Wells Fargo

A man uses an automated teller machine at a Wells Fargo Bank branch. (July 12, 2012)

The Justice Department announced a fair-lending settlement with Wells Fargo & Co., Thursday morning that will compensate tens of thousands of the bank's African-American and Hispanic borrowers who were steered into high-cost, subprime mortgages.

A $175 million price tag is attached to one part of the national settlement, compensating more than 34,000 Wells’ customers nationally whose loans were originated by non-bank mortgage brokers.

Another undetermined sum, expected to be many more millions of dollars, will be used to compensate victims who received bad mortgages directly from Wells Fargo employees. The bank still has to review its records to identify those customers.

In Illinois, the known part of the settlement includes $8 million in cash payments that will be made to 3,300 customers. It will be divided into average cash payments of  $15,000 each to borrowers who were wrongly steered into subprime loans by mortgage brokers between 2004 and 2009, and an average of $1,500 to $2,000 each to minority borrowers who were wrongly charged higher fees on their mortgages.

Wells Fargo also will spend another $7 million in Illinois to offer down payment assistance to homebuyers through a special program.

"When you look at what's taken place, it's horrendous," said Illinois Attorney General  Lisa Madigan, who attended the announcement. "It's not an understatement at all to say that there's an entire generation of wealth in minority communities that's been taken away. The settlement won't roll back the clock but it is a significant step forward to hold banks accountable."

While other states also will receive monies, Illinois was the only state to file suit against Wells Fargo for its minority lending practices.

Madigan's case, filed July 31, 2009, charged that Wells Fargo allegedly discriminated against African-American and Latino borrowers by selling them high-cost, subprime mortgages while white borrowers with the same credit profile received lower cost mortgages. The state began investigating those practices after a Chicago Reporter analysis of Wells Fargo lending data found wide disparities in how white and non-white borrowers were treated.

In 2007, for instance, the study found that Wells Fargo put 34 percent of Chicago-area African-American borrowers who earned more than $120,000 into subprime loans while only 22 percent of white borrowers who earned less than $40,000 were put into that high-cost mortgage product.

According to the state's complaint, Wells Fargo's policies rewarded employees for selling borrowers high-cost mortgages.

In late October, a Cook County Circuit Court judge denied Wells Fargo's motion to dismiss Illinois' case and allowed it to move forward.

"Wells really fought this lawsuit to the nail," Madigan said. The October ruling "certainly put Wells in a position of contending with a lawsuit that wasn't going away. Now we're in the discovery phase and that changes a lot of things."

"Wells really fought this lawsuit to the nail," Madigan said. The October ruling "certainly put Wells in a position of contending with a lawsuit that wasn't going away. Now we're in the discovery phase and that changes a lot of things."

Nationally, about 4,000 borrowers were steered into subprime loans because of their race or national origin, and another 30,000 African-American and Hispanic borrowers who received their Wells Fargo mortgages from brokers were charged higher fees, according to the lawsuit and accompanying consent decree the Justice Department's filed Thursday morning in U.S. District Court in Washington, D.C.

"Wells Fargo adopted loan pricing and origination policies that allowed the personnel who originated its loans both to set the loan prices charged to borrowers and to place borrowers into loan products in ways unconnected with credit risk," the filing said. "Wells Fargo created financial incentives for its employees and mortgage brokers by sharing increased revenues with them."

The filing notes that Wells Fargo has been the largest originator of home mortgages since 2008 and, as the bank told the Justice Department, it now originates one out of every four residential mortgages in the nation.

Last July, the Federal Reserve fined Wells Fargo $85 million to settle allegations that employees of Wells Fargo Financial, a subsidiary, steered customers who were eligible for prime interest rate loans into higher, subprime home mortgages. It was the largest civil money penalty ever assessed by the Fed in a consumer-protection enforcement action and in agreeing to the order, Wells Fargo did not admit any wrongdoing.

The Justice Department's pact with Wells Fargo is the department's second-largest fair-housing settlement and follows a  framework established in December's $335 million settlement of similar allegations made against Countrywide Financial Corp., a subsidiary of Bank of America.

Madigan in June 2010 filed suit against Countrywide Financial Corp. and two related subsidiaries, alleging that it violated the state's fair lending and human rights laws.

Since the subprime mortgage crisis, many lenders have stopped using outside mortgage brokers, which once were a lucrative part of their business, to originate their loans as they seek to improve loan quality. Most recently, in February, Citigroup said it would exit the wholesale mortgage lending channel.

mepodmolik@tribune.com | Twitter @mepodmolik