[cnn-photo-caption image= http://i2.cdn.turner.com/cnn/2009/images/06/11/costello.baltimore.mayor.art.jpg caption="Baltimore mayor Sheila Dixon alleges Wells Fargo violated the federal Fair Housing Act."]
From CNN's Bob Ruff and Carol Costello
Once upon a time, many banks didn't loan money to minorities seeking home mortgages.
The practice is called "redlining." The name comes from the notion that some banks and real estate agencies drew a red line around parts of the map where minorities lived so that they wouldn't do business with them.
The Fair Housing Act was passed in 1968 to stop redlining and prohibit all housing discrimination based on race, religion, gender, disability, or ethnic origin.
So, what's up with "reverse redlining"?
This variation on redlining describes banks who target parts of a city with significant minority populations in order to sell them costly sub-prime mortgages, even if they can afford cheaper prime mortgages.
Beth Jacobson knows all about it.
At one point she was the top salesperson selling sub-prime mortgages at Wells Fargo. One year she made $700,000 in salary and commissions by just selling the sub-primes. Now that she's left the bank she and another former Wells Fargo mortgage officer are spilling the beans by alleging reverse redlining on the part of their former employer.
"Wells Fargo," Jacobson told CNN's Carol Costello, "set up a whole platform called ‘emerging markets’ that was geared to the African American." She says the bank's goal was to sell them sub-prime mortgages, which are much more profitable to the banks than prime rate mortgages. But the problem, says Jacobson, was that Wells was so single-minded about this that "we had products where you didn't have to disclose income…and they would loan up to 95% (of the mortgage total)." When temporary low teaser rates were replaced with much higher rates after two years, she says, the defaults mounted.
The city of Baltimore has been closely watching the effects of this alleged reverse redlining.
In January 2008, Baltimore sued Wells Fargo for violating the Fair Housing Act with "discriminatory lending practices." The case is before Federal Judge Benson E. Legg, who is considering affidavits from Jacobson and Tony Paschal, another former Wells Fargo loan officer, which describe in detail what they say is reverse redlining by the bank.
Paschal, who is African American, claims black loan officers were hired to gain the trust of the black community in order to sell them on high interest loans. He also describes how he often heard employees – whose job it was to target African Americans for subprime loans – jokingly refer to doling out “ghetto loans” to people with “bad credit.”
Baltimore Mayor Sheila Dixon says the effect of reverse redlining is that so many people defaulted from the Wells Fargo loans that her city is forced to spend millions of dollars to protect and clean the empty homes. The city also says it has lost tax revenues from declining property values. Dixon told CNN the city wants Wells Fargo to pay the city "so we can take these communities that have been devastated as a result of these foreclosures to stabilize those neighborhoods."
At least one neighbor who lives near an empty foreclosed building is angry.
We visited Stephan Faison who pointed out the foreclosed Baltimore row house right next door. It was filled with garbage on the front porch and in the back yard. Faison told Carol Costello that the house "is nothing but a rat hotel. That's all it is, nothing but a rat hotel." Faison directs his anger right at the bank. "There's no excuse that it look like that. That's a bank, come on now. It shouldn't look like that at all."
What does Wells Fargo think about all of this? They say "the lawsuit absolutely lacks merit." In a statement issued to CNN, they added the following:
"We have worked hard to be the #1 home lender to people of color and low and moderate-income borrowers nationally in a fair and responsible way. This includes collaborating with leaders within diverse segments who provide us with advice and guidance on how to make people aware that our loans are available to all communities. Our intention has always been to do what is right to ensure we can make home-ownership achievable and sustainable for as many borrowers as possible, with loan pricing that is nondiscriminatory."