The Shameful Legacy of Wells Fargo Finance: A Guest Editorial

- Editor’s Note: This is a guest editorial by Peter Skillern. Mr. Skillern is the Executive Director of the Community Reinvestment Association of North Carolina. His comments also appear in a story published in today’s Charlotte Observer.

I am an advocate who for 20 years has petitioned for lenders to be held accountable for unfair and illegal loan practices.  Yesterday, the Federal Reserve fined Wells Fargo $85 million and ordered up to $200 million in restitution to borrowers. The penalty is meant to address violations made by Wells Fargo Finance, which was a mortgage loan subsidiary of Wells until it was shut down last year. Wells Fargo Finance was one of the largest lenders in North Carolina and the unit that offered the infamous “2-28” mortgage loan. The “2-28” was a loan whose interest rate reset after two years.

But does that mean that justice has been served? After all, the bank was held accountable for its actions, a penalty was leveraged and reparations will be made.  But instead, it feels like a confirmation that a wrong had occurred that could not corrected.

For many people, justice delayed is justice denied.  The Wells Fargo Finance settlement covered the period of 2004 to 2008. Data showed that Wells Fargo Finance steered borrowers into higher cost loans than they deserved. In some instances, Wells employees falsified income statements.

The shame of it is that it was entirely preventable. A lack of regulatory enforcement of fair lending laws, coupled with pre-emption of state anti-predatory lending laws, fostered the environment where Wells Fargo Finance could ignore the law without fear. The hands-off approach, particularly at the Office of the Comptroller of the Currency (who regulated Wells Fargo N.A., but chose to excuse Wells Fargo Finance from oversight) enabled private actors to continue unfair lending practices.

All kinds of people were duped, but minorities suffered the most.  The Federal Reserve and OCC were repeatedly petitioned to examine the subsidiaries of the bank holding companies. Wells Fargo N.A. – the nationally regulated bank – made subprime loans at equal rates to whites and to minorities. Wells Fargo Finance – the largely unregulated subsidiary – made subprime loans at frequencies that were relatively equivalent for both whites and for minorities. The only difference was that borrowers at Wells Fargo Finance were three times more likely to be black than they were at Wells Fargo N.A. It was about the door that you went in to for a loan. Walk into a Wells Fargo Finance office and you left with a high cost loan (essentially all of their loans were subprime), with the strong possibility that you were treated unfairly.

Our agency raised these concerns in multiple complaints and protests against CitiFinancial, NationsCredit and other subprime lenders starting in 1999. Yet the Federal Reserve is taking this enforcement action in July 2011.  Justice is not served when the law is not enforced in a timely fashion.
The settlement does not address the complicity of the regulators in allowing these abusive practices. I do not see any acknowledgement on the part of regulators in their complicity in the problems.

The settlement does not address the harm done to society.  Individual borrowers were harmed by paying higher interest rates which means less money at the end of the month and less principle repaid.  The Federal Reserve alleges that Wells Fargo actively participated in fraudulent loans.  These were unsustainable and contributed to foreclosures and bankruptcies which have a rippling effect.  Because of who borrowed with Wells Fargo Finance, disproportionately minorities paid higher interest rates furthering the racial economic disparities.   The damage goes beyond the borrowers to society.  Compensating individuals for the interest they should not have been charged is small compensation to the harm experienced. By now, many of those families have been foreclosed upon. The stories are tragic and involve people that should have known better. Borrowers at many banks, not just Wells, were put into loans by lenders that told them that they would never have to pay the higher post-ARM reset interest rates, but that instead they would be able to refinance. When the bubble burst, homes were lost, credit was destroyed, and the lenders were bailed out.

The individuals and management of Wells Fargo are not held accountable.  The Wells Fargo press release says it was the result of a handful of individuals that have been fired and not a reflection of the corporate policy. Really?  That handful generated an estimated 12,000 bad loans.  The settlement holds Wells Fargo accountable because of its corporate policy and practice.  Where is the management accountability?

Individual accountability is replaced by corporate culpability and atonements are made through corporate generosity or fines.  Executive leadership are paid millions of dollars in compensation.  Upper tier management are paid hundreds of thousands.  They are not penalized in these settlements.  Shareholders are penalized with these fines.  That is a moral hazard that is not readily recognized by financial institutions or its employees. By comparison advocates and non-profits who stood with consumers are not compensated well.  Instead I see housing counselors being laid off and salaries cut even as they help those harmed by the bank’s lending practices.

That is why I do not feel a sense of justice or satisfaction in this settlement.   Just a confirmation of what is wrong.