Wells Fargo & Co. faces a decision as soon as this month on whether a lawsuit over its pandemic-era mortgage denials to non-white applicants gets class-action status, a key turning point in a high-profile and potentially costly case.
The bank, which was long the biggest U.S. mortgage lender until a recent pullback under Chief Executive Officer Charlie Scharf, has asked a federal judge in California to deny the motion the plaintiffs filed earlier this year. The case consolidates a number of lawsuits brought before and after Bloomberg News reported in 2022 that Wells Fargo rejected a majority of Black homeowners who applied to refinance mortgages in 2020, the only big bank to deny more Black applicants than it accepted.
At the heart of the case is a dispute over a credit-scoring algorithm that plaintiffs say disparately impacted minority applicants, creating a potential class of at least 119,100 people. All non-white applicants who applied for a refinance, home purchase or home equity line of credit and were initially “approved” by Fannie Mae’s, Freddie Mac’s or Wells Fargo’s own internal underwriting system but ultimately denied from 2018 through 2022, the plaintiffs argue, are entitled to damages.
The plaintiffs say that a proprietary model Wells Fargo uses to assign prospective borrowers to one of four risk groups disproportionately sent Black and Latino applicants to higher-risk classes, subjecting them to more scrutiny from underwriters than applicants in other classes. The model, called Enhanced Credit Score, generates a score measuring each applicant’s likelihood of default, resulting in higher denial rates, they say.
“Wells Fargo discriminated against the minority applicants by subjecting them to its discriminatory loan policies,” Dennis Ellis, the lead class counsel, wrote in an April motion. “The lost opportunities of potential wealth building derived from homeownership and access to favorable financing will, unfortunately, have generational consequences for these families.” He said in an interview that the credit ratings “were treated like a gold star or a scarlet letter.”
Wells Fargo, in a response last month, called the conflation of the firm’s front-end loan platform, internal and external underwriting systems and thousands of additional rules and policies “counterfactual and logically incoherent,” and it said the proposed class was “overbroad and ill-defined.”
In the bank’s telling, the scoring model is a workflow tool and there is no such thing as approval through the Fannie and Freddie underwriting systems or its own — the systems merely indicate whether an applicant’s mortgage would be eligible for purchase by Fannie or Freddie. If so, the application moves on to the underwriting phase, in which Wells Fargo underwriters verify documentation such as an applicant’s income, employment and credit history. The internal model just sorts applicants by the strength of their credit profile, with higher-risk applicants assigned to “more skilled” underwriters.
“This case has no merit, and we will continue to vigorously defend ourselves,” Wells Fargo said in a statement. “Our underwriting practices are consistently applied regardless of race or ethnicity of the applicant. Any suggestions otherwise are simply inaccurate.”