Actually, Wells Fargo has been getting sued quite a lot. First the NAACP, then Baltimore, and now Illinois.
The New York Times has some statements from former Wells Fargo employees, describing how the system works. Some of the details are jaw-dropping:
Wells Fargo, Ms. Jacobson said in an interview, saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages. Another loan officer stated in an affidavit filed last week that employees had referred to blacks as “mud people” and to subprime lending as “ghetto loans.”
“We just went right after them,” said Ms. Jacobson, who is white and said she was once the bank’s top-producing subprime loan officer nationally. “Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches, because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans.” […]
Mr. Paschal, who is black and worked as a loan officer in Wells Fargo’s office in Annandale, Va., from 1997 to 2007, offers a sort of primer on Wells Fargo’s subprime marketing strategy by race.
In 2001, he states in his affidavit, Wells Fargo created a unit in the mid-Atlantic region to push expensive refinancing loans on black customers, particularly those living in Baltimore, southeast Washington and Prince George’s County, Md. […]
“They referred to subprime loans made in minority communities as ghetto loans and minority customers as ‘those people have bad credit’, ‘those people don’t pay their bills’ and ‘mud people,’ ” Mr. Paschal said in his affidavit. […]
Both loan officers said the bank had given bonuses to loan officers who referred borrowers who should have qualified for a prime loan to the subprime division.
One example given: Loan officers would falsely claim that Black borrowers had declined to provide documentation of their income, which “flipped” the loan from prime to subprime.
As The Chicago Reporter Blog points out, Wells Fargo isn’t alone. Throughout the industry, Blacks get loans on worse terms than whites with lower earnings.
Wells Fargo is not the only lender giving high-cost loans more often to its highest-earning black customers. Nationwide, African Americans earning more than $300,000 were more likely to get high-cost loans than Asian, Latino and white borrowers earning less than $40,000, according to a Reporter analysis last November.
While income may not accurately reflect credit worthiness, fair lending advocates often point to the racial disparities between wealthy blacks and lower-income individuals of other races and ethnicities as red flags.
I hope these suits encourage a lot of other attorney generals to go rooting through records for evidence of lending racism.
* * *
One thing to keep in mind: It’s not like the lending market just suddenly turned racist now. It’s been like this all along; it’s just that sub-prime lending has made it especially evident.
(Thanks to Brian for reminding me of this story.)
Every time I hear about this (it’s been about the news a few times to my recollection) I get so mad I could spit tacks. I am not that surprised, honestly, but that doesn’t make me less mad. I guess I’m glad that they’re getting sued over it and I certainly hope the outcome is to directly help the people that they screwed over in the first place.
That is f*cked up. It’s truly disgusting that kind of thing is still going on (and ever did).
Why weren’t there lawsuits before the mortgage crisis? Isn’t there any mechanism for oversight of mortgage loans in terms of neighborhood and race? I thought that was part of community reinvestment.
I’m very skeptical. I have no doubt sub-prime banks targeted low income neighborhoods and by extension minority prospects but there’s nothing wrong with that. Sub prime was designed for people who have a hard time qualifying for traditional loans. But:
1. Buying a house is for most people the most expensive purchase they make. people shop around. I have a hard time believing a significant % of minority purchasers didn’t do that. its very hard to pass on a higher rate to someone who qualifies for less. and we’re talking about refis here, so these people were experienced.
2. by quoting a high-rate or hidden fee the banker risks losing the customer to another bank. every loan is a big ticket items to the banker, worth thousands in commisions. why risk losing the whole loan just to make a few extra bucks?
3. there’s underwriting laws. you have to prove a benefit to borrower. you can’t just give someone a bad deal for no reason.
4. blacks getting higher-cost loans makes no sense. i understand the underwriting process these days are completely computerized, unlike the old days when bankers made subjective decisions. it probably came down to credit score determining the higher rate/fees.
