Graeme Sloan/Sipa USA via AP Images
A branch of Wells Fargo bank in Washington, D.C., October 30, 2022
Over the course of 11 years under review by the Consumer Financial Protection Bureau, Wells Fargo Bank denied mortgage borrowers loan modifications when they were eligible, froze and closed customer bank accounts through an automated fraud detection system without a proper rationale, charged illegal surprise overdraft fees, claimed that it would waive monthly account fees and then failed to do so, imposed phantom charges on auto loans, misapplied auto loan payments in ways that added costs to borrowers, posted the incorrect date on payments that generated millions in late fees, neglected refunds owed to auto loan customers, and repossessed customer vehicles incorrectly. This is just a sampling of a range of conduct, including fake bank accounts, falsified records, secret changes to the terms of mortgage contracts, force-placed insurance, and a personal favorite, stealing from mortgage bond investors to cover legal fees in lawsuits filed by those same investors.
It’s clear from this track record that Wells Fargo should not exist as a going concern. The Office of the Comptroller of the Currency (OCC) has Wells Fargo’s corporate charter in its hands, and it does not have to allow serial recidivist behavior to continue. This has not been a priority of that agency, which has instead left it to other regulators to hold Wells Fargo accountable.
The Federal Reserve actually did impose some penalties on the bank, in Janet Yellen’s final official act as chair. Yellen placed a size cap on Wells Fargo, a first for the central bank, and forced the company to replace four members of the board of directors. Wells Fargo could no longer grow through acquisitions or increase its asset base above the $1.95 trillion cap. Imposed in early 2018, it remains on five years later. Separately, the OCC put a mortgage servicing restriction on Wells Fargo in 2021, disallowing the bank from buying mortgage companies or new servicing rights.
But those restrictions might be ending, at least according to bank analysts, who are saying the CFPB’s $3.7 billion settlement this week on the above-mentioned matters could enable Wells Fargo to get out of them.
Here are the details. Wells Fargo had to agree to a consent decree, which mostly refunds customers who were wronged and specifically prohibits the already-illegal practices in auto loan and mortgage lending and deposit-taking, while tacking on a $1.7 billion civil money penalty to the approximately $2 billion in restitution. But for a bank with an asset cap at $1.95 trillion, a $3.7 billion fine isn’t going to break them. (The bank set aside more than half of this money in October.) At best, it will very modestly cut into the stock buybacks Wells Fargo had planned for the year. Meanwhile, the potential gains from lifting the asset cap would be great. This, one can imagine, is why shares in the stock are performing well.
“Progress needs to be made on the consent orders before the Federal Reserve could move to lift the cap, and any resolution on the CFPB orders would push Wells Fargo closer to this goal,” said BTIG analyst Isaac Boltansky in a research note to his clients. Jefferies analyst Ken Usdin called the settlement “positive progress.” Wells Fargo itself, in its statement, said that the CFPB order “provid[es] clarity and a path forward for termination of 2018 [Federal Reserve] consent order.”
A corporate death penalty, while more than appropriate, would be hugely disruptive given Wells Fargo’s size.
But the one thing these observers don’t seem to be counting on is the posture of CFPB Director Rohit Chopra. A signature of his approach, whether at the CFPB or the Federal Trade Commission, has been his insistence that corporate “repeat offenders” should be dealt with harshly, and that laws are not mere suggestions.
In prepared remarks on Tuesday, where Chopra noted that a remarkable 1 in 3 U.S. households contain a Wells Fargo customer, he highlighted the bank’s repeat offenses, including past CFPB fines totaling $1.1 billion and billions more from other regulators. “Put simply, Wells Fargo is a corporate recidivist that puts one-third of American households at risk of harm,” Chopra said. “Finding a permanent resolution to this bank’s pattern of unlawful behavior is a top priority.”
But what would that resolution look like? A corporate death penalty, while more than appropriate, would be hugely disruptive given Wells Fargo’s size (though selling off the parts could make it manageable). And CFPB’s only tool is monetary fines, which are like spitballs to a dragon. Yet Chopra, who fully acknowledged that $3.7 billion would not be enough, noted that the order “does not provide immunity for any individuals” or “release claims for any ongoing illegal acts or practices.” That keeps balls in the air for future civil or even criminal referrals. He also proposed enhancing limitations like the 2018 Federal Reserve size cap, as it has failed to keep Wells Fargo from abusing customers.
Chopra said that the OCC and the Fed cooperated on the settlement, and that he would collaborate with them in the new year. Not every agency in the federal government has the exact same perspective as the CFPB, of course. But the Justice Department, for example, has been more aggressive on corporate concentration recently through its Antitrust Division, and such a big bank engaging in illegal behavior could attract the interest of Assistant Attorney General Jonathan Kanter, especially if tied to anti-competitive conduct (as locking customers into products, freezing assets, or other practices may reflect).
After all, the main reason Wells Fargo routinely rips people off is because its software systems are terrible. And the reason for that is that Wells Fargo (like other big banks) has executed so many mergers that none of the legacy systems can talk well to one another. The abusive and deceptive conduct is the consequence of monopolization.
As CFPB director, Chopra also sits on the board of the Federal Deposit Insurance Corporation, which can make life problematic for Wells Fargo if it so chooses. One very determined regulator really can ensure that fines are not simply the cost of doing business.
Certainly we will see whether the Wells Fargo situation resolves to its benefit or not. In a just world, this company would be liquidated. In an unjust world, a multibillion-dollar fine for cheating customers will lead to a relaxation of rules that will subsequently allow the bank to cheat more customers. Holding to the principle that laws are laws, and that breaking them should have real and painful consequences (as it so often does for low-level drug offenders and innumerable other Americans who aren’t global mega-banks), would be a step toward the former and not the latter.
