A historic $1 billion penalty was assessed Friday to Wells Fargo & Co. by two federal regulatory agencies.
The penalty addresses regulatory claims that the bank violated the Consumer Financial Protection Act in certain auto loans and mortgage interest rate-lock extensions.
It appears that little, if any, of the $1 billion penalty will go toward to Wells Fargo customers affected by the abuses.
The penalty is split with half going to the OCC, which will go to the U.S. Treasury, and half to the bureau. It is the largest penalty ordered by the bureau.
However, the bank has been ordered to “remedia)te harmed consumers and undertake certain activities related to its risk management and compliance management.”
Although the bureau under the Trump administration has expressed a willingness to relax many financial regulations, President Donald Trump tweeted on Dec. 8 that he did not support federal regulators easing sanctions and penalties against Wells Fargo.
“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,” Trump tweeted. “But will be pursued, and if anything, substantially increased. I will cut regs, but make penalties severe when caught cheating!”
Mike Mulvaney, acting director of the bureau, said the settlement signifies what “we have said all along, that we will enforce the law. That is what we did here.”
The OCC said it “took these actions given the severity of the deficiencies and violations of law, the financial harm to consumers, and the bank’s failure to correct the deficiencies and violations in a timely manner.”
Regulators determined Wells Fargo “engaged in unsafe and unsound practices relating to improper placement and maintenance of collateral protection insurance policies on auto loan accounts and improper fees associated with interest rate lock extensions.”
The OCC cautioned it “also reserves 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.”
Several consumer advocacy, investors, shareholder advisory groups and Democratic congressional leaders have called for Wells Fargo to make a clean sweep of board members serving during the time of the fraudulent customer-account scandal, as well as to remove Timothy Sloan, who was promoted to chief executive after John Stumpf abruptly retired as chairman and chief executive in the first month of the scandal surfacing.
Sloan said in a statement that reaching a settlement with the agencies “affirms 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.”
Sloan has said repeatedly, including in a March 28 interview with the Winston-Salem Journal, that the bank “has more work to do” even after 18 months of taking steps to “strengthen 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.”
From the financial perspective, Wells Fargo said it will take an $800 million reduction in its first-quarter net income, lowering it to $4.7 billion. The reduction equates to 16 cents per diluted earnings.
Wells Fargo warned April 13 of the likely decline in its first-quarter profit when it issued its earnings report.
The consent order requires Wells Fargo to submit, for review by its board, “plans detailing its on-going efforts to strengthen its compliance and risk management, and its approach to customer remediation efforts.”
Consumer research group ValuePenguin said Wells Fargo moves to second for amount of regulatory penalties among fined financial institutions.
The bank trails just the $2.1 billion fine accessed to Ocwen Financial in 2013 for violating consumer-protection laws in its treatment of mortgage borrowers. North Carolina received $26 million from the Ocwen settlement.
Arnold Danielson, chairman of Danielson & Associates, said that $1 billion fine is anti-climatic now that it has been accessed.
“For a bank whose pre-tax earnings are well above $30 billion, it is nothing like the fines paid by its rivals five or so years ago,” Danielson said. “It is headlines today, but no political or long-term impact.”
Erin Mahoney, organizing coordinator for the Communications Workers of American and Committee for Better Banks, said the level of fine was not enough to bring about real change to Wells Fargo and its financial practices, particularly in light of the federal corporate tax-rate cut that went into effect in late December.
“With a $3.7 billion windfall in tax cuts, Wells Fargo can sign over $1 billion for their misdeeds today with money to spare on out-of-touch executive pay and share buybacks, while still failing to address the atrocious lies and scheming,” Mahoney said.
The bank reported April 13 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.
“How many scandals does it take to hold Wells Fargo accountable once and for all?” Mahoney asked.
“We need the bank to fire Tim Sloan, respect workers’ right to organize and speak out, and make sure the Consumer Financial Protection Bureau has the leadership and means to make sure this never happens again.”
Wells Fargo confirmed on Aug. 31, 2017, that there could be at least 3.53 million accounts affected by its fraudulent customer accounts scandal, up from the 2.1 million initially announced.
Retail-bank employees opened accounts for customers who did not request them, or added non-requested 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 to pay in September 2016 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.
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.
The bank already has agreed to make more than $400 million in scandal-related payments.
“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.