Wells Fargo & City Of Philadelphia Resolve Discrimination Suit

Recently, relating to a discrimination lawsuit filed against Wells Fargo (NYSE:WFC) by the City of Philadelphia in May 2017, the two have agreed for a settlement, per which the bank will contribute $10 million for sustainable housing-related programs for low-and moderate-income residents.

Accusations

In May 2017, a federal lawsuit was filed against Wells Fargo by the City of Philadelphia, accusing the former of engaging in discriminatory lending practices.

The city argued that the bank had purposely provided minorities with riskier loans, carrying high interest rates, even though they were eligible for cheaper loans. In an analysis conducted on the bank, it was revealed that about 23% of loans given to the African-American and Latino borrowers were risky and costly, while for the whites it represented only 7.6%.The complaint also noted that bank officials were aware of such practices.

It was noted that the U.S. Department of Justice and some of the other cities such as Los Angeles, Oakland, Miami, Baltimore, Memphis and Miami Gardens filed similar lawsuits against Wells Fargo. While some of these have already been resolved, others are continuing.

Nevertheless, the bank has declined the charges, claiming those to be “unsubstantiated accusations.” It promises to have fairly conducted business in Philadelphia for the last 140 years. Additionally, Wells Fargo had requested to rescind the suit in July 2017, as the city failed to prove the allegations, but was denied by U.S. District Judge Anita Brody in January 2018.

Last June, Wells Fargo again filed a motion, claiming the city has failed to identify the loans alleged as discriminatory. Furthermore, the number of loans claimed was later reduced to 506 by the city from the previously-claimed 1,067. Nonetheless, the city claimed the bank’s request to be “lacking merit" and believed it should be denied.

In addition to the above, a motion was filed by the city in August 2018, requesting Brody to demand audits and audit-related documents associated with Wells Fargo’s FHA compliance relating to underwriting, buying, or selling loans to minority residents of Philadelphia.

The federal judge ordered the city to produce “enough information to identify each specific loan that the city alleged to be discriminatory in its complaint.” The deadline provided for the same was till Oct 5.

Further, the city’s motion received rejection, under which it had demanded from the court to induce Wells Fargo for providing documents and data of correspondent loans where the latter had purchased debt, although it did not play any role in the credit decision. Moreover, the city’s claims included allegations on Wells Fargo for setting the terms and/or pricing under the Fair Housing Act on these loans as per the bank’s needs though originated by third-party correspondent lenders.

As part of the recent settlement, Wells Fargo refrained from admitting the liability and “vigorously denied” the allegations.

Settlement

Specifically, the settlement includes grants worth $8.5 million for down payment and closing-cost assistance to low- and moderate-income persons and households who would purchase houses within the limit of the city. Notably, the grants will be aided through the Philadelphia Housing Development Corporation’s (PHDC) current program infrastructure.

Further, $1 million will be distributed among up to three non-profit organizations, which have implemented the city’s Residential Mortgage Foreclosure Prevention Program. Lastly, grants worth $0.5 million will be provided to the city’s land-care program.

Notably, homeowners and the referenced not-for-profit organizations will fully benefit from this agreement. Moreover, the funds provided by Wells Fargo will not be used for any other purpose.

Additionally, the City of Philadelphia and Wells Fargo will jointly conduct a program entitled "Understanding Philadelphia". The program initiated for staffs working at Wells Fargo Home Mortgage in the Philadelphia community and officials of the city and PHDC, along with some external subject matter experts.

The program motive is the securitization of the history of the housing market in the city, its varied neighborhoods and residents’ existing housing needs.

"We’re pleased that we’ve been able to resolve this matter in a way that will provide real, tangible sustainable homeownership opportunities for many low- and moderate-income residents of Philadelphia," said Joe Kirk, Wells Fargo region bank president, Greater Philadelphia. "The efforts funded by these grants are consistent with Wells Fargo’s broader philanthropic strategy, which includes a $1 billion commitment over the next six years to address the U.S. housing affordability crisis," Kirk further noted.

Conclusion

This San Francisco-based banking giant has been embroiled in a slew of scandals, for the past few years now. Troubles have been mounting at Wells Fargo since the revelation of the sales scandal, which was followed by disclosure of issues in its auto-insurance business, online bill-pay services, and the Wealth and Investment Management segment. With the ongoing review process of business practices, more wrongdoings may be reported, consequently straining the top line.

Among other mortgage lenders — Citigroup (NYSE:C) , JPMorgan (NYSE:JPM) and Bank of America (NYSE:C) — have also been sued for discrimination in lending practices. Deutsche Bank AG (DE:DBKGn) had also been accused by Los Angeles of letting foreclosed homes in low-income regions deteriorate to poor conditions. The case was settled in June 2013.

Shares of Wells Fargo have gained 17.6% year to date, underperforming the industry’s rally of 33.3%.

Currently, Wells Fargo carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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