Fargo Diversity Within and Outside the Firm

¶ … Fargo Diversity Within and Outside the Firm

Wells Fargo's latest press release announces the appointment of Jimmie Walton Paschall to the post of Executive Vice President for Enterprise Diversity & Inclusion ("Wells Fargo names" 2011). This job oversees all aspects of the firm's and the firm's subsidiaries' employment and product diversity under Wells' "Social Responsibility Group" as well as other Management Committee duties ("Wells Fargo names" 2011). Chairman and CEO John Stumpf claims diversity is a "core value" for Wells Fargo, which Ms. Paschall will promote and expand with her award-winning experience ("Wells Fargo names" 2011). The March 2011 ruling that Wells Fargo discriminated against minority homebuyers in Los Angeles, and pending suits in other jurisdictions, indicate Ms. Paschall will need all the experience she can draw on defending the bank against perceptions to the contrary.

Why is this important? Firms generally exist for the purpose of creating equity value for their shareholders, not necessarily to achieve inclusion, which the law already supposedly mandates. Ethical consistency dictates we treat others the way we wish to be treated ourselves, but this is a subjective and debatable rule to hold a business to. Why would the largest retail and mortgage banking firm in the U.S. (in 2009, Annual Report 227) care so much about diversity unless it affected the bottom line? Wells itself describes a business case for diversity in terms of satisfying customers' business needs, maximizing revenue and increased flexibility in emerging markets ("Business Case" 2011). Implied behind this immediate self-interest is a wider construct that would look something like, 'Firms make shareholder wealth faster when they don't have to pay for expensive discrimination lawsuits. Individual tax costs and personal safety costs are lower when there is less crime to avoid or prosecute; creating stable jobs and financial literacy lowers crime, and owning a home increases personal wealth formation. Therefore all firms and individuals, but especially Wells Fargo as the nations leading home mortgage lender, should encourage diversity so that we all have lower costs, increased safety and don't get sued for discrimination.'

If diversity is so profitable to the leading bank, one would expect all the rest would have to follow through competition. If the business case for diversity holds, then discriminating against workers and consumers would be a cost, and those firms who did would eventually be taken over by more competitive, more diverse firms. We can imply however, that if a firm always acts to maximize revenue, and firms discriminate frequently enough we must enforce laws against it, then these two conditions can't exist without discrimination being profitable in some situations. The problem becomes identifying all the potential ways a firm could possibly derive profit from discrimination, which may not be as obvious as hiring or promotion. As a housing and credit lender, banks' products and services have lasting effects on individuals' wealth formation, and so discrimination could also have longer-term effects than say a consumer non-durable like a can of soft drink or a movie rental. This report considers some of the obvious ways Wells Fargo operationalizes diversity and inclusion, and some of the more subtle ways lenders may unintentionally violate ethics they intend to uphold.

Wells Fargo seems to go above and beyond due diligence living up to their own high diversity standards in Human Resources in many ways. The Wells Fargo & Company Corporate Social Responsibility Interim Report 2010 claims that ethnic, racial and sex diversity improved year over year, with nearly 10% more than the national average U.S. population of women or non-white individuals (13). Wells has banks in all 50 U.S. states (Wells Fargo 227) and while the report does not break these numbers into geographic or international regions, 10% is a high enough margin of error to at least support the plausibility of a claim that their hiring and recruitment accurately reflects population demographics by race and ethnicity in the U.S. (U.S. Census 2011) unless those figures are extremely skewed by concentration in a relatively small share of subsidiaries outside the United States. Comparing Wells' diversity against U.S. Labor Force characteristics would probably improve these results but would entail a lengthy description of who is or is not in the U.S. labor force, which would then beg the question 'why,' answers to which would exceed the space for this research. This improvement in hiring coincides with and perhaps derives from participation in some of the largest affinity and professional associations organized around these characteristics (Corporate Social Responsibility 13). This demonstrates commendable performance for race, ethnicity and sex diversity, which the firm claims to support with training and promotion from within (Corporate Social Responsibility 13).

