Wells Fargo & Company agreed Thursday to reach a settlement with the U.S. Department of Justice on charges that it had unfairly discriminated against black and Latino borrowers for several years by funneling them toward expensive subprime mortgages when they would have otherwise qualified for more affordable loans.

The bank denies intentionally discriminating againt borrowers, and announced in an official statement that "Wells Fargo is settling this matter solely for the purpose of avoiding contested litigation with the DOJ." Wells Fargo places much of the blame on its use of third-party mortgage brokers, which it plans to stop:

"Mortgage brokers operate as independent businesses and are not employed by Wells Fargo. Therefore, Wells Fargo cannot set loan prices for independent mortgage brokers nor control the combined effect of the negotiations that thousands of these independent mortgage brokers conduct with their customers."

Per the terms of the settlement, if approved by a federal judge, Wells Fargo will pay a $125 million penalty and establish a $50 million fund to assist with down payments in certain low-income urban areas. As Businessweek reports, the Justice Department filed a complaint with the settlement, alleging senior bank officials were well aware of discriminatory tactics used by subprime originators and implicitly endorsed them:

"In some cases, Wells Fargo steered many borrowers into adjustable-rate mortgages with so-called teaser rates when they qualified for more standard loans, such as those with 30-year fixed rates, the U.S. said in its complaint. The bank created financial incentives by sharing the higher revenue with employees and brokers, the U.S. said"

Subprime mortgages carry higher rates and fees, and during the housing boom, were easily and profitably sold on the secondary market to investment banks and hedge funds on Wall Street and around the world. This created an obvious incentive by loan brokers to take advantage of less-informed borrowers who may have been buying a home for the first time and get them into subprime loans. Easy financing was available because banks could sell mortgages quickly and not be on the hook for long-term risk, which inflated housing prices to an unsustainable level. When the house of cards fell, many people could no longer keep up paying the mortgage on a devaied house, leaving banks holding pools of now worthless mortgages and causing the financial crisis.

As the New York Times reports, President Obama set up an investigative unit within the civil rights unit of the Justice Department in 2010 to look at lending bias during the housing bubble. Before Thursday's settlement, it had already resolved similar cases with Bank of America and SunTrust Bank.

 

Reach Executive Producer Matt Pressberg here.