Obtaining mortgage aid by claiming “discrimination” has become a high art. The problem is that someone always has to pay. Just ask Wells Fargo & Co. On July 12, the San Francisco-based bank, the nation’s largest mortgage originator, agreed to spend $175 million to settle accusations by the U.S. Department of Justice (DOJ) that for several years it steered black and Hispanic homebuyers toward high-cost loans, so it could charge excessive interest and fees. The agreement, in which Wells Fargo admitted no wrongdoing, ostensibly will defray borrower losses and expand homeownership opportunities in lower-income areas. More likely, it will raise the cost of borrowing for everyone, lower underwriting standards and keep lawyers employed. It amounts to a shakedown. And in the context of the big picture, $175 million is on the low side.
The Justice Department’s Civil Rights Division, often in conjunction with nonprofit civil rights organizations and other parties, long has been a vehicle by which federal prosecutors investigate banks, corporations, universities, state and local governments, and other organizations insufficient in their enthusiasm for the affirmation action culture. In this way, DOJ can redistribute wealth and income without Congress raising taxes or spending. Worse, under the doctrine of “disparate impact,” prosecutors don’t have to prove any intent to discriminate. They merely have to show that statistical differences in outcomes between what is and what should be are unacceptably large and have an “adverse impact” on minorities – and prosecutors, on a practical level, get to define the threshold of acceptability. This legal alchemy, rooted in the 1971 U.S. Supreme Court ruling in Griggs v. Duke Power Company (401 U.S. 424), is the basis for affirmative action goals, quotas and timetables.
The mortgage lending industry has been operating under the gun of disparate impact doctrine for years. The Fair Housing Act, the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act, as amended, each hold lending practices to be illegal if they have significant negative impacts on minority borrowers, whether or not such results were intended. In other words, even if a bank such as Wells Fargo doesn’t willfully discriminate against black or other minority mortgage applicants, if its practices produce wide disparities in group outcomes, the bank is subject to punishment. And because DOJ prosecutors can drag the discovery process to interminable lengths, even deep-pocketed targets may choose to capitulate in an out-of-court settlement rather than risk defeat at a highly-publicized jury trial and pay an outsized award. In the new regime, everybody must celebrate diversity whether they like it or not.
Under the Obama administration, DOJ’s Civil Rights Division has been unusually aggressive in its application of the disparate impact doctrine, and not just in the area of mortgage lending. That’s largely because the division leader, Assistant Attorney General Thomas Perez, is aggressive even by egalitarian standards. A division employee during the Clinton years and a staffer for the late Sen. Ted Kennedy, D-Mass., Perez is obsessed with equalizing outcomes across racial and other lines. Liberty and rule of law are of little or no importance in this quest.
It’s hard to overestimate the intensity of Perez’s Third World First/America Last radicalism. While as a Montgomery County, Md. councilman, for example, he promoted driver’s licenses and in-state tuition eligibility for illegal immigrants. He’s displayed untrammeled zeal in prosecuting “hate crimes,” the determination of which is fraught with subjectivity and possessed of an unspoken assumption that whites are guilty until proven innocent (with nonwhites, it’s the other way around). He speaks of illegal immigrants as “living in the shadows.” He has referred to “our Muslim-American brothers and sisters subject to post-9/11 backlash,” “communities of color disproportionately affected by the subprime meltdown,” and “LGBT brothers and sisters…forced to confront discrimination.” Wherever he goes, Thomas Perez sees racism and persecution. And no job is too big to tackle. “We have a very broad, a very ambitious vision,” he enthused a couple years ago. “It’s a very exciting vision, and I wake up every morning with a hop in my step.”
