UPDATE 2-Wells Fargo loses bid to end Baltimore mortgage suit

WARNING: This story contains language in paragraph 13 that may be offensive to some readers.

* Reverse redlining case to continue

* Wells Fargo says lawsuit lacks merit (Adds Wells Fargo comment, details and background throughout)

By Jonathan Stempel

NEW YORK, July 2 (Reuters) - A federal judge has rejected Wells Fargo & Co's (WFC.N) effort to dismiss a closely watched lawsuit accusing the largest U.S. mortgage lender of steering black borrowers in Baltimore to high-cost subprime mortgages.

Judge Benson Legg of the U.S. District Court in Baltimore ruled that the city may continue pursuing its claims that the bank has since 2000 pushed blacks into costly or onerous mortgages when they could have afforded prime loans, or that its practices had a disparate negative impact on blacks.

In a four-page ruling, Legg concluded that Baltimore's allegations "are sufficiently plausible and grounded in fact" to allow the case to proceed.

The bank had argued that Baltimore had lacked standing to sue, but Legg said this issue was "inextricably intertwined with the facts central to the merits of the dispute."

Cara Heiden, co-president of Wells Fargo Home Mortgage, said the bank believes the lawsuit lacks merit, and plans to "set the record straight" and show its commitment to "fair, responsible and nondiscriminatory lending."

Wells Fargo, which is based in San Francisco, is the nation's fourth-largest bank by assets.

Scott Peterson, a spokesman for Baltimore Mayor Sheila Dixon, said the city was pleased with the ruling.

The lawsuit filed in January 2008 is the first by a major American city accusing a mortgage lender of violating the federal Fair Housing Act with predatory lending practices that exacerbated the nation's housing slump.

Officials nationwide have investigated whether Wells Fargo and rivals such as Bank of America Corp (BAC.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) target black and Hispanic borrowers with unfair loan practices, sometimes known as reverse redlining.

Those investigations got a boost on Monday when the U.S. Supreme Court ruled that states may enforce fair lending and other consumer protection laws against national banks such as Wells Fargo.

NARROWING THE CASE

Noting that Baltimore's complaint calls into question "quite a number" of mortgages, Legg said he would consider simplifying the case by focusing on a smaller pool of loans. He scheduled a July 29 hearing to further discuss the case.

The lawsuit claimed that Wells Fargo's policies led to a high rate of foreclosures in targeted neighborhoods, hurting the city's economy by reducing tax revenue and adding to police and fire costs.

According to an affidavit by former Wells Fargo loan officer Tony Paschal, loan officers promoted "derogatory stereotypes" of blacks, referring to them as "niggers" and "mud people" who "don't pay their bills."

In a hearing on Monday, Wells Fargo's lawyers contended that blacks owned only 51 percent of properties foreclosed by the bank in the city between 2005 and 2008. Roughly 64 percent of Baltimore's population is black, U.S. census data show.

The case is Mayor & City Council of Baltimore v. Wells Fargo Bank NA, U.S. District Court, District of Maryland (Baltimore), No. 08-00062. (Reporting by Jonathan Stempel; Editing by Andre Grenon, Phil Berlowitz)