The next page expands this explanation to specific job categories by race and ethnicity, with results that earned the firm #40 ranking on nonprofit DiversityInc.'s "Top 50" firms for diversity (Corporate Social Responsibility 14). The job titles with the highest total presence in the company by percent also show the highest or higher-then-national U.S. shares of non-white male employment (Corporate Social Responsibility 14). These employment classes however are all below "entry-level management," which we can imply is the dividing line between payroll and salaried positions (Corporate Social Responsibility 14). Executive and senior management is actually whiter than the national demographic, but since entry-level management is actually more diverse than those classes and the national average, this may improve quickly if the company promotes from within as they claim. The Wells Fargo board of directors meets national average for race with 7% Black and Asian representation, although ethnicity and women are underrepresented in governance at half of the U.S. demographics (Corporate Social Responsibility 14).

This skew toward white male representation in leadership continues throughout the workforce. While the company's overall share of employment for Hispanics matches the U.S. national average and Wells employs a higher share of women than live in the U.S., these jobs are in the payroll rather than salary level positions, highly concentrated in administrative support, itself the largest employment category by far at 58% of total employment (Corporate Social Responsibility 14). While both Hispanics and women are adequately represented in entry-level management or better, the share of women and Hispanics falls to nearly half the national average the higher up the chain of corporate governance these statistics report (Corporate Social Responsibility 14). Without further detail about job qualifications and evidence explaining representation by characteristics in those general qualified applicant pools in the wider labor force, the verdict is that Wells' claim to diversity in these categories must be qualified beyond aggregate totals or else misrepresent promotion and governance dynamics within the firm. Wells' promotion of cultural and sex diversity in entry level management above and beyond national average in all demographics implies this skew will hopefully continue to improve. That Wells voluntarily publishes this data at all demonstrates real work toward transparency, and thus good intent if they could simply greenwash over the truth behind an aggregate statistic.

Another area Wells Fargo excels in is diversity in purchasing. The corporate investor relations "About Us" Web site contains a labyrinth of dozens of pages promoting diversity in general as a core operating principle, one of which encourages minority- and women-owned businesses to apply for preferential consideration ("Corporate Supplier Diversity" 1998-2011). These efforts toward diversity put real money in the hands of minority groups that have historically been underrepresented in earnings, employment and total wealth for centuries in this country. The result is demonstrated performance and improvement in hiring, promotion and governance that should continue to exceed national averages under the new diversity executive ("Wells Fargo names" 2011).

This may be the end of the story if Wells sold consumer non-durables like soda pop or paperclips, or even most durables like appliances or sports equipment paid for entirely at point of sale. The difference is that Wells Fargo sells investment goods and loans financed over long periods of time where differential interest rates affect total lifetime wealth development. If social demographic groups receive preferential interest rates that result in higher resale value for large-scale purchases like cars or homes, the outcome is a higher opportunity for total wealth based on slower blue book depreciation or faster home price appreciation. Wells Fargo accepts this as true above and beyond mandated compliance with equal opportunity law in many ways, including financial literacy and education delivered through non-traditional and proactive outreach, community development, microfinance lending and donation in low-income communities (Corporate Social Responsibility 10), which ultimately (in theory at least) reaches consumers not eligible for retail credit through minority employers and nonprofits.

Wells' 2010 annual report shows that they assess this credit risk in general using FICO rating scores and other methods discussed below. Note 6 to the 2010 financial statements in the annual report (Annual Report 144) shows that the bank allocates total dollar value of credit fairly evenly across FICO scores above 600 for home loans and credit cards. This makes sense if higher credit rating brackets need less dollar loan-to-value or retail credit paying more cash for homes or purchases. Likewise credit is distributed intentionally across population and industry classes in the attempt to diversify risk. Since past credit delinquency is a major indicator underlying both FICO and Wells' eligibility criteria (Annual Report 136), if FICO ratings lower than 600 and the Wells appraisal indicate risk too high for retail lenders, or conversely if retail lenders would have to charge rates prohibited by law or too high for borrowers to pay in order to justify lending, the result is that the borrower is prevented from obtaining credit by their own historical payment performance and not by demographics of race, ethnicity, sex or age. While these social determinants may demonstrably affect past payment performance, delinquency could occur even at high wealth. Ultimately the bank does not control who chooses to apply for credit, and so measuring credit volume compared to share of national income levels distorts a picture that may be significantly impacted by these demographic characteristics, but which take place in the culture outside the sole responsibility of even the largest single bank. Race, ethnicity and sex undoubtedly affect U.S. credit ratings but these characteristics do not show up explicitly in FICO or apparently Wells Fargo's risk appraisals. The result is that while Wells Fargo cannot be held directly or solely responsible for macroeconomic demographic effects of discrimination, individual consumer demographic markers besides perhaps age do not show up explicitly in the bank's risk analysis and law protects consumers from discrimination where those markers can be determined by the interviewer, the bank allocates credit based on microeconomic individual financial characteristics having nothing to do with heritage or diversity, usually. Usually.

