photo: Steve Rhodes via Flickr

Many observers have noted that one of the few bright spots in the Justice Department under Barack Obama has been the Civil Rights division, under the direction of Thomas Perez. They have restored that division to its core mission of protecting minorities. So it’s no surprise that they, not the new financial fraud task force, not any of the other enforcement and regulatory bodies, would be the ones to pursue an investigation into the banksters:

The Department of Justice is preparing a lawsuit against Wells Fargo, the nation’s largest home mortgage lender, for allegedly preying upon African American borrowers during the housing bubble and steering them into high-cost subprime loans, according to three people with direct knowledge of the probe.

The company, the fourth-largest U.S. bank by assets, is currently embroiled in pre-lawsuit negotiations with the Justice Department in hopes it will settle the accusations and avoid a public lawsuit, these people said.

The allegations mirror those in public actions taken by the Federal Reserve and a separate lawsuit filed by the city of Baltimore.

While Wells did not admit wrongdoing in the recent Federal Reserve consent decrees, the order is based on Wells making restitution for steering people into riskier subprime mortgage loans. So there’s clearly enough evidence here to warrant an investigation. The Fed gave less than a slap on the wrist for these crimes – $85 million, less than what Wells makes in a week. It’s unclear from this report what the Civil Rights division would ask for.

Thomas Perez previously ran Maryland’s Department of Labor, Licensing and Regulation, which has responsibility for consumer protection and mortgage issues in the state. So he’s probably well-versed in what the city of Baltimore has accused Wells Fargo of doing. They charge that Wells loan officers engaged in “reverse redlining,” by particularly going after borrowers in minority neighborhoods for the risky subprime loans. Wells then sold these loans to investors at a hefty markup and pocketed the profits, unconcerned with how the minority borrowers would pay when the rates recast.

The saddest part of this affair is that it was not limited to Wells Fargo. It was standard practice in the mortgage industry, to target unsophisticated borrowers and rip them off, offloading the risk to investors. Dodd-Frank bans the kind of incentive payments (known as “steering payments”) given by banks to mortgage brokers who engaged in this, so they obviously are aware of the problem. This was the basis of all the mortgage fraud investigations during the bubble years. The Civil Rights division is doing the right thing on Wells, but they shouldn’t stop there.

UPDATE: Now we learn that the Civil Rights division is negotiating a settlement with Wells, because nobody does any criminal prosecution anymore at DoJ.

David Dayen

David Dayen