Thomas Perez’s division, its ranks swelled by about 100 staffers thanks to President Obama’s Fiscal 2010 budget, and its sense of mission heightened by the foreclosure crisis, has plenty of businesses hopping to his tune. And he’s demonstrated an ability to intimidate. His team of prosecutors last December coaxed Bank of America into committing $335 million to settle allegations that its money-losing Countrywide Financial Unit discriminated against black and Hispanic borrowers during 2004-08 – the period immediately before Bank of America took over the insolvent Countrywide and paid a combined $2.8 billion to Fannie Mae and Freddie Mac to avoid legal action against outstanding mortgages gone bad. Late this May the DOJ corralled SunTrust Banks Inc. into signing a $21 million “agreement” in a similar case. And earlier this month, Perez and his enforcers bullied a Dallas-area builder, JPI Construction, into agreeing to pay $10.25 million into a special fund set up to remove allegedly discriminatory accessibility barriers for the disabled at more than 30 of its multifamily properties.
The Obama-era DOJ Civil Rights Division also stands ready to go after any state government that tries to assist with the enforcement of federal immigration law. Thomas Perez, along with his boss, Attorney General Eric Holder, played a key role in the Justice Department’s semi-successful effort to invalidate Arizona’s new SB1070 statute authorizing law enforcement agents in that state to ask criminal suspects about their nationality, a law carefully worded to supplement, not supplant, existing federal law. This June 25 the U.S. Supreme Court upheld the core provision, but Perez may have the last laugh because the Court also struck down three other provisions of the law that would have better enabled state authorities to identify illegal immigrants. Moreover, it said that law enforcement could ask a suspect to give his nationality only if the situation met the criteria for “reasonable suspicion.”
The investigation of Wells Fargo was a natural for several reasons. First, Perez and his band of enforcers have made punishing banks a top priority. Early in 2010, DOJ’s civil rights division created a separate task force that would focus exclusively on banks and mortgage brokers. This unit, with the help of bank regulatory agencies and the U.S. Department of Housing and Urban Development (HUD), would sift through voluminous loan data in order to discern “discriminatory” patterns. Thus far, this unit has filed complaints and/or reached settlements in at least 10 cases. Second, Wells Fargo already had amassed a track record of surrender. Last year the Federal Reserve Board imposed an $85 million settlement on Wells Fargo based on allegations that the bank’s now-defunct subprime unit steered borrowers into high-cost loans. Under the agreement, Wells Fargo will compensate aggrieved borrowers anywhere from $1,000 to $20,000. And this February the bank agreed to set aside $5.35 billion in civil penalties and loan write-downs, part of the $25 billion, five-bank settlement with state attorneys general (assisted by the U.S. Department of Justice) over hasty processing (“robo-signing”) of mortgage foreclosure documents. Third, Wells Fargo, with revenues of $87.6 billion and profits of $15.9 billion in 2011, makes for an easy target. Driven heavily by mergers and acquisitions (e.g., Norwest, Wachovia), it’s now the nation’s largest bank in mortgage origination volume and market capitalization, and the second-largest in deposits, home mortgage servicing and debit cards.
The Wells Fargo shakedown originated nearly a half-decade ago. In January 2008 the City of Baltimore filed a federal civil complaint against the bank, claiming its lending practices discriminated against black borrowers and led to a wave of foreclosures that reduced property tax revenues and increased public service costs. The lawsuit, led by Mayor Sheila Dixon and joined by the City Council, charged that Wells Fargo had underwritten high-cost loans (at least three percentage points above a federal benchmark) to 65 percent of black mortgage applicants in the city yet only to 15 percent of white applicants. Mortgage refinancings likewise carried higher costs for blacks. In December 2009 the City of Memphis and surrounding Shelby County, Tenn. filed a suit against Wells Fargo, alleging violations in Federal Housing Administration (FHA)-insured as well as conventional home loans.
