The NAACP this week filed a class action suit accusing Wells Fargo and HSBC of charging unfairly high interest rates to African American homeowners with high incomes and high credit scores. The banks were quick to slap down the charges as “totally unfounded and reckless,” even in the face of convincing evidence from the NAACP.
The lawsuit cites several studies that document discrimination, including a 2006 report by the Center for Responsible Lending that found black people were 31 percent to 34 percent more likely to receive higher-rate subprime loans. The suit claims the banks violated the Fair Housing Act, the Equal Credit Opportunity Act and the Civil Rights Act.
“Generations of African Americans have been deprived of the opportunity to participate in the American dream by banks that refused to give them mortgage loans simply because of the color of their skin or placed them in unfavorable loans that decimate them financially,” the suit states. “It is beyond dispute that the African American community has long been the victim of discriminatory banking practices.”
Jealous said subprime mortgages, intended for people with poor credit, were given to African-Americans who qualified for better loans 54 percent of the time compared with 23 percent for white people.
The class includes any African American who received a subprime loan even though they qualified for a standard loan. The NAACP was set to name a third bank in the suit but the still-unnamed bank escaped the outing by settling before the suit was filed.
Banks accused of racism in home loans [The San Francisco Chronicle]
(Photo: digicla)
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This is ridiculous.
“I am wondering why can’t a subprime lender give prime loans?”
Good question, although a moot one now as subprime, as referred to in this article, essentially doesn’t exist anymore.
I think right before all of this blew up anyways, there was a push to consolidate. There was also almost constant revisions to the referral policy, undoubtedly to try to prevent conflict of interest issues like the one I described.
“But if Wells Fargo structures their system in a way that results in racist results, aren’t they still culpable?
Why shouldn’t Wells Fargo be judged harshly for not doing the same?”
A few things.
1. If my presumption is correct, I don’t think we are looking at “racist” results. If, as I suspect, a similar percentage of blacks were referred to prime loans as whites, then I don’t see it as racist as much as I do people getting screwed by a loan officer no matter what the color of their skin. The sad fact of demographics means greater numbers of African Americans would be applying for sub prime loans to begin with. I don’t see enough here to demonstrate that the numbers don’t reflect “more in, more out.”
2. I’m near positive Wells Fargo recognized the problem. This lawsuit is NOT the first to bring this up, I heard about this issue at least 5 years ago. The problem is, how do you fix it?
Let me try an analogy. A person is in the market for an automobile. It just so happens that Chevrolet makes a “perfect” car for them. Problem is, this person is standing in a Pontiac dealership, looking at a car that is more expensive and missing key features.
The optimal solution for GM is that the Pontiac salesman refer the person over to a Chevy lot. But how do you encourage that behavior? Without a referral plan, the salesman’s best interest is to hard sell the customer into the car that pays them money, even if it is the wrong one. The only readily apparent way to change that incentive is if the salesman got paid EXACTLY THE SAME AMOUNT to refer a borrower as they would make selling them a car themselves.
However, it is not like the Pontiac salesman is going to work for free either, so you would have to pay him as well. But paying two salespeople full commission on one car destroys profits pretty quickly.
Another option- consolidate so that Chevy and Pontiac are sold at the same dealership, and thus the salesman can steer the borrower into the best vehicle without a conflict of interest. Sounds good, but on a real level it would be an enormous undertaking. Which lots do you close? Who manages the new lots? etc etc.
Of course I am leaving out the fact that car dealerships are independently owned and Wells Fargo branches aren’t, but I think the comparison is still valid. Recognizing the problem and providing a workable solution are two different things.
@Jeff.
Good points all, and I don’t think that, in this day and age, WFB personnel would behave in a racist fashion. Indeed, I’m sure they’d be outraged were they to come across overt acts. But in these sorts of cases, isn’t it the results that count? Good people can do bad things if they follow a senseless (or at least tone-deaf) policy.
I suppose that it’s moot now, sub-prime being dead as a category. And hindsight is perfect. But I think part of the frustration that I feel is that I’d have hoped that Wells Fargo’s execs would have done a cursory look at the racial breakdown, then changed policies accordingly. Especially if the (apparently) discriminatory results could have been eliminated by tweaking their program. Allow brokers in low-income neighborhoods to handle both, with neutral incentives, for instance. Or make these brokers’ commissions be the same if a customer’s loan is transferred.
I can see non-discriminatory reasons for them not doing this (sub-prime rates paid by prime-eligible customers? AWEsome!) But this short-term gain is apparently going to cost them a small fortune in PR and potential lost lawsuits. And might be seen as less than consumer-friendly.
@Trai_Dep: “But I think part of the frustration that I feel is that I’d have hoped that Wells Fargo’s execs would have done a cursory look at the racial breakdown”
Also, wouldn’t they have an FHA compliance officer somewhere whose JOB it would be to run down those numbers? Banks and discriminatory mortgage lending is an old story, and a smart bank is going to worry about it.
