Wells Fargo (WFC) allegedly engaged in reverse redlining, the act of offering economically disadvantaged borrowers riskier mortgages, in neighborhoods across Memphis and surrounding Shelby County, according to the claims of former employees in a lawsuit (download here), filed by the relevant municipal governments. The litigation also claims that, as a direct result, these actions may be contributing to a disproportionately high number of foreclosures in predominately black areas. Wells Fargo, the nation's top originator with $238bn in mortgages in 2008 (16% market share) compared to #2 Chase Home Finance at $187bn, denies the charge. Reverse redlining claims against high-profile lenders have become increasingly common as the mortgage crisis has worn on and foreclosures continue to mount. In September, a judge ruled a discriminatory lending lawsuit against Wells Fargo would proceed as a class action case. That suit claims Wells Fargo discriminated against as many as 10,000 minority borrowers who were not given the opportunity to purchase low-cost mortgages. In July, Illinois attorney general Lisa Madigan filed a lawsuit against the bank alleging reverse redlining. A study by the Center for American Progress (CAP) claims blacks and Hispanics were more likely to receive higher priced mortgages in 2006 compared to white borrowers at many large US banks, including Wells Fargo. By way of comparison, back in 2006 when the CAP lawsuit says the deals in question were inked, Wells was the second highest originator in the U.S., with $397.6bn (13% market share), between Countrywide at $462.5bn (15.5% market share) and Washington Mutual at $195.7bn (6.6% market share). According to the current lawsuit in Memphis, Wells Fargo originated more high cost and subprime mortgages from 2000 to 2008 in the region’s minority-dominated neighborhoods, while originating lower-cost and prime loans in the area’s predominately white neighborhoods. While the bank originated a greater number of loans in the white neighborhoods, they claim asserts, the rate of foreclosures in minority neighborhoods was eight times greater than the rate of foreclosures in white communities. The suit seeks damages under the Fair Housing Act, which prohibits discriminatory lending practices. Lawyers for the city and county claim 43.2% of Wells Fargo’s foreclosures are in the region’s minority neighborhoods, even though these neighborhoods account for 15.1% of Wells Fargo’s origination portfolio in the market. Foreclosures in the area’s white neighborhoods — where Wells Fargo originated 59.5% of its loans in the market — accounted for 21.5% of the bank’s total foreclosures in the market. The lawyers contend if Wells Fargo were “properly and uniformly applying responsible underwriting practices” in both communities, foreclosure rates would be comparable. But research from both the Federal Reserve Bank of New York and the Columbia School of Business, released in April of last year, argues that claims of reverse redlining are a by-product of insufficient data. See earlier commentary. “The reverse redlining suit seeks to hold Wells Fargo responsible for the damage that its illegal and discriminatory practices have caused the city and county,” Memphis mayor AC Wharton said in prepared remarks during a press conference held at the city’s National Civil Rights Museum. “Our holding this press conference announcement at the National Civil Rights Museum underscores our assertion that the predatory lending issue is one of basic fairness,” he added. The suit’s claims hinge on the testimony of two former Wells Fargo mortgage originators, Tony Paschal and Elizabeth Jacobson, who assert Wells Fargo encouraged them, and other originators, to target blacks for subprime mortgages. In addition, the former employees claim Wells Fargo drafted subprime marketing materials on the basis of race by using software to “translate” the materials into what the bank defined as the “language” of African American, and referred to subprime loans located in minority communities as “ghetto loans.” In a prepared statement, Wells Fargo denied the allegations in the lawsuit and defended its underwriting practices: “The economic problems in Memphis cannot be attributed to a single lender. We believe this lawsuit promotes a weak argument that courts around the country have already rejected. Wells Fargo’s controls and processes have been in place for years and are subjected to constant internal and regulatory review. These controls are designed to assure that every person qualified for a prime loan will get one, without regard to their race,” Wells Fargo said. “We also believe communities are ultimately better served when elected officials and lenders work collaboratively to address the current economic issues facing our neighbors,” the bank added. “To that end, we remain committed to our customers in Memphis and Shelby County, and are proud of our lengthy record leading the industry in fair and responsible lending and supporting the communities we serve.” Write to Austin Kilgore.