5. plus we didn’t know then what we know now. a few years back if you believed housing prices were going to continue to go up, and most people did, a variable (high cost) rate mortgage probably looked like a good deal to both banker and customer, with only conservative people sticking with a traditional fixed rate products.
unlike the Internet scandals of the Clinton era, i think there was very little of this type of fraud in the sub prime bubble. after all, the banks got left holding the bag. ino oter words, the money flowed in the precise opposite direction.
Manju,
I don’t think you are fully informed on this subject.
1. These were not all refinancings. Many were the original mortgages, and these people were targeting buyers who were the first in their families to be homeowners. Moreover, many people who are buying a home get directed to a lender by their real estate broker and assume that their broker is someone experienced in the market who is looking out for their interests — unfortunately, the broker may be getting a kickback for every successful reference.
2. “by quoting a high-rate or hidden fee the banker risks losing the customer to another bank.”
Um, if it’s a “hidden fee,” by definition it wasn’t getting quoted. Hello, small print?
3. “there’s underwriting laws. you have to prove a benefit to borrower. you can’t just give someone a bad deal for no reason.”
I don’t even know what you’re talking about here. Please cite the laws you have in mind.
4. “i understand the underwriting process these days are completely computerized, unlike the old days when bankers made subjective decisions.”
Bankers still make subjective decisions. My husband and I had credit score X when we first checked with a certain regional bank on what their rates on a loan for us would be. We thought it was too high. Then my parents, who had an excellent relationship with the regional bank and who were buying an apartment, suggested that we talk to their loan officer. Suddenly we were getting a better rate despite having exactly the same credit score X — basically, the bank is counting on my inheriting money from my parents (no need to tell the bank that I have siblings and my parents have already marked their money for charity) and I’m now a more worthwhile customer to them.
5. “the banks got left holding the bag.”
Have you not heard of mortgage-backed securities? MBSes have only wrecked the financial markets (beginning with Bear Stearns, which was heavily invested in them) and helped to throw us into the worst recession of our lifetime. The precise reason the lenders could be careless about their loans is that they *weren’t* holding onto those loans. Instead, they repackaged mortgages into securities which were then sold into the secondary market (which in the last several years became increasingly dominated by Fannie and Freddie but was definitely not originated by them).
It was a great set-up for the lending companies: make as many loans as humanly possible, to whomever possible, with the highest up-front transaction fees possible, and then securitize the loan and resell it to some putz like Wachovia. All of which was made possible by the credit rating agencies, which labeled the securities backed by these cruddy loans as Triple-A (very low-risk). The putzes bought because they believed the credit rating agencies knew what they were doing and the flow of income from these subprime loans would be so sweet.
The CRAs either had no idea of the chicanery behind these loans, or had an idea and didn’t care because if Moody’s stopped its flow of high ratings, the securitizer would just get a rating and pay a fee to S&P or Fitch instead. Ah, the wonderful competition of a market in which the people paying for the rating of a difficult-to-assess product are the sellers, not the buyers.
the article states: “he states in his affidavit, Wells Fargo created a unit in the mid-Atlantic region to push expensive refinancing loans on black customers,”
plus my understanding is the bulk of non-cra sub primes were refis. these new mortgage banks were set up like wall st trading floors, cold callng prospects from an offie as opposed to a storefront bank and dong the loan without a face to face. so they really weren’t set up to do first purchases, since how do identify those prospects to cold call?
in contrast, all you need to do refis is a list of homeowners in a given (usually working class) neighborhood who you cold call, take their credit and give them an instant rate, usually a lower variable and some cash out, which the borrowers loved obviously.
But when you shop it around the competition will point it out so the original banker risk losing a big commission for pennies. i’m sure it happened but i doubt it was prevalent. more likely the customer liked the lower rate and monthly payment and there fore accepted the prepayment penalty (the most common cited “hidden” fee)
I don’t know how to cite a law, but these are state laws. underwriting guidelines. so when you do a refi you have to prove the new loan benefits the borrower. i believe all states have them but here could be exceptions. probably the loans made sense when they were made but when property prices plummeted the rates jumped and they became something different.