I mean, I know HOSPITALS get a little anxious if their billing practices tend to charge different racial groups different amounts, which, again, can come from racially neutral reasons (while different insurance providers or lack of insurance may reflect racism in the community, the hospital isn’t responsible for what insurance patients bring to it, and those insurers negotiate the rates) but the EFFECT is what counts.
I’m aware of a situation where due to a local high minority unemployment rate, a municipal hospital ends up charging most of its minority patients the “full” rate and most of its white patients the discount, insurance-negotiated rate. It has nothing to do with the hospital, but the outcome is that the hospital is basically charging racial groups differently … and they have half a dozen execs and an outside law firm running down these numbers and covering their asses six ways from Sunday.
This ABSOLUTELY went on. People are in here claiming the NAACP only now took notice — nope, this investigation has been going on for a long time, and anybody who claims to hold him- or herself out as an informed person about the mortgage crisis is, in fact, the person who needs to explain how they have been so ignorant about an issue that’s already been extensively covered in mainstream media. I work at a large corporate law firm — as far from “bleeding heart liberals” as you get — and some of our financial services partners have been speaking out about this for a while. (They’ve done pro bono work on it too, but I have no idea whether they are providing assistance to the NAACP in this.)
Finally, seeing all the posts about the “race card” reminds me that there’s a much more intellectually dishonest, reprehensible way of shutting down an argument: Making racist assumptions when you’ve failed to learn even a shred of the facts.
You seriously need to chill Eyebrows McGee. Slobbering over every thread that expresses the slightest bit of skepticism doesn’t reflect well on your reading comprehension ability.
@MisterE:
You’re implying that just because we elected a black man, racism in America is automatically a thing of the past? Really?
And if a person is taken advantage of, it’s their fault for not being accountable for, and smart enough to avoid being had? Again, really?
Lastly, though it seems that the two of you may think alike, his opinion wasn’t the truth, nor is yours. I’d suggest that the two of you educate yourself before making crass, ignorant generalizations.
@acklenheights: If a person is passionate about, or interested in the subject of a certain thread and they add intelligent insight, knowledge and input to the conversation, well then we should all be glad they’re here, contributing.
I know that I’m not alone in looking forward to posts from Eyebrows. They’re a positive aspect of this board!
The mortgage companies are REQUIRED by law to put your race on your application. If you refuse to self-describe your race, they are required by law to guess at it. This is theoretically so they can avoid discrimination, although in practice it causes more of it and only records the discrimination taking place.
@ankle: Eyebrows offers an informed opinion while remaining open to discuss factual differences. I see you’re offering an specious one here that is unsupported factually.
Now, who’s adding constructively to the conversation? Jealous, much?
@MisterE: Are you serious?
Let’s clear a few things up shall we?
Most subprime loans were for cash-out or refinance loans. That means that the vast majority of people getting a subprime loan already owned their home. During the housing “boom,” brokers went all over minority neighborhoods looking for people who wanted to get cash out of their homes. Before the recent restructuring of home loans, most banks would not have given people cash-out loans for any old purpose. Why? Because the bank was stuck holding the paper. Enter a widespread secondary market, and ta-da – the problem of holding the paper is gone.
This is where the problem starts for black people. Suddenly, people who have lived pay check to pay check their entire lives are told by a broker driving around their hood in a BMW that they can get $30,000. Now these people were all excited. “I can get $30,000?!” And here is where the really big problem starts.
In the past, the bank, because they were holding the paper, would have only gotten these people a loan they were pretty sure could be paid back. Well, now that problem is eliminated. In fact, not only is it eliminated, they have an incentive to get these people the worst loan product they can sell them. Brokers would have had a huge incentive to get customers the highest interest rate because the broker was compensated based upon a yield spread premium. That means that for a 100K loan, for example, if the broker could talk you into a 10% apr instead of a 9% apr, they were compensated an extra 1% of the value of the loan. If this sounds shady, it because it is.
The problem is that brokers “structured” loans in very creative ways to try and get that extra high APR. And here is where blacks really got screwed. Blacks tend to be quite a lot less financially literate than their white counterparts, and thus, they were more easily suckered into these bad loans. BTW, this is not a racist statement: it’s a fact. Many studies have shown that blacks and other minorities are less financially literate.
But that’s not really the end of the problem. Even if the borrower could maybe sort of see that the loan terms weren’t all that great, by this point, they were heavily psychologically invested in getting that cash. They had already though of all the things they were going to do with it, etc.
I do not think that any of these banks or brokers were targeted blacks. They were targeting ANYONE who could be suckered into one of these loans. Because of a number of factors, blacks were, on average, more easily scammed.
OK, I had all I can take here. Let’s say it all to gether, it’s all the Black peoples fault we are here. 29 to 32m people only in the country and about only 16% of that number own a home. Taken about (someone give me this number) 300m people in this country all together someone tell me how the blacks did all this? Think before you respond because everyone is waiting.
One more thing, if someone purchases a home and make three years of payments on time, how is that buying a home you can’t aford? I have so much to say but you can’t win these conversations so you stay out of them as much as you can
thanks
LT