Last year, Wells Fargo agreed to pay $175 million to settle a lawsuit brought by the Justice Department, which alleged that Wells Fargo had “discriminated by charging approximately 30,000 African-American and Hispanic wholesale borrowers higher fees and rates than non-Hispanic white borrowers.”
The term “wholesale borrowers” refers to borrowers who came to Wells Fargo from mortgage brokers. While the pricing of these loans was controlled entirely by the brokers, Wells Fargo, as the lender, was viewed as responsible.
Soon thereafter, Wells Fargo decided to exit the wholesale lending business.
Historically, many if not most loan officers (LOs) charged borrowers what they could get away with, since their compensation was tied to the charge. The result was that some borrowers paid more than others for no better reason than their LO’s powers of persuasion. However, for a variety of reasons black and Hispanic borrowers paid more than white borrowers.
In 2011, the Federal Reserve issued a new Truth in Lending rule that prohibits LOs from collecting larger fees on loans with features desirable to lenders, such as a higher interest rate. The only exception is that LO fees can vary with the size of the loan, and almost all LOs set their fee as a percent of the loan amount. And while brokers can continue to be paid by the borrower or by the lender, they can no longer be paid by both.
The wholesale lenders who deal with brokers responded to these new rules by requiring all their brokers to post their fee with the lender. If the broker posted a fee of 1.5 percent, for example, they would receive 1.5 percent of the loan amount from the lender on all loans delivered to that lender, regardless of their features. Brokers remained free to charge the borrower as an alternative, but this option is no more used under the new rules than it was earlier, because brokers find it a harder sell.
The only sure way for a lender to avoid this risk is to make sure that all its brokers charged the same fee, which requires that the lender set a uniform fee.
Setting a uniform fee will protect the lender from being held responsible for discrimination, but it won’t eliminate discrimination. Brokers will still be able to direct high-fee loans to one lender and lower-fee loans to another.
What do you think?