Wells Fargo CEO John Stumpf apologizes to Senate Banking Committee
The city of Sacramento has filed a federal lawsuit against Wells Fargo alleging the banking giant steers African American and Latino borrowers into high-risk and high-cost mortgages.
The suit, filed Friday in U.S. District Court in Sacramento, also seeks monetary damages against Wells Fargo, alleging the mortgages forced the city "to divert resources intended for other programs" to provide services to blighted neighborhoods impacted by the lending practices.
"These illegal practices suppressed property values in minority and low income communities in Sacramento, reduced the city's property tax revenues, and increased the cost of providing municipal services such as police, fire fighting and code enforcement," the city's lawsuit reads.
Four confidential witnesses who are former Wells Fargo employees told the city there was "a wide pattern and practice at Wells Fargo in which employees intentionally steered minority borrowers into higher cost loans because of their race and ethnicity."
One witness told city attorneys that Wells Fargo loan officers racially profiled borrowers' ability to repay loans. Another witness said that a lack of Spanish-speaking loan officers in the Sacramento area led to many Spanish-speaking borrowers agreeing to loans that "were more expensive than necessary."
The city is asking a jury to determine what monetary damages, if any, Wells Fargo should pay.
"Discriminatory lending is reprehensible and undermines the economic future we are fighting for in Sacramento," Mayor Darrell Steinberg said in a text message. "The city will do all in its power to protect our residents and neighborhoods from the impact of these practices."
Wells Fargo spokeswoman Julie Campbell said "the city's accusations against Wells Fargo do not reflect how we operate in the communities we serve."
"Wells Fargo has been serving the Sacramento community for more than 160 years and we will vigorously defend our longstanding record of fair and responsible lending," Campbell wrote in an email. "We deeply value our relationship with Sacramento, and are working diligently and consistently with customers, credit counselors, non-profit organizations and government agencies to expand homeownership across the credit spectrum."
According to a city news release, Wells Fargo "was aware and, in fact, incentivized the marketing of high-cost or high-risk loans to minorities" beginning in 2004 and continuing today. Those mortgages involved "lender credit loans," according to the city, that allowed Wells Fargo to cover a lender's closing costs in exchange for issuing a mortgage with a higher interest rate. However, lenders were forced to pay that higher interest rate long after the lender credits had been repaid, "generating additional revenue for the bank but no additional benefits for the borrower," according to the city.
The city said mortgages in predominantly minority neighborhoods were nearly three times more likely to result in foreclosures.
The city also said African Americans with FICO credit scores greater than 660 were nearly three times as likely to get a high-cost or high-risk loan than a white borrower with scores above that mark. Latino borrowers were 1.77 times as likely than a white borrower.
A 660 FICO score is generally considered the cutoff between subprime and conventional lending, though banks have traditionally given better rates to borrowers with even higher scores in the mid-700s and above.
The city severed ties with Wells Fargo in October 2016 in the wake of the bank's fraudulent accounts scandal. The City Council approved its treasurer divesting nearly $30 million in business from the bank - most of it in the form of bonds - after Wells Fargo paid a $185 million civil settlement and fired 5,300 employees who opened fraudulent bank accounts under corporate pressure to meet sales goals.