They can, but those are outliers. especially in sub prime where they never meet the customer. old fashioned leather chair, give me references banking is more subjective. relationship banking like high-net worth wealth management (merrill lynch, etc) will have more subjectivity.
True…but i didn’t bother with this nuance becuse my point still holds: unlike the Internet scams the individual investor didn’t get stuck with the bag, but rather the institutions did.
the borrower got money from the banks (like countrywide) who at that point had the bag (the bad loan). they sell the bag to the ibanks (goldman, merrill, etc) who then hold the bag and some got caught (lehman, bear) before they were able to pass the buck to the secondary market of sophisticated institutional players (pensions, hedge funds, etc).
in contrast, the Internet scam went in the other direction. hedge funds, VCs owned shares in a tech startup, the ibanks take them public, and the institutions thru the ibanks sell the worthless stock to the general public in an ipo. when the stock crashes the individual investor is left holding the bag.
“plus my understanding is the bulk of non-cra sub primes were refis.”
Again, not sure what you mean by this. Do you mean sub-prime loans made by lenders who were not covered by the Community Reinvestment Act? If so, that’s irrelevant to Wells Fargo — it’s an FDIC insured depository institution with assets of $250 million or more and very much covered by the CRA.
Yes, there was a Wells Fargo unit specifically for refinancings, but those are not the sole basis of Baltimore’s lawsuit against Wells Fargo. Read the First Amendment Complaint. It relies heavily on the Abt Associates study, “Using Credit Scores to Analyze High-Cost Lending in Central City Neighborhoods” (2008), which “found that, after controlling for credit scores and other legitimate underwriting factors, the prevalence of high-cost (i.e., subprime) purchase and refinance mortgage loans increased with increases in the African American concentration of Baltimore neighborhoods. Id. at 2, 13-14. The racial disparity was statistically significant. Id. at 18.”
One of the people providing evidence for the lawsuit, Paschal, worked solely in refinancing, but the other, Jacobson, did not.
Manju, you really ought to read the First Amended Complaint to understand the claims on which the lawsuit is founded.
“But when you shop it around the competition will point it out so the original banker risk losing a big commission for pennies. i’m sure it happened but i doubt it was prevalent. more likely the customer liked the lower rate and monthly payment and there fore accepted the prepayment penalty (the most common cited “hidden” fee)”
When you shop around, you don’t send the paperwork from one potential lender to another. Not to be rude, but have you ever bought property or refinanced it in the U.S.? You call around and ask what rates and fees each lender is offering. According to the complaint, Wells Fargo employees were told to tell potential customers that the prepayment penalty could be “waived” — except actually it couldn’t be. Sorry, most people believe that banks can’t lie to you, so they believed what the Wells Fargo employees were telling them.
“They can, but those are outliers. especially in sub prime where they never meet the customer.”
Read the complaint. They were meeting customers all the time.
“True…but i didn’t bother with this nuance becuse my point still holds: unlike the Internet scams the individual investor didn’t get stuck with the bag, but rather the institutions did.”
I don’t think anyone else said this was anything like the internet scams; you’re the one who raised the comparison. And most individuals’ investments are through institutions — e.g. mutual funds, pension funds, etc. Your distinction between “institutions” and “individual investors” is meaningless for the average American, who doesn’t sit around trading individual stocks himself but instead does what he’s told and puts his money in a 401k. The internet scams didn’t affect many Americans’ financial health because they weren’t in that many portfolios. In contrast, MBSes infected a huge number of funds. Public school teachers approaching retirement are finding their pensions under threat, despite your belief that only “institutions” were left “holding the bag.”
Manju: You’re banned from the blog. Stick rule.
OK, after talking to Barry, we’ve decided that we won’t ban you for making stupid arguments. But be aware that “I don’t think this is logical” is not an argument against documentation. So, if you have actual arguments against the documentation, apply those. Otherwise, further denials of the phenomena based on air and posies will be treated with the moderation they deserve.
What is a “stick rule”
Manju, the moderation has been modified to remove the ban.
