Wells Fargo (WFC) has agreed to pay $42.5 million in a settlement with the Department of Housing and Urban Development and 14 private fair-housing groups for failing to maintain and market foreclosed properties in minority neighborhoods.

The settlement is the first of its kind to resolve a federal housing discrimination complaint that a mortgage servicer treated foreclosed homes differently based on the racial composition of the neighborhood.

The complaint against Wells was filed in April 2012 by the National Fair Housing Alliance and 13 of its member organizations who alleged that the San Francisco bank had systematically failed to clean up and post "for sale" signs in minority communities at the same rate as in white neighborhoods. The group has filed similar complaints with HUD against Bank of America (BAC) and U.S. Bancorp (USB)

Wells denied the allegations but reached out to HUD and the housing groups to resolve the complaint before any violations were found that Wells had discriminated intentionally on the basis of race or national origin.

Bryan Greene, HUD's general deputy assistant secretary for fair housing and equal opportunity, said Wells' investment will help stabilize African-American and Hispanic neighborhoods "in a way that advances equal housing opportunities."

The settlement money will be largely be used rehabilitate run-down properties and promote home ownership in hard-hit neighborhoods.

But the settlement is particularly unique for the non-monetary relief it will provide. Wells has agreed to give owner-occupants priority over investors in purchasing real-estate-owned properties in minority neighborhoods, and will allow a third party to monitor its REO portfolio to ensure it maintains the standards set forth in the agreement.

In addition, Wells' corporate trust services division also will play a role by sending a letter to all mortgage servicers reminding them of their contractual and legal obligations to adequately maintain and market REO properties, says Peter Romer-Friedman, a partner at Cohen Milstein Sellers & Toll, who represents the National Fair Housing Alliance.

"This is important because Wells will be telling other servicers that it's important for them to follow the law," Romer-Friedman says.

Under the agreement, Wells will pay $27 million to promote home ownership and rehabilitate properties in 19 cities, including Washington D.C., Baltimore, Philadelphia, Oakland, Miami and Atlanta. A separate agreement calls for an investment of $450,000 in Jacksonville, Fla., that will be administered by the nonprofit housing group Jacksonville Area Legal Aid.

Wells will pay an additional $11.5 million to support neighborhoods in 25 other cities that were not part of the original complaint, including Austin, Tex., Las Vegas, Detroit and the California cities of Bakersfield, Fresno, Modesto and Riverside.

Wells also will pay $3 million to the National Fair Housing Alliance and its members for legal costs and damages.

Most fair housing settlements include some form of education and outreach. To that end, Wells has agreed to pay $300,000 to sponsor two conferences to discuss fair-housing issues, and will pay $250,000 to NFHA to hold public seminars that will address issues of mortgage delinquencies and foreclosures. The company also will develop a fair-housing training program on REO issues for its employees and agents who sell REO properties.

"Wells Fargo will continue to focus its resources on responsibly maintaining, rehabilitating and marketing our REO properties nationwide," JK Huey, a senior vice president at Wells Fargo Home Mortgage, said in a statement. Wells has spent $775 million, or an average of roughly $11,000 in repairs on each of its 71,000 REO properties that have been sold since 2009, Huey says.

Consumer advocates have long complained that since the housing downturn, investors have swept into many neighborhoods, buying up properties with cash and rented them out, essentially displacing owner-occupants. Wells has agreed to extend its homeowner priority period to 15 days from the current 12 days to give potential homeowners some priority in buying REOs. The company also will create a new five-day homeowner priority period every time there is a price reduction on a Wells REO.

"Many neighborhoods all across the country have been seriously damaged by REO homes left un-attended," Shanna Smith, the president and chief executive of the National Fair Housing Alliance, said in a statement. "This partnership will help to get some of those neighborhoods back on their feet."

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