Anyone doubting Baltimore and Memphis/Shelby County were going in for the kill need only have looked at their representation, the Washington, D.C.-based litigation shop of Relman, Dane & Colfax. The firm, led by affirmative action zealot John Relman, had a national reputation for bagging multimillion-dollar settlements from corporate targets, from Avis Rent-a-Car to Denny’s Restaurants, in highly dubious discrimination cases. Local governments weren’t the only plaintiffs by this time. In March 2009 the National Association for the Advancement of Colored People (NAACP) sued Wells Fargo for steering blacks to subprime mortgages. Wells Fargo was one of 15 lenders targeted by the Baltimore-based NAACP; other defendants included Citigroup, HSBC Holdings and JPMorgan Chase. The case was beginning to assume a familiar pattern: Make the defendant fear the consequences of court defeat to the point where settling becomes attractive.
On April 7, 2010 Baltimore and Memphis each filed an amended complaint against the bank, three months after U.S. District Judge J. Frederick Motz dismissed the original Baltimore complaint as too broad. He said the City could sue, but only in relation to houses and neighborhoods tangibly connected to Wells Fargo’s lending practices. The new suits, coincidentally or not, were filed on the same day on which the NAACP dropped its suit against Wells Fargo given that the bank agreed to let the Baltimore-based civil rights group review its lending practices. The company believed such “cooperation” would obviate the need for legal action. “We believe we can accomplish more for homeowners through working with communities than having to respond to litigation,” said Wells Fargo spokesman Oscar Suris. “It is our hope that Baltimore and Memphis make that same choice soon.” As could have been predicted, Baltimore and Memphis/Shelby County didn’t make that choice. Why settle for a half-measure when total victory is entirely possible?
Wells Fargo sought motions to deny the Baltimore and Memphis/Shelby County lawsuits legal standing, but in the spring of 2011 federal courts denied the motions. The U.S. Justice Department’s Civil Rights Division, quietly, now entered the fray. In July 2011 an inside source revealed that the bank and DOJ were involved in secret negotiations to settle allegations of steering nonwhites toward high-cost loans. The Office of the Comptroller of the Currency had launched its own investigation, a probe eventually folded into the DOJ complaint. And the allegations were national in scope, covering more than a half-dozen metropolitan areas. Neither the government nor Wells Fargo would confirm the existence of the talks. But the result could have been predicted: Wells Fargo would pay. It would take a full year to find out how much and to whom.
This July 12 Thomas Perez and his team of prosecutors announced a settlement: Wells Fargo will pay $175 million to borrowers in areas experiencing significant levels of discrimination. Of this, $125 million represents damages payable to overcharged borrowers and $50 million represents future down payment assistance to borrowers taking out home loans in presumably underserved areas. Next to last year’s Bank of America/Countrywide settlement, it was the largest federally-brokered fair-lending payout. “This in a way brings to a close a certain chapter,” triumphantly declared plaintiffs’ attorney John Relman. “This is the way you start to make things better on the ground.” Assistant Attorney General Perez likewise was aglow. “This is a case about real people – African-American and Latino – who suffered real harm as a result of Wells Fargo’s discriminatory lending practices,” he remarked. Wells Fargo Home Mortgage President Mike Heid, true to corporate form, spun the news as a win-win outcome: “Our commitment to our customers and to turning the housing market around is stronger than ever.”
The $175 million figure, in fact, is only part of the picture. To get the cities of Baltimore and Memphis to call off their lawsuits, Wells Fargo had to pay a hefty price, especially in the latter case. Wells Fargo agreed to provide $3 million in assistance to home mortgage borrowers in Baltimore. That was pocket change compared to the whopping $432.5 million that the bank agreed to get Memphis and Shelby County off its back. Under the settlement, Wells Fargo will make available up to $425 million in mortgage loans to residents of Memphis and surrounding county areas, setting aside $125 million of that for high-risk borrowers. The bank also would pay $3 million to the City for economic development and another $4.5 million for property improvements and community development grants. In each case, Wells Fargo stated it preferred a settlement to a protracted court battle. Translation: Wells Fargo preferred to pay economic blackmail to avert a jury trial it was virtually certain to lose, given that each city’s population is nearly two-thirds black.
