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Wells Fargo's Legal Woes Persist

Zacks Equity Research

The U.S. District Judge – Otis Wright II in Los Angeles rescinded the bid filed by Wells Fargo & Company (WFC) regarding the dismissal of a lawsuit charged against the bank by Los Angeles City. The lawsuit accused it of discriminatory lending practices towards minority borrowers. The judge has ordered the plaintiffs to pursue the proceedings over their claims against Wells Fargo.

It has been notified that Wells Fargo was involved in predatory lending practices since 2004 and provided overcharged (higher fees and interest rates) loans to minority borrowers leading to increased number of foreclosures. Moreover, the bank has been accused by the city of discriminating against borrowers in providing loans based on their race.

Notably, the mortgage crisis in Los Angeles led homeowners to lose around $78.8 million in home values following over 200,000 foreclosures from 2008-2012. Further, Los Angeles lost property tax revenue of around $481 million.

Last year, the three mortgage lenders – Wells Fargo, Citigroup Inc. (C) and Bank of America Corp. (BAC) were sued by the city for discrimination in lending practices. Recently in Mar 2014, HSBC Holdings plc (HSBC) was sued by Cook County in the U.S. for providing high-cost home loans to minority borrowers in Chicago. The plaintiffs hold banks accountable for tax revenue losses and rise in municipal services due to increased foreclosures.

We believe settlement of such issues would put the mortgage borrowers at ease to some extent. Such settlements also provide some relief to the companies and their shareholders as it reduces the litigation overhang. However, the company’s dented financials and goodwill due to such lawsuits cannot be ignored.

Currently, Wells Fargo holds a Zacks Rank #3 (Hold).

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Read the Full Research Report on BAC
Read the Full Research Report on HSBC

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