Baltimore's effort to recover millions of dollars in lost revenue stemming from the wave of home foreclosures that followed the collapse of the housing market in 2007 was vindicated Thursday when Wells Fargo Bank, the nation's largest mortgage lender, agreed to pay at least $175 million to settle claims that it discriminated against African-American and Hispanic borrowers by steering them into high-cost, subprime mortgage loans. Baltimore will receive $7.5 million, and seven other communities — Chicago, Cleveland, Los Angeles, New York, Philadelphia, the San Francisco Bay Area and Washington — will benefit as well
The Justice Department, which announced the agreement, said it is the second largest fair-lending settlement in its history. Its investigators found a pervasive pattern of predatory lending in which outside mortgage brokers originating Wells Fargo loans consistently charged black borrowers higher fees and interest rates than whites and targeted minorities with more expensive subprime mortgages even when they qualified for regular loans.
Depositions taken by attorneys for Baltimore City included statements by former Wells Fargo employees that described a company culture which encouraged brokers to offer minority borrowers loans at rates they knew they couldn't afford, leading to widespread defaults. Thomas Perez, who heads the Justice Department's Civil Rights Division, said an African-American seeking a $300,000 loan paid an average of nearly $3,000 more in fees than a similarly qualified white applicant, which he described as amounting to a "racial surtax."
The outcome of the case, which the city initially filed in 2008, was long in doubt. The city argued that when Wells Fargo foreclosed on more than 400 subprime mortgages that were, in effect, designed from the start to fail, the impact on already struggling neighborhoods was devastating. When families were pushed out of their homes because they could no longer afford the payments, they left behind vacant properties all over the city that drove down the value of surrounding homes and caused a spike in costs for police and fire protection. The double-whammy of lower property tax revenues and higher service costs strained the city budget and forced the closure of neighborhood fire stations and rec centers, the city claimed.
But the company countered that only about half the foreclosed homes purchased through its subprime mortgages were ever vacant, and that in any case the city already had more than 30,000 vacant properties before the housing bubble burst. That inventory was far more destabilizing to neighborhoods than the relatively small number of vacancies that came about as a result of foreclosed Wells Fargo mortgages, it said, and therefore it was impossible to attribute the city's budget problems to them. Moreover, the company denied ever discriminating against minority borrowers.
In agreeing to settle with the Department of Justice, the company stuck to that position, saying it was doing so only to avoid further litigation. It follows other recent cases in which large lenders have settled similar lawsuits without admitting guilt. In December, Bank of America agreed to pay $335 million to settle charges of discrimination by its Countrywide Financial unit, and it May SunTrust Mortgage paid out $21 million to settle a similar case.
In its agreement with Baltimore, Wells Fargo will pay $4.5 million for community improvement programs in the city and an additional $3 million for local housing and foreclosure-related programs. It also set a five-year lending goal for home mortgages in the city.
This is not an ideal resolution to this case. About 1,000 city residents will receive some cash compensation for having been pushed into subprime mortgages or charged higher rates and fees because of their race. But it won't help their neighbors whose properties are now worth less than they owe on them, and it will be small comfort indeed for those who lost their homes to foreclosure and are now struggling to recover from the impact on their personal finances. Moreover, the $7.5 million plus commitments for additional lending in Baltimore won't begin to undo the damage of the subprime mortgage crisis here. But at least the city will get back some of the money it lost because of Wells Fargo's unethical business practices, and if the best thing that comes out of this case is that the company lives up to its promise not to discriminate in future against people because of their race or ethnicity it will have been well worth it.