Just a year ago, the theory that poor and minority borrowers were to blame for the housing crisis took hold with a vengeance, and so did the belief that the government forced lenders to make subprime mortgages to meet affordable housing goals. The view took on greater prominence in the heat of a presidential campaign, and an obscure anti-redlining law known as the Community Reinvestment Act became a scapegoat for subprime lending and the collapse of the mortgage market.
Things have changed quite a bit since then, as the spotlight has shifted to lenders and their behavior during the boom. States and cities continue to aggressively pursue subprime lending discrimination suits, and judges across the country are signaling a willingness to move forward with some cases. As the lawsuits wind their way through the court system, more details and allegations about the inner workings of the subprime world are emerging. And as startling as some of the charges already have been — a former loan officer for Wells Fargo testified in one affidavit that employees regularly referred to minority borrowers as “mud people” and called subprime mortgages “ghetto loans,” — there’s even more ahead, said David Berenbaum, executive vice president of the National Community Reinvestment Coalition.
“The ‘smoking guns’ are coming out,” Berenbaum said, referring to possible evidence that lenders targeted minority communities and borrowers for higher priced loans. “And I expect more and more of these smoking guns to become apparent.”
In the latest development, a Superior Court Judge in Los Angeles recently certified a 2005 lending discrimination lawsuit against Wells Fargo as a class action case. The suit contends that area managers at the bank refused access in some minority neighborhoods to a software program that allowed for discounted prices on mortgage loans. Barry Cappello, a partner with Cappello & Noel in Santa Barbara, which represents some 10,000 to 20,000 borrowers in the suit, said he believes it is the first subprime lending discrimination suit in California to be classified as a class action.
According to Cappello, Wells Fargo introduced a program in 2002 called “Loan Economics,” which gave loan officers the authority to offer discounts to loan applicants. The savings on lower fees and interest rates could be significant, ranging from $500 to as much as $10,000 per loan. The suit claims that the Los Angeles area Wells Fargo manager refused to allow loan officers operating in certain minority neighborhoods to offer the program. Borrowers in predominantly white neighborhoods were given access to the software.
Cappello said the suit stemmed from complaints by black and Hispanic loan officers for Wells Fargo, who said they asked to use the software in their branches but upper management refused.
Wells Fargo is fighting the suit and has denied all the charges. In a statement, the bank said, “We are disappointed in this ruling and intend to vigorously defend this matter as the case proceeds. The decision does not indicate the court believes the underlying allegations have any merit. We feel the allegations represent a complete mischaracterization of our long-standing commitment to responsible lending and the pricing practices and tools we use. The policies, systems and controls we have in place ensure race is *not *a factor in the pricing or products we offer.”
The case could go to trial in about a year, Cappello said.
More lawsuits are expected in the near future over the treatment of Hispanic borrowers in Arizona and Texas, who were offered high-cost loans they didn’t understand at misleadingly low teaser rates, then refinanced into even more expensive loans than their initial mortgages, Cappello said.
Wells Fargo, the nation’s largest home lender, also has been a target of lawsuits elsewhere. Last month, Illinois Attorney General Lisa Madigan sued the lender, alleging that blacks and Hispanics were sold high-cost subprime loans more frequently than white borrowers with similar incomes. The suit contended loan officers were offered incentives by the bank to steer borrowers into the more expensive loans, and that white borrowers generally received the lower-cost prime mortgages.
Some borrowers thought they were getting prime loans from Wells Fargo Home Mortgage, the suit also charged. But their loans actually came from Wells Fargo Financial, the bank’s subprime unit.
In Iowa, two watchdog groups charged this week that minority homeowners in Des Moines were three times more likely to receive high cost subprime loans from Wells Fargo than white homeowners.
In June, the New York Times reported on affidavits from a 2008 lawsuit by the city of Baltimore against Wells Fargo over subprime lending, which charged that the bank targeted blacks in Baltimore and suburban Maryland for high-interest subprime loans. Former loan officers testified in affidavits about using terms like “mud people” and “ghetto loans.” The bank also had an emerging markets unit that pinpointed black churches as fertile ground for selling subprime loans, according to the former officers. And in March, the NAACP filed suits in federal court in California against Wells Fargo and HSBC, alleging minority borrowers were more likely to be issued higher rate subprime loans than white borrowers with similar credit scores and qualifications. Both banks have strongly denied the charges. The NAACP also has pending litigation against nearly a dozen other banks and lenders over subprime lending discrimination.
Should the charges in the lawsuits be proven, it would amount to massive violations of the Fair Housing Act, the Equal Credit Opportunity Act, and other fair housing and lending laws, Berenbaum noted. Enforcing fair lending laws has been “an issue the government has failed to address over the past decade,” he said. Lenders could face criminal penalties from the government for violating fair housing laws, and they could be subject to punitive damages and fines from government lawsuits.
Big lenders like Wells Fargo and HSBC are obvious targets for suits because of their size and the amount of lending they did. In addition, many other lenders and originators of subprime loans have gone out of business, complicating efforts to address allegations of lending discrimination through lawsuits.
That leaves a major question regarding all the lending still unanswered, Berenbaum said: Where has the U.S. government been? The Federal Reserve reported in 2005 that an analysis of federal mortgage data found that blacks and Hispanics were more likely to receive higher interest rates on mortgage loans – and that it intended to examine the practices of 200 lenders as a result.
But nothing’s happened since that announcement, Berenbaum noted. Instead, as the years go on, and the government takes no action, allegations about price differences in mortgage loans based on the race of borrowers and their neighborhoods continue to grow.
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