Move over deferred prosecution agreements. Move over non prosecution agreements. Move over neither admit nor deny consent decrees. Hello deny consent decrees.
The Justice Department has put forth a consent decree to settle allegations that Wells Fargo Bank engaged in a “pattern or practice of discrimination” against qualified African-American and Hispanic borrowers in its mortgage lending from 2004 to 2009.
Wells Fargo was represented by Bart Williams of Munger Tolles & Olson.
Under the consent decree, Wells Fargo asserts that “it has treated all of its customers fairly and without regard to impermissable factors such as race and national origin.”
The bank said it entered the agreement “solely for the purpose of avoiding contested litigation with the Department of Justice.”
The bank said that its borrow data “proves that its subprime borrowers had significantly weaker credit characteristics than its prime borrowers.”
But at the same time, Wells Fargo agreed to pay $175 million to resolve the allegations against the bank – the largest residential home mortgage originator in the United States.
Wells Fargo will pay $125 million in compensation for wholesale borrowers who were steered into subprime mortgages or who paid higher fees and rates than white borrowers because of their race or national origin.
Wells Fargo will also provide $50 million in direct down payment assistance to borrowers in communities around the country where the department identified large numbers of discrimination victims and which were hard hit by the housing crisis.
Wells Fargo has agreed to conduct an internal review of its retail mortgage lending and will compensate African-American and Hispanic retail borrowers who were placed into subprime loans when similarly qualified white retail borrowers received prime loans.
Compensation paid to any retail borrowers identified in the review process will be in addition to the $125 million to compensate wholesale borrowers who were victims of discrimination.
The Justice Department alleges that between 2004 and 2008, Wells Fargo discriminated by steering approximately 4,000 African-American and Hispanic wholesale borrowers, as well as additional retail borrowers, into subprime mortgages when non-Hispanic white borrowers with similar credit profiles received prime loans.
All the borrowers who were allegedly discriminated against were qualified for Wells Fargo mortgage loans according to Well Fargo’s own underwriting criteria.
The United States also alleges that, between 2004 and 2009, Wells Fargo discriminated by charging approximately 30,000 African-American and Hispanic wholesale borrowers higher fees and rates than non-Hispanic white borrowers because of their race or national origin rather than the borrowers’ credit worthiness or other objective criteria related to borrower risk.
The Justice Department alleges that African-American and Hispanic wholesale borrowers paid more than non-Hispanic white wholesale borrowers, not based on borrower risk, but because of their race or national origin.
Wells Fargo’s business practice allowed its loan officers and mortgage brokers to vary a loan’s interest rate and other fees from the price it set based on the borrower’s objective credit-related factors.
This subjective and unguided pricing discretion resulted in African-American and Hispanic borrowers paying more.
The complaint alleges that Wells Fargo was aware the fees and interest rates it was charging discriminated against African-American and Hispanic borrowers, but the actions it took were insufficient and ineffective in stopping it.
As a result of Wells Fargo’s policies and practices, qualified African-American and Hispanic wholesale borrowers were placed in subprime loans rather than prime loans even when similarly-qualified non-Hispanic white borrowers were placed in prime loans.
The discriminatory placement of wholesale borrowers in subprime loans, also known as “steering,” occurred because it was the bank’s business practice to allow mortgage brokers and employees to place a loan applicant in a subprime loan even when the applicant qualified for a prime loan.
In addition, Wells Fargo gave mortgage brokers discretion to request exceptions to the underwriting guidelines, and Wells Fargo’s employees had discretion to grant these exceptions.
This is the second time that the Justice Department has alleged and obtained relief for borrowers who were steered into loans based on race or national origin, a practice that systematically placed borrowers of color into subprime mortgage loan products while placing non-Hispanic white borrowers with similar creditworthiness in prime loans.
By steering borrowers into subprime loans from 2004 to 2008, the complaint alleges, Wells Fargo harmed those qualified African-American and Hispanic borrowers.
Subprime loans generally carried higher-cost terms, such as prepayment penalties and adjustable interest rates that started with low initial teaser rates, and then increased significantly after two or three years, often making the payments unaffordable and leaving the borrowers at a much higher risk of default or foreclosure.
The department began its investigation into Wells Fargo’s lending practices in 2009 and received a referral in 2010 from the Office of the Comptroller of the Currency (OCC) which conducted its own parallel investigation of Wells Fargo’s lending practices in the Baltimore and Washington, D.C. metropolitan areas.
The OCC found that there was reason to believe that Wells Fargo engaged in a pattern or practice of discrimination in these metro areas on the basis of race or color, in violation of the FHA and ECOA.