bank of America and other large lenders over similar allegations. In that case, Miami accused the lenders of steering minority borrowers into predatory loans that caused properties to fall into foreclosure, resulting in blight, loss of property tax income and increased spending on municipal services.
The banks argued that individuals could sue under the Fair Housing Act, but cities could not. The Supreme Court ultimately disagreed, finding that the law was broad enough to encompass the city as a plaintiff, and sent that case back to the Eleventh Circuit, which previously ruled in favor of the city.
Wells alluded to that ruling in an emailed statement to American Banker on Monday.
“The city’s unsubstantiated accusations against Wells Fargo do not reflect how we operate in Philadelphia and all of the communities we serve,” a spokesman said. “The U.S. Supreme Court’s recent ruling in the City of Miami case means that, for Fair Housing Act claims, financial institutions cannot be held responsible for harm they didn’t cause. These types of cases have been pending in other states and have been rejected by all courts who have addressed the merits of the claims.”
The city of Philadelphia said that Wells Fargo’s lending practices had a disparate impact on minority borrowers. African-American borrowers were 2.1 times more likely to receive a high-cost or high-risk loan from Wells than white borrowers, and Latino borrowers were 1.6 times more likely to receive such loans than white borrowers, according to the city's suit.
That disparity persisted when borrowers had FICO scores above 660. African-American borrowers with a score above 660 were 2.5 times more likely to receive those loans and Latino borrowers with similar scores were 2.1 times more likely to receive those loans. And a loan in a predominantly minority neighborhood is 4.7 times more likely to result in foreclosure than a loan made in a predominantly white neighborhood, the city said.
In its complaint, the city seeks “equitable relief,” which could include an injunction to stop Wells Fargo from engaging in discriminatory lending practices. The city is also seeking monetary damages based on the loss of property tax revenue resulting from unpaid taxes on abandoned properties, as well as the reduction in tax collections resulting from the decline in value of foreclosed and adjacent properties.
The city is also seeking compensation for what it described as noneconomic injuries, like interference with its progress toward goals for nondiscriminatory housing practices.