Banking and Finance Law Daily Senate Banking examines Wells Fargo response to unauthorized account issue
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Tuesday, September 20, 2016

Senate Banking examines Wells Fargo response to unauthorized account issue

By Colleen M. Svelnis, J.D. and Richard A. Roth, J.D.

Wells Fargo Chairman and CEO John G. Stumpf apologized for the unauthorized accounts that his company opened and the unauthorized, unwanted products Wells Fargo provided to customers at a September 20 Senate Banking Committee hearing. During his testimony, Stumpf also discussed changes Wells Fargo has made to address the problems, including terminating employees and strengthening its controls.

On Sept. 8, 2016, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency penalized Well Fargo Bank, N.A., for secretly opening two million unauthorized deposit and credit card accounts. In addition to a $100 million fine levied by the CFPB, Wells Fargo must pay consumers full refunds—expected to total $2.5 million—and hire an independent consultant to conduct a thorough review of its sales procedures. The OCC required the bank to pay an additional $35 million civil money penalty and make restitution to customers who were harmed by the bank’s unsafe or unsound sales practices (see Banking and Finance Law Daily, Sept. 8, 2016).

Stumpf apologized for his company, saying Wells Fargo "failed to fulfill our responsibility to our customers, to our team members and to the American public." However, he claimed that the activity was not an "orchestrated effort" by the company, explaining that the problematic cross-selling strategy was intended to create a deeper relationship with customers by providing a wide variety of products to satisfy their financial needs.

Prevention efforts. Stumpf detailed the evolution of efforts to detect and deter unethical conduct over the last five years.

  1. The Quality-of-sale Report Card was included in 2011 in California and 2012 across retail banking. This is intended to deter and detect misconduct through monitoring of sales patterns that may correlate with unethical behavior. The Sales and Service Conduct Oversight Team also began in 2011 to proactively monitor data analytics to root out sales practice violations.

  2. Beginning in 2012, Wells Fargo reduced the number of sales that team members would need to qualify for incentive compensation and reduced sales goals for branch-based team members.

  3. The company expanded its training materials for managers in 2013.

  4. A cross-functional oversight team was added for retail banking sales integrity issues to identify trends around sales integrity issues and identify additional improvements to prevent future violations.

  5. Sales-related terminations for sales-related misconduct occurred from Jan. 1, 2011 through March 7, 2016.

  6. A third-party consulting firm began working in August 2015 to evaluate products and services from 2011-2015 to determine whether customers may have incurred financial harm. 1.5 million accounts were identified (out of 82 million) with transaction patterns that might be consistent with improper conduct.

  7. After the consulting firm identified a population of credit cards that had never been activated by the customer and had no customer transaction activity, customers were notified that they would receive a refund for any fees that may have arisen from an account that may not have been authorized.

  8. Product sales goals for retail banking were eliminated effective Jan. 1, 2017.

Preventive measures. Stumpf also stressed that Wells Fargo has worked closely with the OCC to strengthen oversight. He listed other efforts the company has put in place, including an email confirmation to customers within one hour of opening an account and revised procedures for credit cards. He also said that Wells Fargo added an enhanced branch compliance program dedicated to monitoring sales practice violations. The company has contacted all customers with open, inactive credit cards to confirm whether the customer authorized the account, Stumpf told the committee.

Chairman’s criticism. In his opening remarks, Committee Chairman Richard Shelby (R-Ala) hinted at an intent to criticize the CFPB and OCC enforcement actions. Noting how long the conduct continued and that it was brought to light by the Los Angeles City Attorney, Shelby queried:

  • Where were the federal regulators during those years?

  • If the OCC and the CFPB were aware of these issues before the L.A. City Attorney’s lawsuit, why did they wait until 2016 to bring an enforcement action?

  • Why did it take an L.A. Times reporter to uncover what should have been uncovered by Wells Fargo’s regulators?

  • How many millions of unauthorized accounts does it take before the CFPB notices?

Democratic perspective. On the other hand, the opening statement of Committee Ranking Member Sherrod Brown (D-Ohio) strove to focus the hearing solely on Wells Fargo. Brown ridiculed Wells Fargo’s description of customers who "received products or services they did not want." "That makes it sound like there was a mix-up under the Christmas tree, and I got the right-handed baseball glove meant for my brother Charlie," Brown said.

Wells Fargo has not admitted any responsibility for any misdeeds, Brown asserted. He pointed out that the bank has even invoked arbitration clauses in agreements for legitimate accounts to block customers from seeking redress in court for fraudulently opened accounts.

The senator also contrasted the 5,300 low-level employees who were fired "with no parachute of any color" with the treatment of Carrie Tolstedt, Wells Fargo’s Senior Executive Vice President for Community Banking. Tolstedt has been allowed to retire with benefits that could exceed the CFPB’s record fine even though she has known of the problem for more than five years, Brown charged.

CFPB Director’s testimony. In written testimony, CFPB Director Richard Cordray said "fraudulent conduct occurred on a massive scale" at Wells Fargo Bank. He rejected the idea that the problem can be dismissed as bad conduct by a few employees, noting that the bank has fired at least 5,300 employees, including "branch managers and managers of managers."

According to Cordray, the CFPB’s enforcement action makes clear that financial institutions will be liable if they implement compensation programs that threaten consumers and create incentives for violations of the law.

Comptroller’s testimony. In an oral statement, Comptroller Thomas J. Curry characterized the bank’s practices as outrageous and unacceptable. According to Curry, the OCC’s action built on prior examinations and now will continue both at Wells Fargo Bank and other large and midsize banks. The agency’s earlier actions, which began with "a small number of complaints from consumers and Bank employees" in March 2012, were outlined in Curry’s written statement.

Curry conceded, though, that the OCC should have done a better job. To address that, he has asked a senior deputy comptroller to search for potential gaps in the OCC’s supervision.

Companies: Wells Fargo

MainStory: TopStory BankingOperations CFPB CrimesOffenses DirectorsOfficersEmployers OversightInvestigations

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