Systemic Racism in Banking: The Wells Fargo Case

There is a piece in the New York Times today is reporting on their investigation into the explicitly racist practices of Wells Fargo in their subprime mortgage business (Creative Commons License photo credit: TheTruthAbout… , h/t Schiffon Wong). According to the NYTimes,  Wells Fargo created a unit in the mid-Atlantic region to push expensive refinancing loans on black customers, particularly those living in Baltimore, southeast Washington and Prince George’s County, Md.

wells fargoAccording to a former employee of the banking giant quoted in the article, the company viewed the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages. Another loan officer stated in an affidavit filed last week that employees had referred to blacks as “mud people” and to subprime lending as “ghetto loans.”  The employee, a Ms. Jacobson, who is white and said she was once the bank’s top-producing subprime loan officer nationally, goes on to reveal:

“We just went right after them. Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches, because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans.”

The NYTimes backs this anecdotal evidence with their own more systematic investigation:

The New York Times, in a recent analysis of mortgage lending in New York City, found that black households making more than $68,000 a year were nearly five times as likely to hold high-interest subprime mortgages as whites of similar or even lower incomes. (The disparity was greater for Wells Fargo borrowers, as 2 percent of whites in that income group hold subprime loans and 16.1 percent of blacks.)

To understand the Wells Fargo case, it’s important to understand the broader context of this banking institutions’ policies as part of a larger pattern.

Sociologists Doug Massey and Nancy Denton in their ASA-award-winning book, American Apartheid, document the systematic pattern of housing discrimination in the U.S., as well as the dire consequences of such enforced segregation.   Part of Massey and Denton’s argument is that segregation in housing leads to “social dislocations” (William J. Wilson’s term) in other areas like high school drop-out rates, increased rates of drug use, delinquency and crime, in other words, “the making of an underclass” (the subtitle of their book).

Massey and Denton’s work was path-breaking for the way that it clearly and painstakingly documents the “construction of the ghetto,” but their findings were not exactly new.  The Kerner Commission Report from 1968 famously concluded:

“What white Americans have never fully understood— but what the Negro can never forget— is that white society is deeply implicated in the ghetto. White institutions created it, white institutions maintain it, and white society condones it.”

The report from today’s NYTimes and the evidence of explicitly racist practices of Wells Fargo do not mean that everyone that worked there agreed with these policies or harbored explicitly racist views.   Indeed, as Eduardo Bonilla-Silva as recounted in his Racism Without Racists, the continued operation of white supremacist system does not require the presence of extreme racists in that system.  In fact, I’m sure that many of the people that worked at Wells Fargo would never consider themselves racists but rather well-meaning and liberal in their views on race.

So, then it becomes necessary to understand Wells Fargo’s banking discrimination — and the housing segregation such discrimination creates — within an even broader context.  For that, it’s important to understand the white racial frame that sustains systemic racism, as Joe has described here and in his important book by the same name.  Note the loan officer mentioned in the NYTimes piece that referred to blacks as “mud people” and to the subprime lending as “ghetto loans.” These statements reflect thinking within the white racial frame and the result is the maintenance of systemic racial segregation in housing and further economic devastation of black families that might otherwise be homeowners.

That’s the real tragedy of this story, to my thinking.  Families that worked hard, tried to buy a home and provide a better life for their kids, are now facing foreclosure – and maybe worse – because of the systematic racism in Wells Fargo’s banking practices.    The question really becomes then if we, as a nation, are so “tragically bound to that starless midnight of racism,” as Dr. King said, that we can never move beyond it.    It’s time, I think, to begin holding institutions accountable for racist practices like these.

Addressing Structural Racism and the Economic Crisis

The NAACP has filed lawsuits against two of the nation’s largest mortgage lenders — HSBC and Wells Fargo — alleging “systematic, institutionalized racism” in their subprime lending (image from here).  But this lawsuit is really just the tip of a very large, and deeply racist, iceberg.

Part of this has to do with the way that housing – and what former President George W. Bush once called ‘the ownership society’ – was the only path to wealth creation in the U.S.   In other words, most of the wealth that people have and accumulate in the U.S. is through home ownership.  This has been a central tenet of the American Dream for decades.  Unfortunately, this dream was only available to a few and that availability was often based on race.   Listen to this short video (1:52) in which Professor Kimberlé Crenshaw explains the roots of this inequality with journalist Laura Flanders.

Joe Sims of Political Affairs, writes in his extensive piece entitled, “The End of Neo-Liberalism and Bush’s Last Scam: How Racism Sparked the Financial Collapse,” that:

Still, as the main civil rights organizations charged in the summer of 2008, the racist origins of the subprime mess are difficult to ignore. A cursory glance at some of the statistical highlights provides ample evidence. An excellent study authored by United For a Fair Economy entitled “Foreclosed” suggests several indicators, chief among them the disproportionate numbers of people of color holding subprime loans: over 50 percent of all mortgages held by African Americans fall into this category. The figure is 40 percent for Latinos.

While some political leaders blamed the “mismanagement” of Fannie Mae and Freddie Mac and demagogues like Ann Coulter and Pat Buchanan blamed Black and Latino families for the economic collapse of the subprime mortgage market, the fact is, as Sims points out that bad credit was not the primary factor for distributing the loans, a myth conveniently circulated and repeated to this day. Sims refers to Rep. Charles Schumer who refutes the bad credit explanation, quoting the Wall Street Journal:

Based on the Journal’s analysis of borrowers’ credit scores, 55 percent of subprime borrowers had credit scores worthy of a prime, conventional mortgage in 2005. By the end of last year, that percentage rose to over 61 percent according to their study. While some will have damaged their credit in the interim, it’s clear that many subprime borrowers have the financial foundation for sustainable homeownership, but may have been tricked into unaffordable loans by unscrupulous brokers.

Basically, the subprime mortgage scheme was a way for Wall Street bankers to drive up profits (some were pushing for 25% profit margins, according to Sims) and doing it on the backs of mortgages to predominantly African American and Latino homeowners.  Sims speculates:

Perhaps this explains at least in part why no Wall Street insiders had qualms about their activities or why in recent weeks the issue seems to have almost disappeared from discourse on the economic recession.

So what made the loans predatory?  According to Sims and a study by a group called United for a Fair Economy:

One factor is their marketing and sales to inappropriate customers. Another is pre-payment penalties. Seventy percent of subprime loans had such penalties. A third element was Adjustable Rate Mortgages (ARMS), which often carried unexplained ballooning interest rates that increase payments by as much as one-third. A majority of subprimes were ARMS. Yet another condition was the exclusion of tax and insurance costs when estimating the monthly payment for a potential home-buyer. And finally the encouragement of ordinary borrowers to take interest-only loans, where in the initial year or two only the interest is paid on, after which the principal rates kick in raising the cost dramatically.

The stimulus package and economic recovery needs to acknowledge that what are often referred to as “marginal”  home owners or borrowers were largely Black and Latino working-class families struggling to make ends meet, targeted by Wall Street financiers.  Recovery is likely to further entrench racial inequality if leaders fail to acknowledge the role of racism in the current economic crisis.