I can’t discuss Goldman anymore, but if someone is under the impression that GS directly invested in MBSes and other CDOs, read this and the links in it. Its being a bit out of date actually is useful, because it reminds us that this wasn’t as rapid a collapse as one might think from all the “who could have expected Lehman to die?!” rhetoric since Sept. 15 of last year.
the documentation is a pending lawsuit so its one-sided. i’m skeptical for the reasons i stated, just knowing how the business worked–the intense competition, the computerization and objectivity of approvals, and of course that what looks so bad now looked great in a world where property prices always went up.
people lie for money (and power), not just bankers. my guess is both sides will settle.
And the reason why I’ve heard off the record from a number of people (not Democrats) in the banking industry about the racist lending practices of their colleagues which everyone knew about (which drove one of them to leave the business) is…?
the documentation is a pending lawsuit so its one-sided.
So offer some counter-documentation. The complaint has studies and employees who have filed affidavits. Wells Fargo’s main defenses seem to be:
(1) Baltimore’s standing is dubious because the harm to the city was indirect and there was no privity of contract between the city and the bank;
(2) Wells Fargo loans made up a small percentage of the loans for all the foreclosures in Baltimore of the last few years;
(3) Some of the examples offered in the initial complaint of properties that had been improperly treated were actually bought as investments, not by people intending to live there.
There has not been much from Wells Fargo saying “These people are liars!”
Sure, everybody lies for money and power. That doesn’t mean that when their lies hurt people, we shouldn’t get angry and that there shouldn’t be recourse.
I didn’t read the link PG, but my understanding of what happenned at Goldman was that the CFO (david vinier , i think) called a meeting sometime in “07 worried about a housing bubble ( i guess he read krugman and Roubini). they were long MBS and thus at risk so they essentially bought an insurance policy (credit default swaps) to insure themselves against their own bankers and traders, who they didn’t inform.
a prudent move that payed off. thats appears like a conflict of interest but big banks with different divisions often bet against each other. think of a mutual find company with a defensive fund and an aggressive fund,. when one goes up the other goes down, but they sell both at once.
plus it helps that goldman has no retail base. since they, and in this case all other banks, sold to instituions the level of fiducualry responsibilty is much lower. i can recall only one time that an instutional level palyer sued an ibank for fraud, wheras that happens in retai all the tiem. (i think it was ron perelman suing morgan stanly and winning. )
i was referring to non-cra conforming loans. your right, wells isn’t a subprime bank but this unit loos like it was, and it doesn’t appear to be under the cra, since it was doing mostly refis.
your right, wells isn’t a subprime bank but this unit loos like it was, and it doesn’t appear to be under the cra, since it was doing mostly refis.
Are you saying that this particular unit, despite being part of Wells Fargo (an FDIC-insured depository institution that must abide by the CRA) was in some way not “under the CRA” because it was doing refinancing? That doesn’t make sense. In 1998, according to the Treasury Department, CRA-covered lenders did $135 billion in both originations AND refinances for low- and moderate-income borrowers and/or people in predominate low and moderate income areas. I don’t understand why you think CRA-covered lenders don’t do refis. When rates were down earlier this year, I looked into getting refinancing from BoA and Citibank. Both are covered by the CRA. On what are you basing your ideas about how lending works?
wells was covered by the cra but that doesn’ mean every loan they made was cra conforming. i’m guessing here, but its sounds to me that wells set unit to mimic the profitable non-bank lenders,…those who made subprime loans outside of cra guidelines, mostly refis but not exclusively. these turned out to be the most risky, or crappiest, loans though under the best conditions they look ok.
since people are so pissed, i assumed they got these non-cra subprime loans, tho its possible they got cra conforming ones, since they suck too, though they don’t suck as much.
i’m not a mortgage banker but i’d think the cra guidelines would prevent lenders from having draconian pre-payment penalties and the such.
