Wells Fargo Loses Mortgage Discrimination Case

Yesterday a Los Angeles jury sided against Wells Fargo in a lender liability class action case, the Courtroom View Network reports. The bank is now on the hook for $3.52 million.

According to testimony, Wells Fargo is alleged to have used a proprietary software package called “Loan Economics” to reward non-minority mortgage-seekers for being non-minorities (“Hooray! We’re Norse!”) by offering them lower interest rates. Minority borrowers didn’t fare as well, primarily because, as attorney-for-the-plaintiffs Barry Cappello suggested, minority borrowers were less likely to shop around for lower rates.

The case went to trail back in December of 2010, with 7,348 loans in question. Capello calculated each loan-holder suffered about $4,000 worth of damages, bringing the initial suit to around $29.4 million. During the course of the trial – a near two-month affair, plus an additional month for deliberation – the jury whittled the number of loans down to 880, which is where we get that $3.52 million figure.

Of course, this being a class action case, Capello wasn’t offering his services pro bono. Attorney fees for class action cases can run anywhere from 25 to 33 percent, which means the plaintiffs would receive the equivalent of maybe a month’s mortgage payment, or about 471 Bloomin’ Onions® from Outback Steakhouse.

The defense’s defense was…well: they lost. Attorney Tom Nolan essentially (and, in his defense, no doubt unintentionally) told the jury to fine Wells Fargo: “If you find as a jury that Wells Fargo discriminated against borrowers, for God’s sake, hit us, with a big fine. But do so only on the evidence. Because a careful review of the evidence, not the incendiary language that’s used about the race issues in this country, should drive this verdict.”

In opening statements, Nolan told the jury that “[Mr. Capello] will not and cannot establish that Wells Fargo or its employees used race, ethnicity, or level of income to discriminate using the Loan Economics program.” Which may be true on a technicality, since it was the Loan Economics software, and not the employees, that made the decision about attractively lower interest rates.

On one hand, it’s pretty clear – after The Bubble and all – that not everyone should be buying a house. It’s probably also worth a few minutes of your time to think about who is ultimately responsible for finding lower interest rates for consumers. And if you find yourself saying, “Well, consumers are responsible,” then stop to consider the fact that Wells Fargo didn’t make its Loan Economics tool available for all customers. “They could have gone elsewhere,” you could counter. But, well, they didn’t. And selectively rewarding a segment without being explicitly about the selective rewards seems to be on the wrong side of sketchy.

In fact, during the trial, Nolan told the jury that Loan Economics was never intended to be a comprehensive tool; that’s its purpose was to increase loan volume and profitability. The increasing-loan-volume side of the equation is easy to suss out: you’re going to get more people taking out more loans if you help things along with lower interest rates. However, you can also increase profitability by taking advantage – I’m sorry, allegedly taking advantage – of those who don’t know to ask for lower interest rates.

This may have proved to be a win-win in the mid-2000s; but cases like this show that there’s a price to pay for that kind of profitability.