Banking and Finance Law Daily Wells Fargo fined $1 billion for auto loan, mortgage practices
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Friday, April 20, 2018

Wells Fargo fined $1 billion for auto loan, mortgage practices

By Lisa M. Goolik, J.D.

In a coordinated action, the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency assessed Wells Fargo Bank, N.A., a $1 billion penalty for alleged violations of the Consumer Financial Protection Act and Federal Trade Commission Act relating to improper placement and maintenance of collateral protection insurance policies (also known as forced-place insurance) on auto loan accounts and improper fees associated with mortgage interest rate lock extensions. Under the terms of the consent orders, Wells Fargo will remediate harmed consumers and undertake certain activities related to its risk management and compliance management. The Bureau assessed a $1 billion penalty against the bank and credited a $500 million civil monetary penalty collected by the OCC toward the satisfaction of its fine.

Inconsistent interest-rate-lock policies. The Bureau found that from Sept. 16, 2013, through Feb. 28, 2017, Wells Fargo unfairly failed to follow the mortgage-interest-rate-lock process it explained to some prospective borrowers. It was the bank’s policy that when a mortgage loan did not close within its initial interest-rate-lock period and the primary cause of the delay was attributable to the bank, if the borrower chose to extend the interest-rate-lock period, the extension fee was to be charged to the bank, and not the borrower. But, in certain instances, Wells Fargo charged borrowers rate-lock-extension fees that should have been absorbed by the bank due to a failure to adequately train and inform its loan officers.

Unnecessary forced-place insurance for auto loans. In addition, the Bureau determined that, from Oct. 15, 2005, through Sept. 30, 2016, the bank operated its force-placed insurance program for auto loans in an unfair manner. Typically, if a borrower does not procure or maintain physical-damage insurance for a vehicle, a bank may protect its interest in the collateral by acquiring force-placed insurance on the borrower’s behalf and charging the borrower for the insurance premium paid, in whole or in part, by the bank to the insurer, plus interest. In this case, Wells Fargo forcibly placed insurance for the vehicles of about 2 million borrowers who secured auto loans with the bank. According to the Wells Fargo’s own analyses, it forcibly placed duplicative or unnecessary insurance on hundreds of thousands of those borrowers’ vehicles.

Unsafe and unsound practices. The OCC’s fine reflects a number of factors, including the bank’s failure to develop and implement an effective enterprise risk management program to detect and prevent the unsafe or unsound practices, and the scope and duration of the practices. A separate order also requires Wells Fargo to develop and implement an effective enterprise-wide compliance risk management program.

The OCC also modified restrictions placed on the bank in November 2016 relating to the approval of severance payments to employees and the appointment of senior executive officers or board members. The original restrictions applied to all employees, which the OCC said unnecessarily delayed severance payments to employees who were not responsible for the bank’s deficiencies or violations. The modified order maintains restrictions on the approval of severance payments to senior and executive officers and the appointment of senior executive officers or board members.

Notably, the OCC reserved the right to take additional supervisory action, including imposing business restrictions and making changes to executive officers or members of the bank’s board of directors.

Agencies credit coordinated effort. "I am especially pleased that we were able to work closely and effectively with our colleagues at the OCC, and I appreciate the key role they played in the negotiations," saidBureau Acting Director Mick Mulvaney. "As to the terms of the settlement: we have said all along that we will enforce the law. That is what we did here." The OCC also credited the agencies’ coordinated efforts, stating that it was "made possible through the collaborative approach taken by the [B]ureau."

Wells Fargo adjusts earnings. As a result of the fine, Wells Fargo announced that it will adjust its first quarter 2018 preliminary financial results by an additional accrual of $800 million, which is not tax deductible. The accrual reduces reported first quarter 2018 net income by $800 million, or $0.16 cents per diluted common share, to $4.7 billion, or 96 cents per diluted common share.

Timothy J. Sloan, president and chief executive officer of Wells Fargo, commented, "For more than a year and a half, we have made progress on strengthening operational processes, internal controls, compliance and oversight, and delivering on our promise to review all of our practices and make things right for our customers. While we have more work to do, these orders affirm that we share the same priorities with our regulators and that we are committed to working with them as we deliver our commitments with focus, accountability, and transparency."

Waters calls for stiffer penalties. In response to the news, Rep. Maxine Waters (D-Calif), Ranking Member of the Committee on Financial Services, pushed for additional penalties, such as holding culpable executives accountable or revoking the bank’s charter. "I have been clear in the past that fines are not sufficient in addressing the pattern of illegal behavior by Wells Fargo, and this action still does not put the bank’s past behavior to rest. Steeper penalties are still necessary," said Waters.

Waters was unconvinced that the fine indicates a change for the Bureau since Mulvaney took the lead. "Far from it, Mr. Mulvaney has spent nearly five months working to undermine the Consumer Bureau from the inside. He has taken a series of actions to help out payday lenders, gutted the Office of Fair Lending and Equal Opportunity, scaled back enforcement actions, and asked Congress to further weaken the Consumer Bureau."

Companies: Wells Fargo Bank, N.A.

MainStory: TopStory BankingOperations CFPB ConsumerCredit EnforcementActions Loans Mortgages UDAAP

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