The bank’s settlement with the Justice Department bears special mention because the details of how the $175 million sum came to be are known. DOJ researchers, after looking at more than 34,000 mortgage loans Wells Fargo had underwritten to minority borrowers in three dozen states and the District of Columbia during 2004-09, concluded there had been “systemic discrimination.” Around 4,000 of those borrowers had been steered into subprime loans carrying steeper interest rates and fees than prime loans. Each of those households will receive on average $15,000 in compensation. Even when minority borrowers received prime loans, they paid fees ranging from around $1,000 to $2,000 higher than similarly qualified white customers. On the surface, the settlement seems reasonable. But in fact it isn’t. The Justice Department’s argument for combating “predatory lending” can be rebutted in several ways.
First, and most importantly, the Justice Department applied the “disparate impact” standard which, as explained earlier, corrupts the very idea of equality under the law. Federal prosecutors didn’t find any evidence of deliberate racial-ethnic discrimination by Wells Fargo because they didn’t look for it in the first place. They simply analyzed loan volumes and characteristics in selected geographic areas, and drew normative conclusions about what the bank should have charged by race. As the Wall Street Journal (July 13) opined: “This so-called disparate-impact analysis takes no account of bargaining between lenders and borrowers, or other factors that might relate to creditworthiness. It also doesn’t consider the intent to discriminate, which is required in most other realms of civil and criminal law.”
Second, the main target of the investigation wasn’t Wells Fargo itself, but its third-party mortgage brokers. The Wells Fargo press release announcing the settlement stated the case was “based on a statistical survey of Wells Fargo Home Mortgage loans between 2004 and 2009, and the claims primarily relate to mortgages priced and sold to consumers by independent mortgage brokers.” The Justice Department acknowledged that it focused on broker-underwritten loans because brokers had “discretion to request exceptions” to underwriting guidelines. But using this subset as a proxy for all loans loads the dice. For one thing, brokered loans accounted for only about 5 percent of its mortgage volume. It’s hard to make the claim they were representative. For another, monitoring the behavior of contractors spread across the country is harder than it looks. The Department of Housing and Urban Development, for example, long has had problems overseeing firms managing FHA-foreclosed homes, which at times have become public eyesores. In the Wells Fargo case, the bank capped fees at 4.5 percent of a prime loan and 5 percent of a subprime loan. The brokers, able to charge up to those limits, had an incentive to steer creditworthy borrowers to subprime loans. And they easily could bypass bank-imposed filters intended to identify prime customers by encouraging borrowers to skip down payments or withhold certain documents, thus disqualifying them for a prime loan. If there was illegal behavior here, it was a case of consumer fraud, not civil rights.
Third, the high rates of foreclosure were the result of the government’s insistence upon relaxing underwriting standards as a way to reach “underserved” (i.e., minority) homebuyer markets. The foreclosures, in other words, represented loans which, under normal market circumstances, never should have been made. Unfortunately, for decades, Congress and a succession of presidential administrations, pressured by belligerent civil-rights and community groups, have forced primary lenders and Fannie Mae/Freddie Mac into raising the portion of their respective portfolios devoted to risky mortgage loans – that is, loans taken out by households with low income and asset levels and/or with nearly nonexistent credit histories. The obsession with perpetually boosting the nation’s homeownership rate to 70 percent and beyond by “reaching” blacks and Hispanics, however unqualified they might be, was central to the great financial meltdown of 2008. And it wasn’t just Democrats who touted minority homeownership. At the December 2003 signing ceremony for the American Dream Downpayment Act, for example, President George W. Bush announced:
Last year I set a goal to add 5.5 million new minority homeowners in America by the end of the decade. That is an attainable goal; that is an essential goal. And we’re making progress toward that goal. In the past 18 months, more than 1 million minority families have become homeowners. And there’s more that we can do to achieve that goal. The law I sign today will help us build on this progress in a very practical way.
