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US bank pays out $175m to settle claim of race bias

Wells Fargo accused of making black and Hispanic customers pay higher product fees

One of America's largest banks has agreed to pay $175m to settle claims that it engaged in racial discrimination during the pre-crash housing boom by charging black and Hispanic customers higher fees than whites for their mortgages, sometimes steering them into costly sub-prime loans.

While agreeing to pay the fines, Wells Fargo, which has made significant contributions to the presidential election campaign of Mitt Romney, made clear it was doing so to end the litigation and was not admitting to any guilt in the case. The announcement nonetheless puts an unwelcome spotlight on practices which, according to the US government, amounted to the levying of a "racial surtax".

The US Justice Department said more than 34,000 black and Hispanic borrowers in 36 states paid more for their home loans purely because of the colour of their skins and not for reasons of creditworthiness. Of the sum to be paid by the bank, $125m will go towards compensating those borrowers. The balance of $50m will be used to help borrowers in the regions where most victims lived – including Washington, New York, Philadelphia, Baltimore and California – with their mortgage deposits.

The agreement also brings to a close litigation brought against the San Francisco-based Wells Fargo by Lisa Madigan, Attorney-General of Illinois. The state also accused the bank of deliberately peddling high-cost subprime mortgages in minority areas.

"Wells Fargo's illegal discriminatory lending practices helped destroy a generation of wealth in African-American and Latino communities in Chicago and across the nation," Ms Madigan said, adding that the settlement "holds Wells accountable and requires the bank to invest in the same communities it helped [to] destroy".

Officials said the fine was the second-largest imposed in a fair-lending case. It was, however, a good deal less than the $335m that Bank of America agreed to pay in November to settle allegations that its Countrywide mortgage unit similarly sold overpriced loans to minority customers during the mortgage-lending rush.

All of the leading US banks have donated heavily to Mr Romney, who, as the Republican nominee, is outstripping President Barack Obama in fund-raising, in part thanks to support from Wall Street. Wells Fargo is estimated to have given him $235,550 by the end of June, and Dan Bricken, the managing director at Wells Fargo Securities, will reportedly act as the co-host for one of two Romney fund-raising events in London this month.

The fines against Wells Fargo were announced by the US Deputy Attorney-General, James Cole, thus concluding a case investigated by the civil rights office at the Justice Department. "[The action] makes clear that we will hold financial institutions accountable, including some of the nation's largest, for lending discrimination," Mr Cole said.

The loans were not sold by the bank's internal retail mortgage division but by independent brokers. Wells Fargo said yesterday it would stop using outside brokers to sell its mortgage products.

The bank insisted it was not admitting culpability, saying: "Wells Fargo is settling this matter solely for the purpose of avoiding contested litigation with the [justice department] and to instead devote its resources to continuing to provide fair-credit services and choices to eligible customers."

Under the agreement, about 30,000 borrowers who were charged inflated fees for mortgages will each receive roughly $2,000 compensation. About $15,000 will be paid to each of around 4,000 customers who, according the government, were pressed into buying costly subprime loans because of their ethnicities.