The country's largest mortgage lender is under fire (again) after the Pa. Human Rights Commission accuses it of doing some shady things.
The country’s largest mortgage lender faces accusations of predatory lending. Again.
Last week, the Pennsylvania Human Relations Commission, the state agency charged with enforcing civil-rights laws, accused Wells Fargo of targeting Philadelphia African-Americans for high-cost loans. The Commission alleges that from 2004 through 2008, Wells Fargo targeted African-Americans and African-American neighborhoods for predatory and unfair lending practices, triggering a higher rate of foreclosures.
The firestorm engulfing the country’s real-estate market burned hottest throughout black America. During the four-year period, 51.5 percent of loans to blacks in this city were high-cost, while only 18.5 percent of those to white borrowers were. It holds true any way you look at it: The blacker the neighborhood, the higher the cost of the average loan, and the larger the rate spread—the amount of money the bank makes off a loan due to interest rates.
Dana Porter, 45, bought her house in 2002 through Wells Fargo. At the time, Porter was an IRS tax examiner, so she did her homework before looking for financing and insisted on a fixed-rate mortgage. But Porter says what she received instead was an adjustable-rate mortgage, or ARM, which can skyrocket after an initial fixed-rate “teaser” period.
“I put extra money down so that my mortgage payments would be $550 a month for at least five years. After two years, it went up $100. Every year after … it went up.”
During the height of the housing bubble, ARMs were particularly widespread in black neighborhoods. Some, like Porter, allege they were misled into the loans. In other cases, according to the complaint, Wells Fargo failed to properly underwrite the loans, only ensuring the borrowers’ ability to pay the initial low rate.
For Porter, trouble at work pushed her finances to the brink.
“I ended up losing my job, and I wasn’t able to pay my mortgage,” she says. “At one point in time, it [the house] was going up for sheriff’s sale once every three months.”
Porter says she applied for and was accepted to the federal Home Affordable Modification Program. But things didn’t get easier.
“Every month I was sending them my financial information, and they kept saying they didn’t get it,” says Porter. “I was then denied the modification, and the payment was higher than it was supposed to be.”
Porter says she received a letter in June laying out a payment plan for March, April and May. “The letter was dated December 2009,” she says.
Wells Fargo refused to respond to PW ’s questions about the complaint, but released the following statement.
“We do not tolerate discrimination against, or unfair treatment of, any consumer. We practice responsible lending with the overarching principle of only approving mortgage loan applications where we believe the borrower has the ability to repay the loan, and our loan decisions are based on credit and transaction risk. We are committed to serving all customers responsibly and fairly, and we will vigorously defend the Commission’s unfounded claims.”
Wells Fargo is also defending itself against Baltimore, Memphis, Tenn., and the state of Illinois, all of which have filed similar suits against the San Francisco-based bank. In January, a federal judge threw out Baltimore’s complaint for being overly broad, and the two cities have now filed amended lawsuits.
Some of Wells Fargo’s problems were baked into the very architecture of its loan system. The bank charged higher interest rates on smaller loans, regardless of the homeowners’ credit worthiness. This had a disproportionate impact on black Philadelphians since they are more likely to own a home worth less than $75,000 than are white homeowners. But the predation was also far more explicit. The complaint highlights several strategies Wells Fargo allegedly used to mislead even financially savvy borrowers like Porter:
“Respondents’ predatory practices identified in the report include charging excessive fees; charging excessively high interest rates that are not justified by borrowers’ creditworthiness; requiring large prepayment penalties while deliberately misleading borrowers about the penalties; using deceptive sales practices to wrap insurance products into mortgages; convincing borrowers to refinance mortgages into new loans that only benefit Respondents; deceiving borrowers into believing that they are getting fixed rate loans when they are really getting adjustable rate loans, and more.”
This is no accident of the market—banks have software that help predict a borrower’s ability to pay. According to the complaint, Wells Fargo eagerly courted African-Americans. At the height of the housing boom in 2005, the bank held a series of “wealth building” seminars targeted at African-Americans, headlined by (now repentant) black media personality Tavis Smiley. After getting interested parties in the door, loan officers allegedly mislead borrowers, steering them away from lower-cost loans for which they were qualified.
Indeed, the Commission claims that Wells Fargo was so dedicated to tailoring a special approach that their computer program actually had a pull-down “language” menu that included “African-American” as an option.
Foreclosures devastate not only individuals who lose their homes, but entire neighborhoods and cities. A 2004 study found that every home within 150 feet of an abandoned home in Philadelphia lost an average of $7,627 in value, continuing to take thousands of dollars out of homes up to 449 feet away. Vacant properties also foreclose on tax revenue and cause increased crime, burdens that cities like Philadelphia can ill afford.
The Pennsylvania Human Relations Commission filed a complaint against Wells Fargo Bank early this month, claiming that the bank used reverse redlining in Philadelphia neighborhoods. In other words, Wells Fargo is accused of exploiting poor, African-American residents by allowing an abundant of sub-prime loans in densely black-populated neighborhoods that ultimately caused thousands of vacant properties. Among [...]