“Wells Loses Mortgage Discrimination Case”

I chose a recent article by Courtroom View Network, because I felt that its topic might be of particular interest to those of us in the ECON 121 class. "Of what interest is a discrimination article to me as an economist" you might ask yourself? To those persons lacking a firm knowledge of economic principles and terminology it would probably appear to be just another article about race discrimination, because it does, after all, mention that Wells Fargo was found guilty of discriminating against minorities. So how does race discrimination have anything to do with the world of economics? The answer is that race discrimination alone has nothing to do with economics, but that’s not the only type of discrimination involved here, there is another type, and it has everything to do with the world of economics—price discrimination.

But before we can gain a better understanding of how it was that Wells Fargo was found guilty of price discrimination, we must first develop a clear understanding of what constitutes price discrimination. Our ECON 121 textbook (Economics 19e, by Samuelson and Nordhaus) defines price discrimination as: “a situation where the same product is sold to different consumers for different prices” (glossary). It further tells us that price discrimination “is widely used today, particularly with goods that are not easily transferred from the low-priced market to the high-priced market” (194). This type of discrimination is most often carried out by large firms having market power; they are hoping to maximize profits through discriminatory pricing. While the airline industry is perhaps the most frequent offender of price discrimination, they are by no means alone, as utility companies and banks also make the evening news headlines.

Armed with a better understanding of what price discrimination is, we can now delve more deeply into the Wells Fargo case. It starts with their usage of a software tool called “Loan Economics,” which it claims was intended “to increase loan volume and profitability, not to offer the lowest price on every loan.” It’s not the tool, but rather the manner in which Wells Fargo utilizes it that raises allegations of discriminatory pricing in the issuance of 7,348 mortgage loans. What’s wrong with utilizing a software program that helps maximize profits? Nothing, except in this case they used it to offer lower mortgage rates to borrowers in non-minority neighborhoods, while at the same time offering borrowers in minority neighborhoods much higher mortgage rates—they sold the same product to different consumers for different prices. In response to these allegations, Wells Fargo tried implying that its minority buyers willingly agreed to pay these higher mortgage rates, but testimony would reveal that they accepted these higher rates only because they were never informed of the lower rates offered to non-minority borrowers.

It should be noted that a jury, after lengthy deliberations, did find that Wells Fargo discriminated based on race—which it was—but only on 880 of the loans in question. If this case had been heard by a jury panel consisting of economists, Wells Fargo would have been found guilty of price discrimination as well.

TheStreet.com, Inc.

By Courtroom View Network

http://www.thestreet.com/story/11058133/1/wells-fargo-loses-mortgage-discrimination-case.html