Wells Fargo & Co., the country's No. 1 home mortgage lender, is paying at least $175 million to settle federal allegations that it systematically discriminated against African-American and Hispanic borrowers during the housing boom and afterward.
The settlement, subject to court approval, is the second-largest fair lending settlement in U.S. Justice Department history. It was made public Thursday as federal officials filed a complaint against Wells Fargo in U.S. District Court for the District of Columbia.
"An applicant's creditworthiness, and not the color of his or her skin, should determine what loans a borrower qualifies for," Deputy Attorney General James Cole said in a statement Thursday.
Consumer groups applauded the settlement, while the American Bankers Association said it fears the Justice Department's interpretation of fair lending could cause banks to yank back on making loans, with potentially harmful consequences to groups that officials are trying to help.
San Francisco-based Wells Fargo said in a news release that it denies the accusations and is settling only to avoid costly litigation. It said the Justice Department's charges focus on mortgages that were sold to consumers by independent mortgage brokers and not by Wells Fargo employees.
"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," the bank said.
The statement quotes Mike Heid, president of Wells Fargo Home Mortgage, based in Des Moines. A company spokesman said Heid was not available for an interview.
As part of the deal, Wells Fargo will pay $125 million to compensate wholesale borrowers who were steered into subprime mortgages or who paid higher fees and rates than did white borrowers, and pay $50 million in down-payment assistance to borrowers in areas nationwide that Justice Department officials identified as having concentrations of victims and which were hit hard by the housing crisis.
The Justice Department said there has been no determination of how much each victim will receive. However, it said the roughly 30,000 borrowers who were charged higher prices for loans will receive an average of $2,000 each. Approximately 4,000 borrowers who were steered into subprime loans when they could have qualified for prime mortgages will receive an average of $15,000.
The eight metro areas targeted by the Justice Department are Baltimore, Washington, Chicago, Philadelphia, San Francisco, New York, Cleveland and Riverside-San Bernardino, Calif.. The Justice Department will identify individuals for compensation within 45 days, and the bank will contact those people within six months.
The Twin Cities area is not on the list, although Wells Fargo is Minnesota's largest bank by deposits and employs 20,000 people in the state. Plus, federal data show that generally speaking, the Twin Cities has the highest level of disparity between black and white borrowers in terms of approval rates for prime mortgages, according to Myron Orfield, head of the Institute on Race & Poverty at the University of Minnesota Law School. Orfield said he didn't have data on Wells Fargo's loans.
Orfield said he thinks the Twin Cities region wasn't included because no major organization brought a complaint against the bank over the issue.
A Wells Fargo spokesman said he didn't know why the Twin Cities area wasn't included. "We know that the primary selection criteria was having to do with the need for these communities to get help recovering from the housing crisis," Wells Fargo spokesman Oscar Suris said in an interview.
A Justice Department spokeswoman said the cities targeted were ones where Wells Fargo is not already operating a Neighborhood LIFT program offering down-payment assistance.
Wells Fargo also agreed to do an internal lending compliance review of subprime mortgages made through its retail channel from 2004 to 2008, and to rebate African-American and Hispanic retail borrowers who were sold subprime loans when similarly qualified white borrowers received prime loans. Those payments are on top of the $125 million for affected wholesale borrowers.
Orfield, at the Institute on Race & Poverty, said he thought the Justice Department settlement would be bigger because the evidence against Wells Fargo was strong. For instance, employees in at least one place allegedly called people in minority communities "mud people" and subprime loans were called "ghetto loans."
Orfield said he thinks banks are eager to settle with the Justice Department ahead of new rules confirming the concept of "disparate impact," which are expected shortly. Under disparate impact, showing a pattern of discrimination in lending is enough to create an intention of discrimination.
Wells Fargo also said on Thursday that it made its own decision to shut down its entire wholesale mortgage operation -- the Wells Fargo Home Mortgage arm that provides independent mortgage brokers with the financing for originating home loans. Wholesale mortgages represented about 5 percent of Wells Fargo's funded mortgage volume of $130.4 billion in the first quarter.
The closing affects about 1,000 employees around the country. Suris said he expects most will find other jobs within Wells Fargo.
"We want to have total control over how fair, responsible lending is conducted on every loan that we write," Suris said in an interview. "We believe it is the right decision to make in light of this settlement."
The closing doesn't affect the bank's correspondent mortgage business, in which it buys mortgages from brokers who have already closed loans, Suris said.
Jennifer Bjorhus • 612-673-4683