opinion

Unaccountable?

The Fed Closes In on Wells Fargo

Miami, Oakland, and Philadelphia say the bank handed loans to African-American and Hispanic borrowers it knew or should have known would turn out to be troubled—and they’re suing.

opinion

Gary Cameron/Reuters

Just before Janet Yellen was headed out the door of the Federal Reserve, she did something unprecedented in the history of the central bank: She slipped a choke chain on Wells Fargo that inhibits its growth until it no longer exhibits “pervasive and persistent misconduct.”

Among the things that need cleaning up are lawsuits from a handful of cities—Philadelphia, Miami, Oakland, Miami Gardens, and now Sacramento—alleging that the bank’s predatory and discriminatory lending to minority borrowers set off a spiral of foreclosures resulting in blighted neighborhoods that have drained municipal resources.

What the suits have in common is the allegation that the bank handed loans to African-American and Hispanic borrowers that it knew or should have known would turn out to be troubled.

Philadelphia’s lawsuit, according to The Atlantic, “says Wells Fargo purposefully pitched high-risk loans to black and Latino borrowers, though their credit enabled them to apply for better loans.”

And, as the city of Miami said in its original brief filed in late 2013, “When a minority borrower who previously received a predatory loan sought to refinance the loan… [the Banks] refused to extend credit at all, or on terms equal to those offered when refinancing similar loans issued to white borrowers.”

The brief said “banks” because a similar suit was filed against Bank of America.

Joel Liberson, a California attorney and CPA on the team representing the cities, said in an email that each municipality has specific claims but declined to estimate the liability that Wells Fargo faces.

Liberson also said it would be “inappropriate” to speculate about whether the restrictions placed on Wells Fargo by the Fed would encourage the bank to settle with the cities. The Fed acted after a string of scandals rocked the bank, beginning in the fall of 2016 when Wells Fargo was fined $185 million—including $100 million by the Consumer Financial Protection Bureau (CFPB)—for opening as many as 3.5 million bogus accounts as part of what has been described as the biggest cross-selling scandal in banking history.

The coiffed Wells Fargo CEO, John Stumpf, was dragged up to Capitol Hill to explain the how the scandal could have happened, but his efforts to mollify both the Senate Banking Committee and the House Financial Services Committee backfired badly (it was an election year, after all) and not long after, he was crisis-management road-kill.

In subsequent months, there were more revelations of bad behavior at the bank, including, as Bloomberg wrote, that “auto-loan clients were forced to pay for unwanted car insurance and… mortgage customers were improperly charged fees.”

And the stream of stories about the bad-news bank still hasn’t stopped. A former fraud investigator for Wells Fargo in Portland, Oregon, filed a whistle-blower suit late last month alleging that when there was suspicion of fraud, the bank frequently froze or shut down customer accounts even if the suspicions were raised by customers themselves—instead of investigating as required by law.

According to The New York Times, the suit claims that simply canceling an account was a way to avoid the cost of mounting an investigation.

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The suit filed in late February by Sacramento is similar to those of the other cities, alleging that “Wells Fargo’s loan officers and mortgage consultants used race as a factor in determining which loan products to offer borrowers [and] what interest rates to charge…

“For example, if a borrower had a Mexican name, loan officers were likely to exercise their discretion to charge a higher rate and issue a more expensive loan to make up for a discount given to non-minority borrowers.”

But the Sacramento suit goes beyond those brought earlier because it makes reference to the cross-selling scandal that led to the strictures imposed by Yellen’s Fed. The complaint says that the Fed’s action “underscores the sweeping nature of Wells Fargo’s compliance failures and the toxic environment created within [the bank] to cross-sell customers at least eight products, including mortgage loans. These deficiencies exist to this very day.”

One of the ironies of the battering Wells Fargo’s once-stellar reputation has taken is that it “built itself into the most valuable U.S. bank after the financial crisis partly because it did not rely on risky trades or complex derivatives to turn a profit,” according to Reuters.

It’s been a decade since the U.S. housing bubble began to burst, sending the country and the global economy hurtling into the Great Recession.

With the housing market thriving again, the five biggest banks (Wells Fargo among them) set to get a $10 billion boost to profits from the Trump tax cuts, and the administration’s neutering of the CFPB and attempt to dismantle Dodd-Frank laws meant to prevent another meltdown, it looks as though the dark days of the crisis are behind America and the good times are rolling again for financial behemoths.

But across the country, cities are still confronting the aftermath of reckless and predatory lending and fighting for compensation.

Miami, for example, claims that the banks’ lending practices led to a scarred landscape of ghost neighborhoods where drugs, crime, and fires proliferate, straining first responders such as fire and police departments and lowering the tax base.

The financial costs to Miami are unclear, and calls to Miami City Attorney Victoria Méndez and Senior Assistant City Attorney Henry Hunnefeld, who is involved in the Wells Fargo litigation, were not returned.

But no banks have been more aggressive in fighting back against such lawsuits than Wells Fargo and BofA (whose BofA Merrill Lynch investment arm stuck with its buy rating for Wells after the Fed acted).

One tactic that didn’t work was to try undermining the right of a city such as Miami to hold the banks accountable.

In a decision last May in the case of Wells Fargo & Co v. City of Miami, the U.S. Supreme Court ruled that Miami has the standing to bring a lawsuit against Wells Fargo and BofA alleging that the banks “violated the law when they issued riskier but more costly mortgages to minority customers than they had offered to white borrowers,” the SCOTUSblog said.

Still, the blog analysis went on, “the case will now return to the lower court for it to decide whether there is enough of a connection between the banks’ lending practices and the city’s economic injuries to hold the banks liable.”

Multiple efforts to contact Neal Katyal of Hogan Lovells in Washington, the attorney-of-record in Wells Fargo’s unsuccessful effort to derail the Miami suit, were ignored.

After Philadelphia filed suit against Wells Fargo last May, Mayor Jim Kenney said in a statement that “all neighborhoods throughout the city suffered… harm” because of predatory loans to minority borrowers that resulted in foreclosures.

But the bar for proving that is high.

For Wells Fargo, though, there is now a financial imperative—besides the moral one—for it to acknowledge mistakes of the past and do the right thing when it comes to recognizing the legacy of its predatory lending and compensating damaged cities and their taxpayers.

What better way to begin clawing back its integrity.