City of Baltimore Sues Wells Fargo Over Foreclosures
MICHEL MARTIN, host:
I'm Michel Martin. And this is TELL ME MORE from NPR News.
Later, when is it their turn to pick up the check? If you have trouble finding your voice when it comes to family, friends and money, we have some help for you.
But first, we want to talk about the national foreclosure crisis. Last week, Bank of America announced plans to acquire the mortgage company Countrywide for nearly $4 billion. The deal will save Countrywide from bankruptcy.
And the city of Baltimore has filed suit against Wells Fargo Bank. The city claims the bank unfairly targeted black neighborhoods with subprime mortgages. It's the first time a city has sued a major lending company, and it could pave the way for similar litigation around the country.
To talk more about this, I'm joined here in our Washington studio by John Relman. His Washington, D.C.-based firm Relman & Dane is representing the city.
Also here with me is Lisa Rice, the vice president of the National Fair Housing Alliance, a group that promotes fair lending practices.
Also with us on the phone, our regular contributor, personal finance adviser Alvin Hall. Welcome to all of you. Thank you so much for speaking with us.
Mr. JOHN RELMAN (Lawyer, Relman & Dane, Washington, D.C.): Thank you.
Ms. LISA RICE (Vice President, National Fair Housing Alliance): Thank you.
ALVIN HALL: Thank you, Michel.
MARTIN: Mr. Relman, first, could you explain exactly what is the origin of the suit - what is it that Wells Fargo is alleged to have done?
Mr. RELMAN: Well, it, for the last few years, there's been an increasing case development that makes it illegal under the Fair Housing Act for a bank to target a minority community for bad loans, for predatory practices, for irresponsible lending practices. And in the past, it's been the case that banks discriminate against minority communities by not making good loans available. But recently, with this rise of subprime lending, what we've seen is that minority communities are getting targeted for bad practices and bad loans.
What Baltimore has said is - the mayors have said around the country, have noticed that in the minority communities, the foreclosure rate is many times greater in the minority community than in the white community. And people are saying, why is that? If it's related to targeting of bad loans to those communities that inevitably end up in foreclosure, worse than in the white community, that violates the Fair Housing Act. And so the city is saying, we got to do something about that if it violates the law.
MARTIN: Why just Wells Fargo? What about other lenders? There are other lenders who are operating in Baltimore.
Mr. RELMAN: There are other lenders. Wells Fargo has the largest number of foreclosures, or among the largest in the city of Baltimore. And the rate at which they foreclose in the black community is four times that of the white community, making among the highest of all the lenders in Baltimore. So they're a natural focus of attention.
MARTIN: As you would imagine, we invited Wells Fargo Bank to participate in this conversation. They declined. But they did offer a statement saying, "Race is not a factor in our pricing. We do not tolerate illegal discrimination against or unfair treatment of any consumer. Our loan pricing is based on credit risk. We are committed to serving all customers fairly. Our continued growth depends on it," end quote. So, Mr. Relman? The bank says that the terms of its loans are based on credit risk. What evidence do you have that these loans are predatory?
Mr. RELMAN: Well, we know because you can make - banks have the ability to look at people's resources, their credit scores and other factors to determine whether they can - whether they'll be able to repay these loans. And they can do that equally well in the white community, as in the black community. But as in we see in Baltimore, the foreclosure rate is four times in the minority community what is it in the white community. That means that something is going terribly wrong.
And it is not the case that the banks like Wells Fargo cannot predict, with all these information that they get, exactly what a person's ability to repay is. They know. Instead, it's consistent with what we see, which is price discrimination - that is, folks in the minority community paying more than folks in the white community. And it's consistent with other practices, such as putting people into loans that they really shouldn't have, they can't afford, loan products that will encourage people to come in for a couple of years at a low rate, and suddenly, they get bumped up to a higher rate. Banks have to responsibility to make sure that people really can pay this back. And all the indicia in Baltimore, that Wells didn't do that.
MARTIN: Okay. But what evidence do you have that this is based on race?
Mr. RELMAN: Well, again…
MARTIN: Simply because there's a pattern.
Mr. RELMAN: Again…
MARTIN: What is it - I guess the argument they would make it that these folks got these kinds of mortgages because their credit worthiness would have suggested that that's what they should get.
Mr. RELMAN: Well, even when we look at credit worthiness factors, I mean, you can look at - Wells had the ability to look at these credit scores, to look at other indicia - reserves - and other things that people have. And the types of loans that they make in the minority community, many of them are fixed rate loans. It means that the interest rate isn't going to change over the 30-year period. If they were doing their job and they weren't bumping people up, then -in price - then we should see foreclosure rates that are similar.
They should be able to predict. But we're not. And in addition, there's other organizations. There is, for instance, the Center for Responsible Lending that's founded that there are - Wells have predatory practices. They came out in the report in 2004. We know that African-Americans, 65 percent in 2006, were in what's called high-cost or high interest rate loans, compared to 15 percent for whites.
