The city of Los Angeles joined a long line of litigants on Thursday when it filed separate lawsuits (pdf) against Wells Fargo Bank and Citigroup Inc. over questionable home loans they made to low-income borrowers just before the economic crash in 2008.
The suits allege that the loans amounted to discrimination because they were targeted at minority communities and violated the federal Fair Housing Act. After years of effectively excluding these potential borrowers from the housing marketplace through redlining, the suit argues, the bankers opened the floodgates by offering them predatory loans.
Banks have foreclosed on 1.7 million homes in California since 2008 and Wells Fargo is responsible for 20% of them. Home values have declined $78.8 billion in Los Angeles during that time, according to a study cited in the Wells Fargo lawsuit. More than 79,000 Los Angeles homeowners are underwater on loans worth $7.3 billion. If banks wrote down those loans, it would pump $780 million into the local economy and add 11,353 jobs.
The suits don’t seek a specific amount of restitution, but cite studies that show 200,000 foreclosures in the L.A. area between 2008 and 2012 cost the city $1.2 billion for “maintenance, inspections, trash removal, increased public safety calls and other code enforcement services.” The city also claims it lost $481 million in property tax revenues.
Although the lawsuits focus on the period beginning just before the financial and housing crash, they outline a long history of predatory behavior by the banks that dates back decades and continues to this day. Banks increased their issuance of subprime loans targeted at minority communities from $96 billion to $640 billion between 1996 and 2006. While it was increasing those predatory loans, it was redlining the areas for more conventional loans.
The lawsuit says a regression analysis of loan data that takes into account credit history and other factors found that a Wells Fargo African-American borrower was 2.078 times more likely to get a predatory loan than a white borrower. A Latino was 1.548 more likely. When you break out those borrowers with FICO credit-worthy scores of over 660, African-Americans were 2.124 times more likely to receive a predatory loan than a white person.
“Wells Fargo possesses sophisticated underwriting technology and data that allows it to predict with precision the likelihood of delinquency, default, or disclosure,” the lawsuit reads. “The fact that Wells Fargo’s foreclosures are so disproportionately concentrated in minority neighborhoods is not the product of random events. To the contrary, it reflects and is fully consistent with Wells Fargo’s practice of targeting minority neighborhoods and customers for discriminatory practices and predatory pricing and products.”
The city made the same accusations in its lawsuit against Citigroup.
Wells Fargo and Citigroup both released statements dismissing the allegations. Wells Fargo said it was a “fair and responsible lender” and called the lawsuit “meritless.” Citigroup said it was “fair to all of our customers.”