Wells Fargo Plea to Dismiss Unfair Lending Lawsuit Rejected

Per a Reuters article, Wells Fargo & Company’s WFC plea to fully dismiss a lawsuit which accused it of practicing discriminatory mortgage lending practices was dismissed by the U.S. District Judge Gary Feinerman.

Background

In December 2014, Illinois' Cook County had filed a lawsuit against the bank alleging it of targeting minority borrowers in the Chicago area and violating the Fair Housing Act (FHA). Wells Fargo was charged of making them borrow loans that were too costly for them, which resulted in higher fees, frequent defaults and foreclosures. Also, the bank was accused of offering bonuses to employees who were successful in giving such loans.

In the lawsuit, the county also alleged Wells Fargo of engaging in the practice of "equity stripping" in order to maximize the income and assets the bank could generate by originating or acquiring high-cost and other nonprime mortgage loans.

In July 2017, Wells Fargo had requested the federal court at Chicago to dismiss the lawsuit saying that the county failed to show that the bank had directly caused the harms alleged in the lawsuit.

Judge’s Decision

Feinerman allowed the county to pursue federal Fair Housing Act claims against Wells Fargo to the extent the bank's alleged "equity stripping" practices boosted the cost of administering and processing a higher number of foreclosures.

Per the article, Feinerman dismissed claims alleging harm from lost property taxes, the need to combat crime and blight, racial segregation and other factors, calling them "ripples" that "flow far beyond" Wells Fargo's alleged misconduct.

Also, the federal judge stated that the cities are eligible to pursue FHA claims so long as they are successful in establishing a "direct" link between the alleged misconduct and the resulting harm.

Our Take

Legal hassles at Wells Fargo seem unlikely to end soon. Thus, legal costs are likely to hurt its bottom-line growth. However, its strong capital position and a much attentive management might keep it from landing into trouble again.

Shares of Wells Fargo have lost 7.4% over the past six months against 3.8% rally for the industry it belongs to.

 

The stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks worth considering in the same space are Fifth Third Bancorp FITB, M&T Bank Corporation MTB and BankUnited BKU. All these stocks carry a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Fifth Third has been revised 1.8% upward for the current year, in the last 60 days. The company’s share price has increased 25.1% in the past year.

M&T Bank has witnessed 1.2% upward earnings estimate revision for 2018, in the last 60 days. Its share price has risen 16.8% in the past year.

BankUnited’s shares have gained 8.8% in a year and its earnings estimates for 2018 have moved up 1.3% in the last 60 days.

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