Over 3,900 minority borrowers of
Wells Fargo & Co.
) will receive nearly $60 million in cash rebates from the
company, according to a Bloomberg report. These borrowers were
unjustly placed into the non prime loans category despite being
eligible for the prime one.
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This $60 million payment from Wells Fargo is part of a settlement
with the U.S. and is over and above the $125 million payment and
$50 million assistance fund that Wells Fargo conceded to pay as
part of a settlement that received the federal judge's nod in
Deposited into an escrow account last week, this fund size was
calculated following an internal review of loans offered to
minority borrowers. On an average, Wells Fargo will provide
$14,850 per borrower.
Wells Fargo, however, did not concede to the charges brought
forward by the government. The lender was accused of
discriminating among its borrowers and compelling minority
borrowers to shell out higher fees and interests compared to the
white borrowers. However, Wells Fargo agreed to the settlement
just to steer clear of the litigation.
Further, under the settlement, Wells Fargo will perform a
statistical analysis of subprime mortgages that originated during
2004-2008, via its retail channel, to black and Hispanic
borrowers who might have been eligible for the prime loan
The Back Story
As a matter of fact, after reviewing loans, including loan terms
and creditworthiness of the borrowers, earlier in the year, the
Department of Justice revealed that Wells Fargo overcharged
(higher fees and interest rates) about 34,000 minority borrowers
in 36 states and the District of Columbia compared with white
borrowers who had similar credit profiles. Further, among these,
4,000 borrowers were duped with subprime mortgages. Majority of
these victims remained unaware of this bias.
Wells Fargo is not the only bank entrapped in such issues.
Bank of America Corporation
) settled similar civil charges amounting to $335 million against
its Countrywide Financial unit in December 2011. Likewise, the
mortgage-lending unit of
SunTrust Banks Inc.
) agreed to pay nearly $21 million to settle such charges earlier
We believe this move would put the mortgage borrowers at ease to
some extent. Further, it would offer some relief to Wells Fargo
and its shareholders as the litigation overhang would be
lessened. However, the adverse impact on the company's financials
and its goodwill cannot be avoided. Yet, such measures will aid
the housing market to recover going forward and considerably
lessen fraudulent practices in the industry.
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.