Over 3,900 minority borrowers of Wells Fargo & Co. (WFC - Analyst Report) will receive nearly $60 million in cash rebates from the company, according to a Bloomberg report. These borrowers were unjustly placed into the non prime loans category despite being eligible for the prime one.
This $60 million payment from Wells Fargo is part of a settlement with the U.S. and is over and above the $125 million payment and $50 million assistance fund that Wells Fargo conceded to pay as part of a settlement that received the federal judge’s nod in September.
Deposited into an escrow account last week, this fund size was calculated following an internal review of loans offered to minority borrowers. On an average, Wells Fargo will provide $14,850 per borrower.
Wells Fargo, however, did not concede to the charges brought forward by the government. The lender was accused of discriminating among its borrowers and compelling minority borrowers to shell out higher fees and interests compared to the white borrowers. However, Wells Fargo agreed to the settlement just to steer clear of the litigation.
Further, under the settlement, Wells Fargo will perform a statistical analysis of subprime mortgages that originated during 2004–2008, via its retail channel, to black and Hispanic borrowers who might have been eligible for the prime loan category.
The Back Story
As a matter of fact, after reviewing loans, including loan terms and creditworthiness of the borrowers, earlier in the year, the Department of Justice revealed that Wells Fargo overcharged (higher fees and interest rates) about 34,000 minority borrowers in 36 states and the District of Columbia compared with white borrowers who had similar credit profiles. Further, among these, 4,000 borrowers were duped with subprime mortgages. Majority of these victims remained unaware of this bias.
Wells Fargo is not the only bank entrapped in such issues. Bank of America Corporation (BAC - Analyst Report) settled similar civil charges amounting to $335 million against its Countrywide Financial unit in December 2011. Likewise, the mortgage-lending unit of SunTrust Banks Inc. (STI - Analyst Report) agreed to pay nearly $21 million to settle such charges earlier in 2012.
We believe this move would put the mortgage borrowers at ease to some extent. Further, it would offer some relief to Wells Fargo and its shareholders as the litigation overhang would be lessened. However, the adverse impact on the company’s financials and its goodwill cannot be avoided. Yet, such measures will aid the housing market to recover going forward and considerably lessen fraudulent practices in the industry.
Shares of Wells Fargo currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.