Congressional hearing looks into Wells Fargo predatory lending

An epic legal showdown between Wells Fargo bank and the city of Baltimore will occur on Monday July 6 in the courtroom of U.S. District Judge Benson E. Legg. The city of Baltimore is suing the bank for engaging in deliberate predatory lending practices that targeted Black and Latino consumers. Judge Legg will decide on whether the case can go forward.

The Baltimore Sun reports that the suit has potentially far reaching implications:

“Barbara Samuels, a fair housing attorney for the American Civil Liberties Union of Maryland, which has been following the case, called it ‘innovative’ and potentially groundbreaking. ‘The city filing rather than the individual homeowners keeps the focus on pattern and business practices, as opposed to getting lost in the weeds of individual transactions,’ Samuels said.”

The Baltimore suit is part and parcel of a growing effort by cities, states and civil rights groups to combat conscious discriminatory practices by the country’s leading banks, and was the subject of a congressional hearing last week by the Joint Economic Committee chaired by New York Rep. Carolyn Maloney. Opening the hearing, Maloney said that “today, almost 1 in 6 subprime mortgages are in foreclosure compared to 1 in 40 prime mortgages in the United States.”

The congresswoman stressed the premeditated steering of borrowers by the banks: “Evidence continues to come to light that many of the subprime borrowers who had pay stubs to prove their employment — and may have qualified for prime loans — were steered into more costly no doc loans by some lenders.”

The congressional hearing was initiated by Rep. Elijah E. Cummings of Baltimore after the appearance of a June New York Times article pointing to Wells Fargo’s practices. Citing the suit, Cummings said, “The city’s contention is that the discriminatory lending practices pursued by Wells Fargo promoted high-cost loan instruments which led to foreclosures far in excess of what the rate of foreclosure might otherwise have been.”

Testimony by expert witnesses at the hearing detailed a history of capricious practices by the nation’s largest banks. Robert Strupp, of the Community Law Center, pointed to a pattern by financial institutions of taking advantage of programs designed by the Federal Housing Administration to help low-income borrowers.

As early as the 1970s, Strupp explained, “blockbusting” practices developed as FHA loans were used by banks to get owners to sell quick, with the banks then reselling the homes to minorities at inflated prices. This resulted in a 500 count indictment of banks involved in 7,500 homes in New York City at the time.

In the 1990s, abuse of FHA loans was repeated, according to Strupp: “As a result of these predatory practices, neighborhoods in the 1990s began experiencing rising foreclosures, bankruptcies and neighborhood disintegration. The gravity of the foreclosure situation at the time is best perhaps demonstrated by the decision of the FHA to declare a moratorium on FHA foreclosures.”

Pointing to the racist and sexist consequences of the loans, the expert witness pointed out that research by the Chicago Reporter newspaper found that African Americans with incomes of $100,000 were twice as likely to receive loans than whites making less than $35,000. Half of the loans between 2003 and 2007 were made to women and in one year — 2006 — half of those loans were subprime.

Regulating the practices of the banks, while important, is not enough, declared Gregory Squires, a professor of sociology at George Washington University. “The concentration of income and wealth at the top coupled with the concentration of poverty and persisting levels of segregation and hypersegregation have nurtured significant increases in subprime and predatory lending among vulnerable communities,” he said. “Reforming the regulation of financial services is a necessary but insufficient step for ameliorating the crises created by recent lending practices.”

Squires described persistent and growing inequality, centered in but not limited to a racial wage gap. “While African Americans and Hispanics earn approximately two-thirds of what whites earn, wealth holdings for the typical non-white family are approximately one-tenth that of the typical white family,” he said.

His figures indicate the emergence of a growing crisis: “Between 1970 and 2000, the number of high-poverty census tracts (those where 40 percent or more of the population is poor) grew from 1,177 to 2,510, and the number of people living in those tracts grew from 4.1 million to 7.9 million.” Middle-income working class families, it seems, are being increasingly driven into the ranks of the urban poor, who in turn become targets of predatory lending.

Squires proposed several remedies including indexing the minimum wage to increases in the cost of living and “enacting the Employee Free Choice Act, which allows workers to form a union when more than 50% of workers sign a card indicating their desire to do so in lieu of secret elections, [which] would strengthen the role of unions in the U.S. and their positive impact on wage inequality.”

Sarah Bloom Raskin, commissioner for financial regulation in Maryland, told lawmakers of the pitched battle between states and national mega-banks, a struggle in which “state actions have been hamstrung by the dual forces of preemption of state authority and lack of federal oversight.” In recent years the Bush White House successfully lobbied the Supreme Court to reject state oversight of banks.

Despite her state’s best efforts, Raskin said, there has been a growing epidemic of foreclosures, overwhelming remedial efforts. “In the past 12 months, over 100,000 Notices of Intent to Foreclose have been sent to Maryland borrowers and to our office,” she said.

Ominously, the state commissioner pointed to a new mortgage epidemic as business elements take advantage of new programs and try to get around regulatory measures: “Today, we see another mortgage storm brewing in the area of loss-mitigation consulting. Historically, we confronted fraudulent foreclosure transactions where title was conveyed as part of a scheme to strip homeowners of their equity. Today, with no equity left to strip, the ripoffs have become fee-based with so-called consultants charging high up-front fees to vulnerable consumers to help them get a loan modification.”

It is hoped that the Obama administration’s new financial regulatory reform plan and consumer protection agency will address these issues.

Raskin called for new laws that would allow states to regulate national banks operating in their jurisdiction along with eliminating the “federal preemption of the application of the state consumer protection laws to national banks.”