We know the time to foreclosure is much faster in the minority community, which is consistent with something going terribly wrong and efforts to try and make things work when initial payments may not be made or when there are problems. Al these indicia are that these - that the minority community is getting targeted for practices that are just not responsible lending practices.
MARTIN: Lisa, do you find that - are there similar complaints across the country?
Ms. RICE: Yes, Michel, there are similar complaints across the county. One of the problems is that organizations like Fair Housing agencies and other civil rights groups who look at and monitor these practices don't really have to resources that they need to conduct all of the research, for example, the research that John has just alluded to in reference to this particular lawsuit.
MARTIN: What about the banks argument? Wells Fargo's argument? And I assume that's an argument that other lending institutions would make, that it's not in their interest to foreclose on these properties. It's not in their interest to get people loans that they can't pay back. What would you say to that?
Ms. RICE: Well, corporations, of course, are in the business to make money. And unfortunately, sometimes they can become very short-sighted. And so what becomes more important to them is how much money they're making presently, at the moment. And they can sometimes lose site of the longer term focus or analysis on what's going to happen in terms of their return on investment years to come down the road. It's sort of we're making money now. We'll worry about any problems, you know, when we get to them - which is why you hear a lot of people in the lending industry now saying, oh, well we couldn't see this crisis coming and this has caught us all unawares when those of us who are in the fair lending community have been complaining about this for the past 10 years.
MARTIN: I still have to sort of ask, though, is the issue here that you think minorities are specifically targeted for abusive or predatory lending practice, or is it that by - is that they are, for whatever reason, assumed to be a greater credit risk?
Ms. RICE: I think it is very much the latter. They're assumed to be a greater credit risk. But I think it's more that African-American and Latino communities and borrowers are not targeted for prime products. So if you, for example, look at the distribution mechanisms that lending institutions have set up, what you will find very often is that their brick and mortar retail operations will be focused in predominantly white neighborhoods, whereas they will use mortgage brokers and other third party loan originators in predominantly African-American and Latino communities. So you won't find the same level or the same number of bank branches in predominantly African-American and Latino communities.
MARTIN: If you're just joining us, we're talking about the city of Baltimore's lawsuit against Wells Fargo Bank for allegedly targeting black neighborhoods with subprime mortgages. I'm joined by John Relman, who's representing the city, and Lisa Rice, vice president of the National Fair Housing Alliance.
Alvin, I want to bring you into this conversation. You've been hearing our conversation so far. You work with individuals who are facing this kind of sort of financial distress. I mean, you've also worked with people who are facing foreclosure. What are the factors that lead them to be in those circumstances? Do you feel that a lot of times it's what Lisa talked about? It's a lack of information, that they didn't really feel that they understood the terms as they were signing these terms? Or is it that they feel that they were subjected to high-pressure tactics? What are you hearing?
HALL: I'm hearing, one, that almost none of them read the contracts or looked at the specific details of the contract. Rather, they were told what the loan was by the person selling them the loan. Typically, it was a family member or the cousin of a family member, so there was an emotional issue there. The second thing was they never realized when the mortgages would go up and the amount by which they would go up. That was never laid out to them in any way. And in many cases, the idea of a fixed rate mortgage was not an option.
All the person talked about with them was a teaser rate that would enable them to get on the property ladder and move up. Those are the issues that I'm hearing.
MARTIN: John, what would you say to those who argue that individuals have a responsibility, though, to make, you know, intelligent financial decisions for themselves? That if you don't read the fine print yourself, that's your responsibility, sort of as any person answering into a contract? What would you say to that?
HALL: Well, you know, of course, it's a two-way street. I mean, people do have an obligation to inform themselves about what they're getting into. But at the same time, when you meet with a loan officer and the loan officer tells you - there are complicated terms and the loan officer tells you you can afford this. This is a product that will work for you. And, by the way, if over the next two years, we'll start you at this rate, we'll be able to refinance you at a better rate later on, these are things that people rely on. If someone says to you you can afford an interest rate of 9 percent as opposed to 8 percent, or this adjustable rate is better for you than a fixed rate, you're going to generally rely on that. You're not a financial expert.
And the problem here is not the pricing for the risk, but the bank has an ability, as I said before, to predict almost with mathematical certainty based on these automated underwriting engines, this software, whether you're going to be able to pay it back, whether you're going to be delinquent or default later on. And it's their obligation to make sure that you can do that, because when they don't, the city gets left holding the bag, investors get hurt and of course the borrowers lose their homes.
Now, you ask a very good question. Why would the bank ever allow someone to get into a loan they can't pay back? But Wells, like many of these originators, immediately sold these loans to Wall Street, to secondary market players as soon as they made the loan, because they get points and fees right at the time of closing. That's how they get paid. They sell the loan to Wall Street. More money comes back into them from Wall Street, and they make more loans. So it's a - so the higher the volume of business they can do, the more money they make.
It doesn't hurt them if they offload these loans after they've been made.
Mr. HALL: May I say something?
MARTIN: Sure. Alvin?
