Wells Fargo (WFC) will pay $125 million to settle claims its wholesale brokers steered minority homebuyers into more expensive subprime mortgages. The money will be disbursed among some homebuyers who received loans from Wells.

The San Francisco bank said it will cease funding mortgages originated by independent brokers through its wholesale lending channel beginning Friday in a separate Wells decision not tied directly to the settlement. The bank said it will fund and close existing applications.

Another $50 million will go to fund community development programs across the country as part of the settlement.

The Justice Department and the Office of the Comptroller of the Currency claimed in a lawsuit this week that mortgages priced and sold by the brokers in the Wells wholesale lending program between 2004 and 2009 discriminated against more than 34,000 African-American and Hispanic borrowers.

Wells Fargo denied the allegations in announcing the settlement Thursday.

According to the suit, mortgage brokers pushed roughly 4,000 minority borrowers into expensive subprime loans funded by Wells despite qualifying for less risky prime mortgages.

"These African-American and Hispanic borrowers were placed into subprime loans, with adverse terms and conditions such as high interest rates, excessive fees, prepayment penalties, and unavoidable future payment hikes, when similarly qualified (white) borrowers received prime loans," according to the suit.

The DOJ also alleged another 30,000 minority borrowers paid higher fees and costs for their mortgages simply because of their race.

The disparities also appeared on prime loans given to minority borrowers. In 2007, for example, Wells Fargo wholesale brokers in Miami charged black borrowers on average $3,657 more for a prime loan than whites, according to the lawsuit.

"An applicant’s creditworthiness, and not the color of his or her skin, should determine what loans a borrower qualifies for," said Deputy Attorney General James Cole.

The bank also settled similar allegations from the city of Baltimore brought in January 2008.

Of the $50 million, Wells will provide $4.5 million to fund community development programs in Baltimore and grant another $3 million for local housing and foreclosure-prevention initiatives there.

The rest of the $50 million in grants will go to programs in Washington, D.C., Chicago, Philadelphia, San Francisco, New York, Cleveland and the Riverside, Calif.

The agreement covers similar allegations from the Illinois Attorney General and the Pennsylvania Human Relations Commission.

Wells said it stopped funding subprime loans through its independent mortgage brokers in 2007 and ceased all subprime lending for the rest of its channels in 2008.

The bank will conduct an internal investigation of subprime mortgages originated through its retail branches between 2004 and 2008 and will compensate any affected borrowers.

"Through our separate decision to no longer fund mortgages through independent mortgage brokers, we can control how that commitment is met on every mortgage that Wells Fargo makes," said Mike Heid, president of Wells Fargo Home Mortgage.

The OCC began its investigation into disparate impact claims in 2009.

"The practice of steering minority borrowers into higher-priced subprime loans is not just unacceptable, but illegal, and the OCC is absolutely committed to eradicating these practices," said Comptroller of the Currency Thomas Curry.