Mortgage underwriting algorithm at heart of Wells Fargo’s racial disparity lawsuit

By Housing News


Wells
Fargo
‘s
internal
credit-scoring
algorithm
is
at
the
center
of
a
lawsuit
that
plaintiffs
say
resulted
in
more
than
100,000

disparately
impacted
minority
applicants
.
The
lawsuit
stems
from
a
2022
Bloomberg

investigation

that
found
Wells
Fargo
was
the
only
large
bank
to
deny
more
Black
applicants
than
it
accepted
in
2020
during
the
refinancing
boom.

The
banking
giant
is
fighting
the
plaintiffs’
motion
to
create
a
class
of
at
least
119,100
people
who
allegedly
faced
discrimination
when
applying
for
a
mortgage
or
home
equity
loan
between
2018
and
2022.
These
applicants
were
eventually
denied,
even
though
they
were
initially
“approved”
by

Fannie
Mae
,

Freddie
Mac

or

Wells
Fargo
‘s
internal
underwriting
system
known
as
Enhanced
Credit
Score,
Bloomberg
reported.

In
court
filings,
the
plaintiffs
argue
that
Enhanced
Credit
Score
disproportionately
sent
Black
and
Latino
applicants
to
higher-risk
classes,
subjecting
them
to
more
underwriting
scrutiny
than
other
applicants
and
resulting
in
higher
denial
rates.
Enhanced
Credit
Score
generates
a
score
that
measures
each
applicant’s
likelihood
of
default.

“Wells
Fargo
discriminated
against
the
minority
applicants
by
subjecting
them
to
its
discriminatory
loan
policies,” Dennis
Ellis,
the
lead
class
counsel,
wrote
in
a
motion
filed
in
April.
He
told
Bloomberg
in
an
interview
that
the
credit
ratings
“were
treated
like
a
gold
star
or
a
scarlet
letter.”

In
response,
Wells
Fargo
called
the
conflation
of
the
firm’s
front-end
loan
platform,
internal
and
external
underwriting
systems,
and
thousands
of
additional
rules
and
policies
“counterfactual
and
logically
incoherent,”
and
it
said
the
proposed
class
was
“overbroad
and
ill-defined,”
Bloomberg
reported.

Wells
Fargo
said
its
scoring
model
is
a
workflow
tool
and
that
there
are
no
approvals
through
the
Fannie
and
Freddie
underwriting
systems
or
Enhanced
Credit
Score.
The
systems
merely
indicate
whether
an
applicant’s
mortgage
would
be
eligible
for
purchase
by
Fannie
or
Freddie.

If
eligible,
the
application
then
moves
to
underwriting,
and
in-house
underwriters
verify
documentation
for
income,
employment
and
credit
history.
The
internal
model,
Wells
Fargo
said,
merely
sorts
applicants
by
the
strength
of
their
credit
profile
and
then
assigns
higher-risk
applicants
to
“more
skilled”
underwriters.

“This
case
has
no
merit,
and
we
will
continue
to
vigorously
defend
ourselves,”
Wells
Fargo
said
in
a
statement
to
Bloomberg.
“Our
underwriting
practices
are
consistently
applied
regardless
of
race
or
ethnicity
of
the
applicant.
Any
suggestions
otherwise
are
simply
inaccurate.”

Wells
Fargo,
once
the
largest
depository
mortgage
lender
in
America,
has
significantly

retreated

from
the
residential
mortgage
space
in
recent
years.
It

shut
down

its

correspondent
business

in
2023,
and
said
it
would
focus
on
its
existing
customers
while
developing
special-purpose
credit
programs
to
improve
racial
equity.

 

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