Cue Dr. Evil: "175 Mmmmmmilion Dollars!"
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For the longest time we've been hearing about how racism caused the subprime mortgage meltdown by causing financial companies to charge blacks and Hispanics more fees and interest. And that's why they couldn't pay back their loans: not because they didn't have enough money but because they were being charged too much for their loans. This is in contrast to the more realistic view [i.e., mine] that the main cause was imprudent financiers like Angelo Mozilo using the War on Redlining as an excuse to get out from under traditional regulations on mortgages, like requiring documentation of income.



But when the Obama Administration settles on these discrimination charges, it's always for a pittance compared to the hundreds of billions involved.



From the New York Times:
Wells Fargo, the nation’s largest home mortgage lender, has agreed to pay at least $175 million to settle accusations that its independent brokers discriminated against black and Hispanic borrowers during the housing boom, the Justice Department announced on Thursday. If approved by a federal judge, it would be the second largest residential fair-lending settlement in the department’s history.

An investigation by the department’s civil rights division found that mortgage brokers working with Wells Fargo had charged higher fees and rates to more than 30,000 minority borrowers across the country than they had to white borrowers who posed the same credit risk, according to a complaint filed on Thursday along with the proposed settlement.

Wells Fargo brokers also steered more than 4,000 minority borrowers into costlier subprime mortgages when white borrowers with similar credit risk profiles had received regular loans, a Justice Department complaint found. The deal covers the subprime bubble years of 2004 to 2009. ...

Thomas Perez, the assistant attorney general for the civil rights division, said the practices amounted to a “racial surtax,” adding: “All too frequently, Wells Fargo’s African-American and Latino borrowers had no idea they could have gotten a better deal — no idea that white borrowers with similar credit would pay less.”

I don't see any mention of the race of the mortgage brokers who were getting bad deals for minorities. The financial industry had, in cooperation with the government, made a huge effort to bring in more minority brokers and salesmen. This giant Minority Outreach wasn't just to please the politicians, of course. As with buying cars, where salesmen notoriously exploit the insecurities and lack of financial acumen of black and Latino customers, NAMs tend to be easy meat for mortgage brokers of their own race. The problem is that they are also less likely to pay off their loans.

... The Justice Department estimated that the minority borrowers who had been steered into costly subprime loans would receive an average of $15,000, while the victims who had been charged more costly fees would receive $1,000 to $3,500. In addition, the bank has agreed to give $50 million to a program that assists people in making down payments or improving their homes in eight metropolitan areas: Baltimore, Chicago, Cleveland, an area east of Los Angeles, New York, Oakland/San Francisco Bay Area, Philadelphia and Washington. 

Lending data showed, for example, that in 2007 customers in the Chicago area who borrowed $300,000 from Wells Fargo through an independent broker had paid an average of $2,937 more in broker fees if African-American, and $2,187 more if Hispanic, compared with white borrowers with a similar credit risk, the complaint said. 

Similarly, it said, the data showed that nationwide, an African-American borrower who had qualified for a regular loan was 2.9 times more likely to be steered into a subprime loan, and a Hispanic borrower was 1.8 times more likely, than were similarly creditworthy white borrowers. Subprime loans, which are intended for riskier borrowers, carry higher interest rates.

Of course, the article doesn't mention the default rates by race.

Wells Fargo was also facing lawsuits by several entities beyond the Justice Department, including the city of Baltimore, the state of Illinois and the Pennsylvania Human Rights Commission. It settled with all of them as part of the deal, putting to rest its fair-lending cases from the bubble years. 

The focus of the settlement is Wells Fargo’s failure to police the behavior of its independent loan brokers. The complaint said that the bank had set basic credit guidelines but then had allowed the brokers discretion to charge higher rates or steer people into less attractive loans without ensuring there was no discrimination based on race or national origin 

Wells Fargo and the Justice Department were unable to agree on whether the data had showed any evidence of discrimination in the lending practices of the bank’s in-house “retail” mortgage agents. Instead, they agreed to a methodology to evaluate that data further. If it finds evidence of discrimination, the victims would receive similar compensation on top of the $175 million Wells Fargo has already agreed to pay. 

Under federal civil rights laws, a lending practice is illegal if it has a disparate impact on minority borrowers, even without evidence of discriminatory intent.

Allow me to make a prediction. Financial firms will cut back on their Minority Outreach for awhile, until such point as the Good Times are rolling again, at which point politicians will demand it and we'll go through the whole cycle all over again.

... In December, the division settled a similar lawsuit with Bank of America for $335 million over loan discrimination by its Countrywide Financial unit. In May, SunTrust Mortgage agreed to pay $21 million in a similar case.

Countrywide was the biggest mortgage lender in the country, so that puts some perspective on the Discrimination Caused the Meltdown theory.

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