Bank Payback

Under a consent agreement with the U.S. Department of Justice, Wells Fargo agreed to pay $175 million to settle complaints that the bank’s wholesale mortgage operation discriminated against Hispanic and African-American borrowers.

The bank also settled several related suits filed by states and cities, including Baltimore, which, in 2008, accused the bank of “reverse redlining” and claimed Wells Fargo’s actions caused excessive foreclosures in the city, costing taxpayers “tens of millions” of dollars.

Under the settlement, the bank will pay the city $3 million for “local priority housing and foreclosure-related initiatives,” plus an additional $4.5 million as part of a “lending assistance program” for new homebuyers in the city, according to the Baltimore mayor’s office.

The bank neither admitted guilt nor punished any executives responsible for the alleged fraud.

“Today is not about the past,” Baltimore Mayor Stephanie Rawlings-Blake told reporters at a City Hall press conference announcing the settlement. “This agreement allows us to move forward collaboratively.”

Thomas Perez, assistant attorney general for the U.S. Department of Justice, called the agreement “the second largest fair lending settlement” in his office’s history. (In December, the department extracted a $335 million settlement from Countrywide Financial for similar alleged transgressions.) He credited the city’s leadership for bringing the bank’s bad practices to the federal government’s attention.

“This is a case about real people, African-American and Latino, who suffered real harm,” Perez said. He cited the case of an unnamed 80-year-old African-American woman with a credit score of 714—a high credit score—who he said received a high-interest adjustable-rate loan instead of the low fixed-rate loan she qualified for.

“They should be judged by the content of their creditworthiness and not the color of their skin,” Perez said of these absent victims.

Under the settlement, some 34,000 victims of the practices are supposed to receive cash compensation totaling at least $125 million. That works out to $3,676 each.

“Wells Fargo will contact borrowers directly at last known address,” according to a referral sheet handed out by the Baltimore City Law Department, which said that individual compensation “is expected to be approximately $15,000 per household.” The referral sheet says compensation for “retail borrowers who were steered to subprime” will come from “additional funds beyond the $125 million.”

In addition, the bank has committed to lending $425 million to borrowers in Baltimore City during the next five years, $125 million of which will be loans to “low- and moderate-income borrowers,” according to the press release.

City Solicitor George Nilson said he did not know how those figures compare to the bank’s historical lending in the city, but said that the loan terms should be much better than they were in the mid-2000s because the bank will “be watched with a microscope, which was apparently not what happened in the past.”

A national expert in bank fraud was skeptical of the settlement. William K. Black, an associate professor of economics and law at the University of Missouri-Kansas City and author of the book The Best Way to Rob a Bank is to Own One, says settlements like this are part of a 20-year pattern of ineffectual regulation and enforcement.

“The PR game is always the same,” he says in an email response to City Paper’s questions about the settlement. “Once they settle, the interests of Wells and DOJ favor emphasizing what a large dollar amount is involved—so they create numbers that are as large as possible. The classic means of inflating the number is what you identify: over the next X years, we will make $Y in loans to Z (where ‘Z’ is left very vague). Because Wells is massive, they can typically produce $Y in loans through business-as-usual. As long as ‘Z’ is left vague, no change in lending is required.”

Black continues, “His microscope metaphor is (unintentionally) revealing. Can you use a microscope to regulate a massive bank? Of course not. Yes, the DOJ can look intensely at a particular loan in its microscope—but that is useless when trying to understand a trillion-dollar bank.”

Between 2004 and 2009, Wells Fargo reported profits totaling $51.7 billion. The cost of this settlement, then, represents .3 percent of the profits the bank earned while the alleged discriminatory practices were taking place.

The company released a statement on July 12 announcing the settlement: “Wells Fargo is settling this matter solely for the purpose of avoiding contested litigation with the DOJ, and to instead devote its resources to continuing to provide fair credit services and choices to eligible consumers, and important and meaningful assistance to borrowers in distressed U.S. real estate markets.”

> Email Edward Ericson Jr.