A recent Supreme Court decision that will allow mortgage discrimination cases against Wells Fargo and other banks to proceed is more than just another bad headline for the San Francisco financial giant.
As those cases progress, they represent yet another way that the bank’s practice of opening unauthorized accounts for customers could come back to haunt it.
Attorneys for the cities of Philadelphia and Oakland are arguing that the unauthorized accounts scandal — and the bank’s own admissions as to what caused it — bolsters their claims that Wells Fargo improperly steered black and Latino home buyers into pricier mortgages than white buyers.
Cities have argued that those practices in the years leading up to last decade’s housing crash contributed to thousands of foreclosures and blight, which in turn hurt cities’ property tax income and strained public resources.
Other cities suing the bank over those claims, including Los Angeles and Miami, may seek to raise the unauthorized accounts issue, too.
Those lawsuits are in various stages but all scored a critical procedural victory this month when the U.S. Supreme Court ruled in the Miami case that cities alleging financial harm due to mortgage discrimination can sue banks under the federal Fair Housing Act.
Banks had argued, and a lower court had earlier ruled, that cities could not do so. But the high court said that cities must do more than simply show banks’ practices could “foreseeably” lead to harm. They must show a “direct relation” between allleged predatory lending and its effects on city coffers, it said.
Wells Fargo spokesman Tom Goyda said the accounts scandal and the mortgage discrimination cases have nothing to do with each other and that cities are grasping at straws.
“They’re really just trying to leverage a hot issue in their favor,” Goyda said. “We don’t think the sales practices argument they want to introduce in the Oakland case and Philadelphia and, I assume, to others, is relevant.”
In the Philadelphia and Oakland cases, attorneys point to a report, commissioned by Wells Fargo’s board of directors, that found the practice of opening unauthorized accounts was able to persist for years because of a lack of proper oversight by executives and internal compliance officers.
That same lack of oversight, attorneys argue, may have contributed to mortgage discrimination, in which Wells Fargo pushed minority customers into mortgages that were more expensive — carrying higher interest rates and fees — than the loans that were offered to similarly credit-worthy white borrowers.
The cities' cases against Wells Fargo and other large banks, including Bank of America, rely in large part on statistical analyses of loans, looking at how borrowers of different races were treated differently.
In its case against Wells Fargo, which was dismissed by a lower court but is on appeal, Los Angeles alleged that black mortgage borrowers were more than twice as likely as white borrowers with similar credit scores to receive loans the city deemed predatory. Latino borrowers were 1.5 times as likely. Other cities alleged similar levels of discrepancies between white and minority borrowers.
When borrowers started defaulting on their loans and banks foreclosed, property values fell, cutting into city tax revenue. Los Angeles’ lawsuit against Wells Fargo cited a report from the advocacy group Alliance of Californians for Community Empowerment and the California Reinvestment Coalition that estimated the city lost at least $481 million in property tax revenue.
That report also estimated that the city spent $1.2 billion on costs related to foreclosures, including increased police and emergency calls, property maintenance and safety inspections.
Kevin Stein, deputy director with the California Reinvestment Coalition, said minority neighborhoods were disproportionately harmed by the banks’ alleged practices and thus were hit harder by a wave of foreclosures.
He said neglected foreclosed homes often became dens for squatters and criminal activity, while pools posed health problems as they became breeding grounds for disease-carrying mosquitoes.
“Some of these neighborhoods were devastated and you had people living next to homes that were dilapidated -- stripped inside and out,” he said.
Though foreclosures are way down from the height of the crisis, Stein said the neighborhoods have yet to fully recover. Just the other day, he said, he spoke with a housing counselor from Los Angeles who is still handling related foreclosures.
Joel Liberson, one of a team of attorneys representing Los Angeles, Oakland, Philadelphia and Miami in their mortgage discrimination cases, said better internal controls at Wells Fargo could have prevented some of these problems.
“The practices and policies that led to looking the other way when it came to opening bank accounts and credit cards are the same practices and policies that may very well have given rise to discriminatory mortgage practices,” said
A key element of the cities’ argument, Liberson said, is that both the accounts scandal and the allegations of mortgage discrimination stem from a poorly supervised system of incentives that promoted unethical behavior.
Employee incentives are at the root of Wells Fargo’s unauthorized accounts scandal. To meet ever-growing sales goals, earn bonuses and keep their jobs, thousands of Wells Fargo workers took to opening accounts that customers did not authorize. That practice, first uncovered by a 2013 Los Angeles Times investigation, led to a settlement last year with the bank, which agreed to pay $185 million in fines to regulators.
Liberson said linking the bank’s incentive system and its lack of appropriate corporate oversight strengthens the cities’ cases against Wells Fargo by explaining how unethical practices might have gone unchecked.
“It’s one thing to say you had a business that was issuing unlawful products,” Liberson said. “But one of the important questions a judge or jury is going to want to know is, why did that happen? How did that happen? What allowed it to happen? Those are important questions to answer.”
Philadelphia, which filed its lawsuit against the bank last week, has included findings from the Wells Fargo board report in its complaint.
Liberson and other attorneys representing Oakland asked a U.S. district judge in San Francisco for permission to add similar elements to their case, arguing that the bank’s unethical sales practices “appeared to have been common among all lines of business at Well Fargo, including home mortgages.”
Attorneys in the Oakland case also want the bank to turn over two internal reports related to sales practices and the creation of unauthorized accounts.
The bank’s attorneys, though, say that Oakland is simply trying to “cast Wells Fargo in a negative light.”
“Contrary to the city’s innuendos, those materials have nothing to do with the alleged misconduct in this case,” the bank’s attorneys wrote.
Times staff writer Andrew Khouri contributed to this report.