Note 14, "Guarantees and Legal Actions," explains that the Illinois Attorney General filed a civil suit for damages on behalf of a class of minority customers who allege the bank steered them into higher-cost subprime mortgages at higher rates than other consumers "with similar incomes" and that a subsidiary misled customers regarding mortgage loan terms and engaged in "reverse redlining" (Annual Report 168), which the bank leaves undefined. Interesting in the terms the bank uses to frame the complaint is that the plaintiffs use income to benchmark credit appraisal while the bank uses delinquency, FICO scores and other financial indicators like loan-to-value (Annual Report 136) alongside income, which could indicate higher risk even in the face of higher income if the applicant had serious history of late payments. At the time of publication the firm had filed a motion to dismiss and were awaiting adjudication, which has itself since been rejected (Golobay 2011).

A jury in the Superior Court of California found Wells Fargo did actually violate the civil rights of 880 minority homebuyers March 24 of this year in Opal Jones, et al. Vs. Wells Fargo, et al. (Howard Law 2011). In an apparently as-yet unpublished opinion, the jury found that Wells Fargo did not act with malice but their use of the computer program "Loan Economics" was discriminatory because the program was not used to allocate home loans fairly across all areas, particularly in minority-dense Los Angeles neighborhoods, with the result that minorities were 'steered' into higher-risk, higher-cost mortgages at a higher rate than non-minority buyers in other markets (Prior 2011). This lender liability class outcome will undoubtedly affect the Illinois verdict and all such future class actions like similar cases Wells faces in Baltimore and Memphis (Andrew 2011).

Indeed under "Credit Risk" in Wells' 2010 annual report we find that the bank uses automated valuation models, "AVMs," "to estimate the market value of homes" (56). These programs, probably now including Loan Economics, are usually used according to the bank "only where the loan amount is under $250,000" (Annual Report 56), above which they "require property visitation appraisals by qualified independent appraisers" (Annual Report 56). The bank justifies this procedure as "a lower-cost alternative to appraisals" to "support valuations of large numbers of properties in a short period of time" (Annual Report 56). The bank admits there is a risk that the value of individual properties may deviate significantly from the average value the program uses for the specific market (Annual Report 56). Where would properties below this threshold value cluster? Lower-income neighborhoods. If lower-income neighborhoods are primarily or even heavily minority-dense, and this type of automated program was used primarily for lower-value homes, it seems plausible there could be higher deviation from average values in minority neighborhoods than in whiter, middle and upper class neighborhoods appraised by certified professionals.

The Federal Reserve Bank of New York staff found in 2009 that subprime home loans were cheaper in minority neighborhoods at the high-water mark of subprime lending, August 2005, perhaps because of prior credit shortage and high density (Haughwout, Mayer and Tracy 5). Although statistically significant, the difference was "economically insignificant" (Haughwout, Mayer & Tracy 4). The N.Y. Fed however qualifies this finding with the disclaimer that these results do not indicate whether the consumers who purchased these '2-28' adjustable rate mortgages (ARMs) would have qualified for a less-risky, standard loan (5) and that their model cannot incorporate fees and points assigned at the onset of these mortgages, with the result that "it is possible that we are missing data that might show disparate treatment in loan origination costs" (Haughwout, Mayer & Tracy 4). The overall outcome is that subprime loans were more highly clustered in lower-income, higher-unemployment neighborhoods with lower price than in areas with higher home values and loan products with lower rates of default (Haughwout, Mayer & Tracy 5). These subprime 2/28 ARMs at least were also assigned instead of prime loans partially based on FICO credit scores, for which Blacks consistently rank far lower than Asians or Hispanics (Haughwout, Mayer & Tracy 11), clustered particularly around home values just below Wells' $250,000 appraisal threshold (Wells Fargo 56).