Manju –
I wish you were right about that. However:
My loan officer did this to me (and I’m white). I came into my condo purchase ready to provide documents out the wazoo (and dreading it) since I was largely self-employed, and I’d done a home purchase some years previously under similar conditions. But no, he told me, now you don’t need to do that. He never said “… but if you don’t, you’ll get much worse terms.”
I thought he was working for me. He was recommended to me by my real estate agent. I had no idea he could offer me a loan with worse terms than I might actually have qualified for, or that anyone would be low enough to deliberately do such a thing.
There was no law saying he had to work in my best interest.
First person to say “you can’t cheat an honest person” can… do things that would probably get me a mod warning if I spelled them out.
Mod permission given. Be as colorful as you like.
Manju: I am currently doing both transactional real estate, forensic mortgage analysis, and foreclosure defense as a large part of my practice. I am basing this response not only on my own personal legal experience but on the various conversations which I frequently have with others in the field (strategizing talks) and on the various cases i have read which analyze the performance and behavior of mortgage companies.
Your position is reasonable but, factually, is simply not accurate. Basically, you are making the crucial error of trust.
Ideally:
1) an applicant goes to a bank and tells them what they need, and what they have.
2) The bank acts like an objective party and applies its set of internal rules to put them in the appropriate category of borrower.
3) The bank informs the party of their category and why.
4) The party considers the offer and, if they want, shops it around. Assume taht they don’t go elsewhere.
5) The bank and borrower reach a preliminary agreement and begin moving towards the mortgage.
6) the mortgage is signed with terms as previously agreed.
Now, for reality:
1) an applicant goes to a mortgage broker and tells them what they need, and what they have.
1a) if the borrower looks too poor, the broker (who gets a big commission) doctors the papers to allow them to borrow more money. Banks don’t do this as much, but brokers do it routinely.
2) The bank acts like an objective party and applies its set of internal rules to put them in the appropriate category of borrower.
2a) No party here is objective. Both the bank and the broker CLAIM to be objective, and apply “the usual rules” to put someone in the right category. Both are frequently lying. What they are really doing is acting as self interested parties: the broker is trying to maximize her immediate commission, and the bank is trying to get high payments before it sells off the loan. So even if a really objective look would put someone as a low risk, borrower, the bank and broker are trying their bet to classify them as a high risk borrower.
3) The bank informs the party of their category and why.
3a) Both parties lie to the borrower. “You’re high risk because the appraisal says so” (the bank hires and generally controls the appraisal.) “You’re high risk because you have ___ on your credit report (when people like me have those problems, they get brushed aside.) “You’re getting the best rate available that we could justify for your loan” (plain lying.)
4) The party considers the offer and, if they want, shops it around. Assume taht they don’t go elsewhere.
4a) The fees for application are designed to discourage shopping around. Also, it can lower your credit report if you don’t know what you are doing, and banks/brokers will routinely lie about the potential damage to your credit. Finally, when you have two putatively objective/reliable people telling you that you’ve got the best rate around, why shop?
5) The bank and borrower reach a preliminary agreement and begin moving towards the mortgage.
5a) At this point, the borrower begins to rely on the promises of the bank. This is particularly an issue for refinances, as I’ll discuss below. The bank’s papers actually give the bank a huge amount of wiggle room. But the borrowers–not being lawyers, and usually working without an attorney at this stage–don’t know that.
6) the mortgage is signed with terms as previously agreed.
6a) In a HUGE number of refinances, this doesn’t happen. Instead, the bank attorney shows up with new loan documents because “the final numbers changed.” Remember that wiggle room? It’s technically legal. People who thought they were getting a 7% 30yr fixed loan get presented with papers for an ARM. people who thought they were getting 6% get 8%. And so on.
Why don’t they walk? Simple. Remember that “reliance” I talked about before? Especially with refis, these are people who are often near the end of their rope, tapped out a bit, and desperately in need of money. They’ve been planning for the last 2 months on getting the loan on December 15. they have been saving bills, putting off their landlord and creditors, etc. Now on the DAY OF CLOSING, they are given the choice to take something taht they didn’t want, or walk away. There’s no good choice for them.
