Wells Fargo facing possible $1 billion in civil penalties over customer-account fraud

• Posted on the April 13, 2018 By Richard Craver Winston-Salem Journal
• Richard Craver
• Wells Fargo & Co. confirmed industry and analyst speculation Friday that its two federal regulators want the bank to pay up to $1 billion in civil penalties to resolve multilayered customer-account issues. The bank said those issues include “our compliance risk management program and our past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions.” The Consumer Financial Protection Bureau and Office of the Comptroller of the Currency have oversight over Wells Fargo. The darkening shadow of the customer-account scandal, which surfaced in September 2016, led Wells Fargo to take the unusual step of filing a preliminary first-quarter performance report.

The potential size of the fines had been speculated for several weeks.

At $1 billion, it is likely to be among the largest fines in financial services history and already being considered at a historic level by analysts Friday.

“Even though the fine would be enormous by regulator standards, it would not be that large in comparison to Wells Fargo’s overall earnings capability even with recent turmoil,” Seeking Alpha analyst Erich Reimer said.

The bank reported on Friday a 5.3 percent increase in first-quarter net income to $5.9 billion. Wells Fargo returned $4 billion to shareholders through common-stock dividends and net share repurchases during the quarter, up 30 percent from a year ago.

“Market worries remain over how long it will take to clean up Wells Fargo, and if it’s been chosen as a long-standing target to be made an example of by policymakers,” Reimer said.

3.53 million customer accounts affected

Retail-bank employees opened accounts for customers who did not request them, or added nonrequested insurance and residential mortgage services. Those moves garnered Wells Fargo tens of millions of dollars in fees.

Most of the customer account fraud victims were in Arizona and California.

However, Wells Fargo has said it cannot rule out that at least 38,722 unauthorized customer accounts were established in North Carolina and 23,327 in South Carolina.

Depending on which issue is discussed, the scandal period could go back as far as May 2002, with some customers potentially affected into mid-2017. The most common time frame being used by regulators and the bank for the scandal period is January 2009 through September 2016.

The bank agreed in July to a $142 million settlement addressing customer accounts. The settlement is on top of the $185 million the bank agreed in September 2016 to pay to resolve regulatory complaints about the fraudulent accounts, and an additional $80 million in July to resolve five years’ worth of overbilling to about 570,000 auto-loan customers.

The bank hired a third-party group to review 165 million current and former retail-banking customer accounts.

The review analyzed data on consumer and small-business checking, savings, unsecured credit card, line of credit accounts and identity theft-protection services from Wells Fargo.

Wells Fargo already has agreed to provide $2.8 million in additional refunds and credits on top of the $3.3 million initially committed to people affected.

Bank earnings

could change

Wells Fargo acknowledged that “these preliminary results are subject to change” as it negotiated with the federal regulators.

“At this time, we are unable to predict final resolution of the CFPB/OCC matter and cannot reasonably estimate our related loss contingency,” the bank said.

“Accordingly,” it continued, “the preliminary financial results we report today may need to be revised to reflect additional accruals for the CFPB/OCC matter” when the bank files its first-quarter report with the U.S. Securities and Exchange Commission.

Wells Fargo previously said it could experience overall losses reaching between $2.7 billion and $3.3 billion in its attempt to resolve its scandals. That number has more than tripled since October 2016.

“These are costs we have cited to settle sales issues,” bank spokesman Ancel Martinez said Friday. “However, there are lots of litigation matters in this number, and we have never sized for specific matters.”

On Feb. 3, the Federal Reserve, in the last action by then-Chair Janet Yellen, said Wells Fargo would not be allowed to grow its total assets beyond the $1.93 trillion it had on Dec. 31, 2017.

The bank said those restrictions could lower 2018 profit by $300 million to $400 million. To put that into context, Wells Fargo had $22.2 billion in profit in fiscal 2017.

Trump signaled

tough penalties

Mike Mulvaney, Trump’s interim appointee as CFPB head, is reviewing at least 14 open investigations into the bank, according to multiple media reports in December.

Trump said in the Dec. 8 tweet that “fines and penalties against Wells Fargo Bank for their bad acts against their customers and others will not be dropped, as has incorrectly been reported.”

“But will be pursued, and if anything, substantially increased,” he continued. “I will cut regs, but make penalties severe when caught cheating!”

Reimer, the analyst, said that “it is increasingly becoming apparent, whether with public statements or actual acts such as the Federal Reserve’s recent sanctioning, that Wells Fargo is the one exception that it seems the administration is making an example of” in the financial-services sector.

Tony Plath, a finance professor at UNC Charlotte, said Trump’s tweet “has legs because Trump is just reflecting popular opinion here regarding the egregiousness of Wells Fargo’s series of offenses across the last year or so.”

Plath said that “the issue of the magnitude of the fines that Wells Fargo faces won’t ultimately be settled until the CFPB has a new, permanent director.”

Chief executive: We’re

rebuilding trust

Timothy Sloan, the bank’s chief executive, did not specifically address the potential regulatory fines in his prepared statement.

Instead, Sloan focused on another reminder of the bank’s efforts to rehabilitate its reputation and restore public trust in Wells Fargo and his management team. He made a similar effort when he visited the bank’s Winston-Salem operations on March 28.

“I’m confident that our outstanding team will continue to transform Wells Fargo into a better, stronger company,” Sloan said.

“However, we recognize that it will take time to put all of our challenges behind us,” he said. “We made progress on our priority of rebuilding trust with our customers, team members, communities, regulators and shareholders.”

Reimer said that “while the exact nature of the scandal remains not fully clear at the moment, let alone the fallout, it is clear this is more negative attention that does not benefit Wells Fargo in the slightest.”