On Thursday, the Department of Justice (DoJ) announced that
Wells Fargo & Company
) has agreed to pay nearly $175 million to settle civil charges
against it. The settlement agreement was filed with the U.S.
District Court in Washington, D.C. and awaits approval.
The lawsuit alleged Wells Fargo of discriminatory lending practices
against qualified African-American and Hispanic borrowers on home
loans. Moreover, some of these borrowers were dragged into subprime
Reasons Behind the Claims
After reviewing loans, including loan terms and creditworthiness of
the borrowers, the DoJ revealed that Wells Fargo overcharged
(higher fees and interest rates) about 34,000 minority borrowers in
36 states and District of Columbia compared with white borrowers
who had similar credit profiles. Moreover, among these, 4,000
borrowers were duped with subprime mortgages. Majority of these
victims were not even aware of this bias and the trap they were
The DoJ reviewed loans between the period from 2004 to 2009 and
revealed that the anti-discrimination laws were indeed violated by
the company. The settlement amount paid by Wells Fargo would be
distributed amongst the aggrieved borrowers. Moreover, Deputy
Attorney General James Cole commented that with the settlement, the
government will also certainly help the borrowers, affected by the
housing crisis, to have a chance to access homeownership.
The DoJ's civil rights division, created in 2010, mainly focuses on
banks and financial institutions that are suspected of
discriminating against minority borrowers. At present, the
department is pursuing nearly 20 lawsuits with charges related to
biased practices against minorities who are buying homes.
The investigation of Wells Fargo's lending practices was initiated
in 2009 by the DoJ. Moreover, in 2010, the department received a
referral from the Office of the Comptroller of the Currency (OCC),
confirming the involment of Wells Fargo in discriminatory lending
Such measures will aid the housing market to recover going forward
and stop fraudulent practices in the industry to some extent.
The settlement also resolute the pending litigation filed by the
state of Illinois in 2009 in support of the borrowers belonging to
this region. It also settled the complaint filed by the
Pennsylvania Human Relations Commission in 2010.
Price to be Paid
Precisely, Wells Fargo will have to pay $125 million to wholesale
borrowers who were trapped in subprime mortgages or discriminating
lending rates. Further, additional $50 million will be paid as
direct down payment aid to the borrowers in seven metro areas in
the country, where huge number of victims of racism, who are
affected by housing crisis, were recognized by the DoJ.
Additionally, Wells Fargo will internally assess the working
procedures of its retail lending division in providing subprime
loans to Hispanic and African-American borrowers between 2004 and
2008. If any compensation arises, after the review process, to be
paid to sufferers of discrimination, it will be in addition to $125
million reserve for wholesale borrowers.
Steps Taken by the Company
While going through the details of its mortgage lending procedures,
Wells Fargo illustrated that most of the claims under this
settlement are related to its wholesale mortgage program. These
mortgages were priced and sold to customers by sovereign mortgage
brokers. Therefore, with no control over such issues, Wells Fargo
voluntarily discontinued its mortgage wholesale program.
After July 13, no new applications for loans, provided by
independent mortgage brokers through Wells Fargo's wholesale
program, will be accepted. Moreover, existing applications
will be processed and bunged. At current level, mortgages sold by
independent brokers through mortgage wholesale program stands at 5%
of the company's mortgage loan volume.
Wells Fargo has, however, denied such charges but agreed to the
settlement to put an end to the legal battle. In May 2012, Wells
Fargo had agreed to settle a similar lawsuit by assuring over $432
million in lending as well as other investments in Memphis,
Tennessee. The lawsuit accused the company of racially
discriminatory practices in lending.
The lawsuit filed by Memphis and Shelby County in 2010 accused
Wells Fargo of victimizing African-American neighborhoods over
rapacious loans. This conduct of Wells Fargo since 2000 has led to
a huge number of foreclosures in these neighborhoods. Notably, the
company is battling charges from the DoJ under laws, which forbid
bias against minority homebuyers.
Similar Practices by Peers
Wells Fargo is not the only bank entrapped in such lawsuits.
Bank of America Corporation
) settled similar civil charges amounting $335 million against its
Countrywide Financial unit in December 2011. Likewise, the
mortgage-lending unit of
SunTrust Banks Inc.
) has agreed to pay nearly $21 million to settle such charges in
We believe that this step would put the mortgage borrowers at ease
to some extent. Such settlements also provide some relief to the
companies and their shareholders as these reduces the litigation
overhang. However, the company's dented financials and goodwill due
to such lawsuits cannot be ignored.
Shares of Wells Fargo currently retain a Zacks #3 Rank, which
translates into a short-term Hold rating. Considering the
fundamentals, we also maintain a long-term 'Neutral' recommendation
on the stock.
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