Karl Heideck Explains the Lawsuit by Philadelphia Against Wells Fargo

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According to news reports, the City of Philadelphia has filed a lawsuit against Wells Fargo & Co., alleging that the bank has violated the Fair Housing Act of 1968 by using predatory lending practices aimed at minority mortgage borrowers. Wells Fargo is denying the allegations, contending that its practices are fair and that the claims in the lawsuit are unsubstantiated. The lawsuit was filed on May 15 in the U.S. District Court for the Eastern District of Pennsylvania, and it is the latest in a string of problems for the large bank, which is still reeling from the scandal last year involving its bankers opening bogus accounts in the names of customers.

Allegations in the Complaint

The city is alleging that Wells Fargo Bank, which is based in San Francisco, steered black and Hispanic borrowers into riskier loans with higher interest rates even though they should have been credit-qualified for lower-interest and lower-risk mortgages. Philadelphia also alleges that the bank made it difficult for these borrowers to refinance their mortgages later, forcing a much higher percentage of them into foreclosure than were similarly situated white borrowers. The city investigated its claim for a year before filing the complaint. By looking at data from loans over a 10-year period made by Wells Fargo, the city determined that black borrowers were more than twice as likely to be given higher interest loans than were white borrowers, and Hispanics were 1.7 times as likely to receive the riskier mortgage loans. All of the borrowers who were looked at by the city had FICO scores of 660 or higher. White borrowers with similar credit scores received lower-interest mortgage loans than the minority borrowers did.

Philadelphia alleges that the bank’s actions resulted in blight in minority neighborhoods due to increased foreclosure rates that resulted from the inability of borrowers to refinance their riskier loans. According to the complaint, homes in minority neighborhoods were 4.7 times likelier to be foreclosed on than were homes located in predominantly white neighborhoods. The city is asking for unspecified monetary damages along with an injunction against the bank to force it to stop using discriminatory practices in lending. The period of time during which Wells Fargo allegedly engaged in its predatory lending practices that are subject to the lawsuit was from 2004 to 2014.

City Statistics

With 1.57 million people, Philadelphia is the fifth-biggest city in the U.S. It has a large minority population. Forty-three percent of its residents are black, and 12 percent are Hispanic, according to the 2010 U.S. Census. Wells Fargo’s alleged lending practices towards minority borrowers in Philadelphia reportedly hurt the city because many of the borrowers who later applied for loans to refinance their mortgages were denied, which resulted in many losing their homes to foreclosure. The city claims that this hurt the city because it led to lower property values in the affected neighborhoods, higher crime rates and more frequent incidents of vandalism.

Ongoing Problems for Wells Fargo

Philadelphia’s lawsuit against Wells Fargo is the latest legal headache for the already-reeling bank. It is still attempting to recover from the scandal surrounding its creation of fake customer accounts so that bankers could meet their sales goals. Philadelphia’s lawsuit also comes just two weeks after the Supreme Court of the United States ruled that Miami could sue Bank of America and Wells Fargo under the Fair Housing Act. Justice Stephen Breyer, writing for the majority, wrote that cities can sue banks under the Fair Housing Act if they can show a direct causal link between predatory lending practices and the harms that they suffered as a result. The same attorneys who represented Miami in that case are representing Philadelphia in the current case. Philadelphia reportedly waited to file its complaint until after the Supreme Court’s decision because it wanted to make certain that it had the legal standing to file the lawsuit.

What is Redlining?

The practices that Wells Fargo is alleged to have engaged in are called redlining. This is a practice that dates back to the 1930s in which banks draw red lines around neighborhoods that they don’t want to extend loans to people who live in them. When this practice is done because of borrowers’ ethnicity or race, it is constitutionally prohibited. In Wells Fargo’s case, the bank is alleged to have denied lower-interest loans to creditworthy borrowers simply because of their race or the neighborhoods in which they lived. Redlining is illegal if it is done for an impermissible purpose such as the racial makeup of a neighborhood. It is not illegal if it is done for neighborhoods that don’t meet certain other standards such as being located in flood plains, however.

Wells Fargo’s Reaction to the Lawsuit

Rather than being contrite as the bank has been in the face of the bogus customer account scandal, Wells Fargo has come out fighting in reaction to the lawsuit against it by Philadelphia. In a statement by a spokesperson, the bank stated that the allegations against it by Philadelphia are unsubstantiated. It also stated that it has a history of 140 years of serving the residents of the city and that it uses responsible and fair lending practices. Wells Fargo has not yet filed its written legal answer to the complaint.

For more information, follow @karlheideck on Twitter.

About Karl Heideck

Karl Heideck is an attorney that practices in the greater Philadelphia area
Karl Heideck is an attorney that practices in the greater Philadelphia area

A 2009 graduate with honors of the Temple University Beasley School of Law with his Juris Doctor, Karl Heideck graduated with his Bachelor of Arts in English language and literature from Swarthmore College in 2003. Karl Heideck focuses his legal practice in the areas of civil litigation, compliance and risk management, assisting clients throughout the greater Philadelphia area.

Karl Heideck is currently working as an attorney reviewing discovery for complex banking litigation and securities fraud cases with a focus on liquidity, risk management, acquisitions and transactions issues related to the mortgage crisis of 2008.

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