President Bush and his top political adviser, Karl Rove, didn’t think this one through. Ramped-up minority homeownership carried with it the risk of ramped-up minority foreclosures, especially given that ethically-challenged operators in the real estate industry could make small fortunes at both ends. Mortgage brokers for Wells Fargo and other banks recognized that in an atmosphere of affirmative lending quotas and accompanying lax lending standards, cutting corners now became far more possible.
Fourth and related, the settlement ignores the fact that when a lender charges high-risk borrowers extra, it does so in order to compensate for the higher risk of default. Minority borrowers long have exhibited higher rates of foreclosure than whites, even when controlling for borrower and property characteristics – an inconvenient fact for affirmative lending enthusiasts. Moreover, their incomes and assets as a whole are lower, and their credit histories are weaker. Not to restate the obvious, but lenders are in business to make loans. They don’t make any money turning down an applicant. When a bank says “no” to someone, it’s because the bank believes, rightly or wrongly, that the likelihood of not getting paid back in this case is too high to justify extending credit. It’s not because the bank gets a joyful high from “discriminating.” This holds true regardless of race. A bank no more makes money turning down a black borrower than it does turning down a white borrower. To reach marginally qualified borrowers – a category to which high proportions of blacks and Hispanics belong – lenders, especially as they are under the gun from affirmative action-minded federal regulators, are apt to consider creative financing techniques to secure an approval. Call such lending “predatory,” but it often is the only way to get a borrower approved in accordance with credit guidelines. The U.S. Justice Department and other plaintiffs against Wells Fargo were oblivious to this reality.
To some, the word “shakedown” might be a cliché. Yet it remains thoroughly valid in situations like this. Wells Fargo, without even admitting to any wrongdoing, faced a Hobson’s choice, courtesy of the U.S. Justice Department: 1) agree to be relieved of $175 million; or 2) fight the charges and risk paying a lot more in the form of a jury award. That’s not even including the staggering $400 million-plus it had committed to get the City of Memphis/County of Shelby off its back. Yes, Wells Fargo has deep pockets. But that’s why under the guise of “civil rights,” so many people want to pick them. The bank, having been shaken down, will pass the cost onto customers. It’s a “diversity tax.” And everyone pays it whether they know it or not.
The larger issue is the impossibility of reasonable discussion of race in this country, especially in the context of social inequality. The prevailing orthodoxy is that differences in racial outcomes represent a deep stain on the American character, a lingering reminder of our benighted past. Banks and other institutions found to “discriminate,” even if the evidence is at best prima facie, have to pay up. This obsession with equalizing outcomes across racial lines, regardless of context, has a dangerous side effect: the erosion of rule of law and sound economic decision-making. In his 1999 book, “The Quest for Cosmic Justice,” economist Thomas Sowell explains:
Cosmic justice attempts to create equal results or equal prospects, with little or no regard for whether individuals or groups involved are in equal circumstances or have equal capabilities or equal personal drives. To do this, it cannot operate under general rules, the essence of law, but must create categories of people entitled to various outcomes, regardless of their own inputs. Moreover, it does this sub rosa, by creating huge burdens of proof for any criteria that reveal the inequalities of capabilities and circumstances, while assuming with little or no evidence that only malign intentions or systemic bias could explain unequal results. “Affirmative action” is perhaps the classic example of this approach but it is only one example.
The Department of Justice under the Obama administration is the prime purveyor of cosmic justice in this country, as opposed to the kind of traditional justice embodied in the Constitution. Its “agreement” this month with Wells Fargo was no agreement at all. It was an act of intimidation. And the purpose was to set an example. Banks and other enterprises across the nation will draw the logical conclusion that since Wells Fargo & Co., with all its resources, is too timid to stand up to its accusers, surely it doesn’t pay for anyone to fight. Affirmative action zealots, meanwhile, eager to criminalize statistical disparities, are now busy locating new targets to threaten and sue. Such is the “exciting” vision of Thomas Perez and people like him.