Illinois AG Subpoenas Countrywide, Wells Fargo Over High-Cost Loans

Illinois Attorney General Lisa Madigan subpoenaed Countrywide Home Loans, Inc. and a subsidiary of Wells Fargo & Co. on Thursday, to determine whether the lenders unfairly steered African American and Latino borrowers into what her office characterized as “inappropriate home loans in violation of fair lending and civil rights laws.”

Madigan becomes the latest state AG to pry into subprime lending at the state level, joining New York’s Andrew Cuomo, Ohio’s Marc Dann, and Massachusetts’ Martha Coakley.

The Illinois probe follows a Chicago Reporter study released earlier in the week that found that the Chicago area led the country in high-cost home loans, for the second year in a row. The study also said it found marked disparities in loan pricing between white and non-white borrowers, with African American borrowers three times as likely as white borrowers to receive a high-cost home loan.

“The difference in cost between the home loans sold to white borrowers and those sold to African American and Latino borrowers is alarming,” said Madigan, noting that income level did not appear to account for the differences in pricing, according to study results.

According to the Chicago Reporter study, the wealthiest African American homeowners within Chicago were still more likely than the poorest white borrowers to get placed in high-cost loans.

“The aim of these investigations is to find out the reasons for these pricing disparities and, if those reasons are not based on valid underwriting criteria and creditworthiness, to hold the lenders responsible for their actions,” said Madigan.

Politicians applaud
Illinois Senator Jacqueline Collins lauded the announcement by Madigan’s office. “While predatory mortgage lending affects us all, it is especially devastating to neighborhoods with large minority populations,” she said. “When the disparities between African American and white borrowers are this extreme, it’s imperative that lenders explain why.”

The Rev. Jesse Jackson also weighed in, and said that the AG would send a strong signal to mortgage lenders. “In an era when the federal government has all but stopped conducting fair lending investigations, it’s vital that lenders know that state officials like Attorney General Madigan are keeping a close eye on how they treat minority borrowers,” said Jackson.

Industry participants that spoke with Housing Wire on condition of anonymity, none of whom were involved in the pending investigation, said that banks were often forced during the housing boom to find ways to lend in poorer neighborhoods, per the terms of the Community Reinvestment Act.

The CRA, originally passed in 1977, compels banks to make loans to low-income borrowers as a requirment for brank expansions, new branches, bank mergers and the like.

“Banks have been placed in a Catch 22 situation by the CRA,” Thomas J. DiLorenzo, professor of economics at Loyola College in Maryland , wrote in an essay late last year. “If they comply, they know they will have to suffer from more loan defaults.

“If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars.”