The banks know this, of course. That’s why their documents have such wiggle room. That’s why they don’t tell people up front how expensive it will be.
When we were applying for our (prime) mortgage, our mortgage broker was looking over our tax documents. She initially said everything would be fine, but when we had picked out the house and were actually doing the mortgage application, she came back into the office and said our income wasn’t high enough – the computer was rejecting it. (Why it would reject it now, when I had said the exact same income three weeks before when she was pre-qualifying us, I have no idea.)
Fortunately I hadn’t yet completed my tax return for the previous year – so we *cough* amended our return and amazingly made more money that year. Computer happy, mortgage goes through.
She did not come right out and say “commit fraud on your documents” (and we didn’t commit fraud, we just chose not to claim some expenses, making our nominal net income higher – we subsequently paid the income taxes on the “higher” income) – but that was pretty clearly what she intended from body language, eye contact, word choice (“if only you had more income on the form”) etc.
BTW, it would have been trivial for us to commit actual fraud and just say “we made a kazillion dollars” then file a different tax return – they CAN check with the tax authorities to ensure that the documents you filed on your mortgage application are the same as the documents you filed with the IRS – but they rarely do. So lies are rampant, and some brokers encourage dishonesty.
I don’t think you can rely on the people in the industry to follow ethical behavior without some kind of incentive for them to do so. Right now it works the other way.
I still don’t understand what a “CRA-conforming loan” is supposed to be. In financial parlance, a Conforming Loan is one that conforms to Fannie/Freddie standards so that it can be bought up in the secondary market. What are the standards to “conform” to the CRA, and why would a lender want to conform to it?
I don’t know the standards, but I do know that a lender has to have a certain percentage of their loans qualify for the CRA in order to keep the feds happy. I also know that the standards apply to certain types of loans only. So a lender who primarily makes jumbo loans to rich homeowners is not satisfying CRA with those loans.
I have had clients whose loans apparently qualify for CRA (though I don’t actually know why) and the ability to count that loan as part of its CRA portfolio has been considered a benefit to the bank.
I do know that a lender has to have a certain percentage of their loans qualify for the CRA in order to keep the feds happy. I also know that the standards apply to certain types of loans only.
Right, but the CRA applies to banks and requires them to fulfill their obligations to the community. The CRA-qualified loans are those made to moderate and low income borrowers, or to people who themselves might be more than MLI but who are buying in a MLI neighborhood. But I don’t understand how a loan to working class people, or for a home in a working class neighborhood, could be “non-cra-conforming,” which is the phrase Manju has been using speculatively with regard to the Wells Fargo refinancing unit.
i don’t know what the standards are but i know certain lenders are required by law to follow them, so thats why they do it.
well, non-bank institutions, aka sub prime banks lenders made loans to low income people that didn’t conform to cra standards and weren’t guaranteed by fannie and Freddie even when they were securitized.
as far as i know there’s nothing preventing regulated banks from making these loans on top of their cra obligations, and considering that wells had a refi unit and it is alleged the loans were high cost (cra loans were advertised as relatively low cost) it sounds to me like that is what they were doing.
of course it turns out the cra loans were much riskier than advertised, as the spectacular collapse of fannie and freddie illustrates, so it is possible this unit fell under the cra.
Somebody’s suing Wells Fargo. Well done. I hope someone does so out West. I’ve been hearing stories about them (and other banks as well) for years.
Yes they are Racist! This practice has been well document from the 1960’s it’s called “Redlining”. “It is the practice of denying, or increasing the cost of, services such as banking, insurance, access to jobs,[2] access to health care,[3] or even supermarkets[4] to residents in certain, often racially determined,[5] areas.”
The creditors have always done this and only add the sub clause about race in the 1980’s after civil rights violation became a hot topic. Believe me; I know this practice still considered “acceptable”. Only now they disguise it under the guise of “Social economic risk factors”. BS! Racism is Racism! No matter how you try to cover the stench it stinks to high heaven!