A big legal settlement was announced today: Wells Fargo will pay $175 million after it was discovered that outside brokers selling the company's mortgages were discriminating against black and Hispanic borrowers between 2004 and 2009. A government probe found 34,000 cases in which the bank charged black and Hispanic customers higher fees and rates than white customers with similar credit profiles.
The case was brought by the U.S. Justice Department’s Civil Rights Division, who earned another victory in court. In December, Bank of America paid $335 million over accusations of discrimination by its Countrywide Financial unit, and in May, SunTrust Mortgage agreed to pay $21 million for the same thing. If approved by the court, this settlement will be the second largest fair lending suit in history.
Assistant Attorney General for the Justice Department's Civil Rights Division Thomas Perez explains the recent court ruling and what it could mean for the sinister trend of discrimination in the banking industry. "There's a wide array of types of discrimination," Perez says. This case is just the most recent in a number in which the attorney general has been involved.
Perez mentions one recent instance where a bank engaged in "red-lining," or the practice of designating geographic areas in which a bank will refuse to sell financial products. "The bank in question, in establishing its market area, quite literally drew a red line around Wayne County, which is metropolitan Detroit, and it wasn't lending to African Americans, even though it could have done well and done good," Perez says. "That's wrong."
Another strategy that banks take is called "reverse red-lining," where customers of color are targeted by banks and are sold toxic products. Documents from the Wells Fargo case that Perez has examined indicate that the bank engaged in "steering" minority customers into subprime interest rates with higher loans, and that employees were rewarded for doing so.
"The incentive to manipulate the process was if you put someone in a subprime loan, the originator got more money," Perez says. "And if you put someone in a subprime loan, because it's a higher interest rate, when [the bank sells] that loan on the secondary market, [it gets] more money for it."
"There were some perverse incentives, and those perverse incentives end up working to the detriment of minority borrowers," Perez says. "The bank should have done a better job monitoring those practices." The attorney general says that there is a $125 million fund available to victims of Wells Fargo's steering strategy, and the bank has also committed to reviewing its retail divisions.