Mr. HALL: I disagree with one point. I think everything you're saying is correct except one thing. They do not have the ability to predict who is going to default on these mortgages. That is almost impossible to do. If they could have done that, then the subprime mortgage crisis wouldn't have existed, because they would have been able to hedge those bets.
The problem the banks are facing - and I do agree with everything else he's saying, except that the problem the banks are facing is that they did not help the consumers who were first-time or second-time buyers understand the terms of their mortgages...
Mr. HALL: ...that they were completely and totally negligent.
MARTIN: But then, I guess, Lisa, the same question to you. Whose responsibility is it that a party to a contract understand the terms?
Ms. RICE: Well, I think it's everyone's responsibility, and certainly the onus is on the lending institution - in this case, Wells Fargo - because they have superior knowledge. They do this every single day. They are professionals. They have superior knowledge over the consumer who may do this transaction one, two, maybe three times in their lifetime.
Additionally, what we're finding very, very often is that the terms and conditions are changed at the closing table. So the consumer…
MARTIN: And you would consider that an abusive practice or a predatory practice.
Ms. RICE: Absolutely. Absolutely.
MARTIN: And why would you consider it that? Because you think perhaps a better educated buyer would know to object?
Ms. RICE: Not necessarily. I served on the Federal Reserve board's consumer advisory council, and at that time, we conducted a study - the Fed actually conducted a study that showed that 97 percent of consumers did not understand the terms and conditions of their loans at the closing table, and did not read all of the documents at the closing table, 90 percent - 97 percent of all consumers.
So if you change the terms and conditions, if you're telling a consumer that their APR is a certain percentage all through the loan process…
MARTIN: APR, being?
Ms. RICE: The annualized - the annual percentage rate. That is a tool that we have educated consumers that they're supposed to shop on. So you go to lender A, B and C, and you figure out what the APR is, and that's how you shop for the best loan.
However, if the terms and conditions change at the closing table, that APR that you were given up front is inaccurate.
MARTIN: Why are they allowed to do that?
Ms. RICE: Because our laws allow them to do it, and regulators, quite frankly, allow lenders like Wells Fargo to do that.
MARTIN: And the onus is on the consumer to say I'm not going to sign these papers because these are not the terms that I had agreed to.
Ms. RICE: And oftentimes, the consumer is not in a position to refuse the loan at the closing table because of the way their financial circumstances are. So if…
MARTIN: Or because they're ready to move.
Ms. RICE: They're ready to move…
MARTIN: They already packed everything in their, you know, their trunk. They've sold their house and they're ready to move, and they find themselves not in the - or feel that they're not in a position to negotiate at the last minute.
Lisa, do you feel that this action by Baltimore will have national repercussions? I understand the city of Ohio - of Cleveland, Ohio, is taking a similar action. But they're suing a group of lenders. So do you think that other cities are watching this action?
Ms. RICE: I certainly do. And I think that it has broader implications as well, because if Wells Fargo has the responsibility or is found to be liable under the Fair Housing Act, I think that it will force loan - other loan originators and lenders to think about their sales, underwriting and distribution strategies. And I also think that it will force their regulators, their federal regulators to conduct more thorough fair lending and CRA compliance reviews.
I mean, Wells Fargo received an outstanding from their federal regulator in 2006, where we look at the data in this lawsuit, we see, you know, all of these disparities based on racial lines.
MARTIN: You don't think that regulators were taking these disparities into account, or how do you account for that?
Ms. RICE: No, I don't think that they were looking at the information as closely as they should have been, and we've been arguing that for the past 10 years, telling regulators that they should conduct more thorough fair lending reviews and CRA analyses and examinations.
If lenders thoroughly and completely complied with the fair lending laws, we wouldn't be in this mess today.
MARTIN: Very brief question for you, John. There are those who would argue that this kind of pricing - let's set aside predatory practices or abusive practices, but just this kind of pricing has allowed more people to get into homes than at anytime sort of in our history, and that these kinds of lawsuits will eventually foreclose home ownership for a certain population of people.
How do you respond to that very briefly, if you would?
Mr. RELMAN: The pendulum has just swung too far. I mean, there was an important goal, which was closing the minority homeownership gap, and that during the '90s, there was a lot of emphasis put on that. But the banks took it too far. The mortgage lenders took it too far.
They saw a minority community that have been denied good loans and was starved for credit. And they've taken advantage of that by going into a vulnerable community that they know will say yes, and sold them products that they just should not have. And that's irresponsible.
MARTIN: And as I - I want to emphasize again that we did invite Wells Fargo to participate in our conversation today. They declined, and they did give us a statement, which we will make available on our Web site.
John Relman is an attorney with the Washington firm of Relman & Dane, representing the city of Baltimore in a suit against Wells Fargo Bank. We were also joined by Lisa Rice, vice president of National Fair Housing Alliance. They are both here with me in the studio. We were also joined by our personal finance consultant Alvin Hall. He was with us on the phone from New York. Thank you all so much for speaking with us.
Ms. RICE: Thank you.
Mr. RELMAN: Thank you.
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