Wells Fargo Rejected Half Its Black Applicants in Mortgage Refinancing Boom

When Mauise Ricard III paid a $560.43 application fee to Wells Fargo & Co. on Valentine’s Day in 2020 to refinance his mortgage on a four-bedroom brick colonial in a leafy suburb of Atlanta, he had every reason to expect an easy ride. The Microsoft Corp. engineer is married to a doctor and has a credit score north of 800, putting him in America’s credit elite. The loan officer at the bank even told him he was probably eligible for a fast-track appraisal.

It didn’t take long for problems to appear. Ricard’s house—an investment property that was his home before he moved to another Atlanta suburb in 2017—is in a predominantly Black neighborhood, and in April, the loan officer emailed to say that “perhaps the area is not eligible” for a rapid valuation. By May, she was writing to say the underwriter had more questions. Soon after, Ricard was told he would have to pay a higher 4.5% rate, even though the Federal Reserve had slashed rates to historic lows. Within weeks, Wells Fargo had denied his application. {snip}

Ricard wasn’t alone. Nationwide, only 47% of Black homeowners who completed a refinance application with Wells Fargo in 2020 were approved, compared with 72% of White homeowners, according to a Bloomberg News analysis of federal mortgage data. While Black applicants had lower approval rates than White ones at all major lenders, the data show, Wells Fargo had the biggest disparity and was alone in rejecting more Black homeowners than it accepted.

If, as expected, the Fed’s policy committee moves to hike interest rates at its March meeting, it will begin closing the door on a remarkable wealth event that has seen U.S. homeowners refinance almost $5 trillion in mortgages over the past two years, the most since the early 2000s. It’s one that allowed White homeowners to save an estimated $3.8 billion annually by refinancing their mortgages in 2020, according to researchers at the central bank. But it’s a door that barely opened for Black Americans, who make up 9% of all homeowners and locked in just $198 million a year, less than 4% of the savings.

Wells Fargo, which declined to comment about individual customers, didn’t dispute Bloomberg’s statistical findings. It says it treats all potential borrowers the same, is more selective than other lenders, and an internal review of the bank’s 2020 refinancing decisions confirmed that “additional, legitimate, credit-related factors” were responsible for the differences. But even when taking selectivity into account, the San Francisco-based bank had by far the worst record among major lenders when it came to refinancings by Black homeowners, according to Bloomberg’s analysis of Home Mortgage Disclosure Act data for 8 million completed applications to refinance conventional loans in 2020.

JPMorgan Chase & Co., the largest U.S. bank by assets, accepted 81% of refinancing applications from Black homeowners in 2020 compared with 90% from White ones. Bank of America Corp. approved 66% of its Black applicants and 78% of White ones. Rocket Mortgage LLC, which received 1 million refinancing applications in 2020, more than any other lender, had the smallest gap: It approved 79% of Black applicants and 86% of White ones.

Among major lenders, only Wells Fargo approved a smaller share of refinancing applications from Black homeowners in 2020 than a decade earlier. The bank’s 47% approval rate was its second lowest during the past decade. JPMorgan, Bank of America and Rocket Mortgage, formerly known as Quicken Loans, all approved Black borrowers in 2020 at the highest rate since 2010.

The data also show that 27% of Black borrowers who began an application with Wells Fargo in 2020 withdrew it. That meant only one-third of the 17,702 Black homeowners who sought refinancing were successful. Like the industry as a whole, Wells Fargo approved a greater share of applications from low-income White homeowners than all but the highest-income Black applicants, who had an approval rate about the same as White borrowers in the lowest-income bracket.

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The U.S. Justice Department has hammered banks for lending practices that tend to elevate costs for minority borrowers. After the 2008 housing crisis revealed discriminatory treatment, authorities unleashed a wave of penalties against U.S. lending giants. Wells Fargo agreed in 2012 to pay more than $184 million to settle federal claims that it unfairly steered Black and Hispanic homeowners into subprime mortgages and charged them higher fees and interest rates. The bank didn’t admit to any wrongdoing and said at the time that it treated all customers fairly regardless of race.

