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Wells Settles Discrimination Claims; Closes Wholesale Channel

$175 million settlement with Justice Department

July 12, 2012

By staff

Wells Fargo & Co. has agreed to fork over more than $175 million to settle claims of lending discrimination. In conjunction with the settlement, the company will no longer accept mortgage broker business through its wholesale lending division.

A settlement has been reached between Wells Fargo Bank, N.A., and the Department of Justice. Approval is still required from U.S. District Court for the District of Columbia.

Wells first disclosed a Justice Department fair lending investigation in May.

The agreement resolves alleged disparate impact on mortgages to black and Hispanic borrowers -- who will receive the settlement funds. It also resolves a 2009 discrimination lawsuit filed by Illinois Attorney General Lisa Madigan and a 2010 lawsuit filed by the Pennsylvania Human Relations Commission.

"The DOJ claims are based on a statistical survey of Wells Fargo Home Mortgage loans between 2004 and 2009, and the claims primarily relate to mortgages priced and sold to consumers by independent mortgage brokers," a statement from the San Francisco-based company said.

The Justice Department claims that 4,000 prime-quality loans originated between 2004 and 2008 by mortgage brokers for black and Hispanic borrowers, as well as additional retail loans, were closed on subprime programs while loans to similarly situated white borrowers were closed on prime programs.

In addition, around 30,000 black and Hispanic borrowers were allegedly charged higher fees and rates by mortgage brokers than non-Hispanic white borrowers with similar credit qualifications between 2004 and 2009.

"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 ... 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," the government alleges.

The Justice Department, which noted that the settlement is the second-largest fair lending settlement in its history, said that it began its investigation into Wells' lending discrimination in 2009 and received a referral from the Office of the Comptroller of the Currency in 2010 as a result of a parallel investigation in the Baltimore and Washington, D.C. metropolitan areas.

Wells, which is denying the Justice Department's claims, said that it agreed to the settlement solely to avoid contested litigation with the government.

"The settlement provides $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," the Justice Department announcement said. "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."

The $50 million for community improvement programs includes $4.5 million to the City of Baltimore plus $3 million for Baltimore priority housing and foreclosure-related initiatives in exchange for a dismissal of a discrimination lawsuit filed in 2008. Seven other metropolitan statistical areas identified by the Justice Department as being most in need of support to recover from the housing crisis will also benefit from the payout.

As part of the deal, Wells will conduct a compliance review of a small sample of retail subprime mortgages originated between 2004 and 2008 and "rebate as appropriate." Any amounts rebated are in addition to the $175 million settlement.

Even more significant is a decision by Wells Fargo to stop funding mortgages that are originated, priced and sold by independent mortgage brokers through its wholesale channel. Broker business accounts for around 5 percent of the company's total production, which amounted to $357 billion during 2011 -- more than any other U.S. lender.

"Wells Fargo cannot set loan prices for independent mortgage brokers nor control the combined effect of the negotiations that thousands of these independent mortgage brokers conduct with their customers," the company said.

However, the carefully worded statement seems to leave the door open for broker originations through its correspondent lending channel.

The lender will stop taking new broker-originated applications through its wholesale division after July 13, though it will "work to ensure existing applications are processed and closed."

Association of Mortgage Professionals President Donald J. Frommeyer sees the move as a "big blow" to mortgage brokers and consumers. He suspects that Wells Fargo is unfairly blaming brokers.

"The average mortgage broker is ... not guilty of what they're saying," Frommeyer, who is a senior vice president at Carmel, Ind.-based Amtrust Mortgage Funding Inc., said in a telephone interview. "I think we're being used a scapegoat, per se."

He highlighted new requirements for brokers -- including registration, licensing and education -- that aren't as extensive for bank originators. He noted that at his own company, all broker fees are lender-paid and don't vary between customers.

But the NAMB chief sees opportunity in Wells' exit for regional lenders like Fifth Third Bank.

Frommeyer acknowledged, however, that it continues to be more difficult to operate as a mortgage broker. In addition, it's more difficult to recruit new people into the business due to the licensing, education and background check requirements that delay entry.

Even one correspondent originator sees harm in Wells' move.

"This news comes at a time when the biggest banks, such as Wells Fargo, are backed up and cannot themselves keep up with the volume of loans requested by consumers," according to Pacific Residential Mortgage LLC Chief Operating Officer Eric Wiley. "The wholesale channel has allowed brokers to help keep prices competitive in smaller markets that may only have a handful of local depositories to serve the communities."

While Wiley's Lake Oswego, Ore.-based firm primarily operates as a mortgage banker, he sees mortgage brokers as a relevant business channel.

Wells stopped making subprime loans through independent mortgage brokers in 2007 and ended subprime lending altogether in 2008. Its subprime lending unit, Wells Fargo Financial Inc., was closed down in 2010.

Wells Fargo & Co. disclosed in May a $7.5 million settlement with the city of Memphis, Tenn., and Shelby County, Tenn., over a 2010 lawsuit that also alleged violations of the Fair Housing Act with "unlawful, irresponsible, unfair, deceptive and discriminatory" lending practices in mostly black neighborhoods.

The Justice Department says that its Fair Lending Unit has either filed a complaint in, or resolved, 19 matters since being established in 2010.

More than two dozen discrimination lawsuits were tracked by Mortgage Daily in 2011, and more are on the way, according to Ballard Spahr Partner Christopher J. Willis -- who forecasts an increase in government-filed fair lending cases during the upcoming year.

"I think we're only going to see an increase in the number and severity of fair lending cases that are brought," Willis predicted in a recent webinar. "Again, you have all of these regulators who have made it a huge focus area, and there's no reason to believe that they're going to let off or reduce their activity in this area.

"In fact all signs point to the fact that more cases are coming."

United States of America, Plaintiff, v. Wells Fargo Bank, N.A., Defendant.
Case No. 1:12-cv-01150, July 12, 2012 (U.S. District Court for the District of Columbia).

Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A.
Case No. 08-00062-BEL (U.S. District Court for the District of Maryland).

City of Memphis v. Wells Fargo Bank N.A.
Case No. 2:09-cv-02857-dkv (U.S. District Court for the Western District of Tennessee).

Illinois v. Wells Fargo & Co. et al.
Case No. 09CH26434, July 31, 2009 (In the Circuit Court of Cook County, Illinois, County Department, Chancery Division).

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