U.S. law has long held that a “disparate impact” on minority communities can be evidence of institutional discrimination, meaning regulators don’t have to prove a bank was engaging in deliberate racism to show that it broke fair-lending or fair-housing laws.

The Biden administration is increasing scrutiny of banks and modern forms of discrimination. “If we allow racist and discriminatory policies to persist, we will not live up to our country’s ideals,” Rohit Chopra, head of the Consumer Financial Protection Bureau, said at a press conference in October announcing a new push by the Justice Department and regulators to combat so-called redlining by financial institutions. Among the issues he singled out was the role of mortgage underwriting algorithms that banks have long used, calling the disparities in lending outcomes a sign of “digital redlining, disguised through so-called neutral algorithms.”

Kristy Fercho, who in August 2020 became the first Black woman to oversee Wells Fargo’s home-lending business and its more than 25,000 employees, says the bank’s processes are race-blind and that its lending decisions were “consistent across racial and ethnic groups.” Any racial disparity in outcomes for refinancing in 2020 was the result of variables Wells Fargo doesn’t control, she and other executives say, including credit scores, the appraised value of homes and broader inequities in the U.S. economy.

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Fercho says Wells Fargo is looking at how to better serve Black communities that have often been suspicious of lenders based on generations of discrimination. Among the steps: encouraging Black homeowners, who refinance less frequently than White ones, to take advantage of opportunities to lower their rates. Fercho cites her own mother’s reluctance to refinance her mortgage at any point in its 30-year life as an example of a broader issue. When she asked her mother why she had never refinanced given the money she could have saved, “her answer was ‘I could afford my payments. So there was no reason for me to change it.’”

Wells Fargo has also announced a push to increase Black homeownership and in 2021 invested $50 million in 13 Black-owned community banks. In 2017, it pledged to help create 250,000 new Black homeowners by 2027, a goal Fercho says the bank is on pace to meet or exceed.

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BLACK HOMEOWNERS seeking to refinance mortgages in 2020 faced lower approval rates nationwide than those of any other race. About 70% of 254,000 Black applicants who completed applications had their requests approved by lenders, the data show. By comparison, 87% of 4.9 million non-Hispanic White homeowners were accepted.

The banking industry has long argued that credit scores rather than race explain any disparities, but it has lobbied against the release of federal mortgage data containing those scores. A 2021 study by Fed researchers given access to a privileged version of the same data used by Bloomberg that included applicants’ credit scores showed racial gaps can be largely attributed to those scores and the recommendations automated underwriting systems make to lenders. The study, which looked at both home purchases and refinancings, identified some differences among lenders, but the researchers didn’t document them.

Other researchers and activists say the way credit scores are assembled discriminates against Black families, an increasingly accepted view that has prompted a push to reform the 33-year-old system developed by Fair Isaac Corp. and known as FICO. Those scores are based on the use of mortgages, credit cards, and auto and student loans. But that leaves many people out—almost one-third of Black Americans, according to a 2019 Urban Institute report. {snip}

Including rental payments in the mix would fix a large part of the problem, housing activists say. Minorities make up half of renters in the U.S. and just a quarter of homeowners, according to U.S. Census data. Studies have shown that including rental payments can help raise credit scores and that renters’ histories of paying rent on time are a good predictor of their ability to make mortgage payments.

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The issues surrounding mortgage discrimination can be dizzying. Studies have documented everything from the reluctance of Black homeowners to refinance mortgages to the behavior of loan officers, who tend to approve White homeowners earlier in the month than Black ones. There is also an increased focus on the issue of appraisal discrimination.

But experts say that beyond credit scores and appraisal bias two things have stood out as the cause of the disparities in this refinancing boom: the impact of lenders’ proprietary algorithms, or overlays, and the failure of policymakers to mandate streamlined refinancing programs.

Nikitra Bailey, senior vice president of public policy at the National Fair Housing Alliance, says the stricter overlays many lenders put in place after the financial crisis raised the average credit score needed to refinance a mortgage as high as 775 in 2020. {snip}

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