Wells Fargo May Be Hit With "Repeat Offender" Formal Enforcement Action

It's beginning to seem like every day there's a new scandal breaking out at Wellls Fargo.

Earlier this week, the Wall Street Journal dished on Wells Fargo’s latest scandal when it reported that several regulators and even one US attorney were investigating the bank for gouging clients of its foreign-exchange trading desk.

Among the many humiliating details, the public learned that Wells had tacitly encouraged this behavior with an idiosyncratic bonus structure and even embarrassed and demoted an employee who complained to management about this behavior.

The scandal marked the latest blemish on Wells Fargo’s once-pristine public image following a series of other scandals in its retail lending and banking division. Earlier this year, the public learned that Wells had forced customers in its auto-lending division to buy collision insurance they didn’t need. And when 20,000 customers refused or failed to pay the insurance, the bank had their cars repossessed.

While the bank’s CEO Tim Sloane has been making the media rounds trying to rehabilitate its image, the Comptroller of the Currency, one of the bank’s regulators, has been preparing yet another enforcement action against the bank – what would be its fifth in as many years, according to WSJ.

The paper reported that the OCC has informed Wells Fargo’s board of directors that it is considering an enforcement action known as a consent letter over the bank’s failure to remedy internal controls following its infamous cross-selling scandal – when 5,000 branch managers opened fake accounts in customers’ names that the customers themselves were often unaware of – and the auto-insurance scandal, which the bank publicly admitted over the summer. In the letter would label the bank a repeat offender and purportedly increase the penalties that could be assessed if the bank doesn't finally fix its compliance controls.

The banks also admitted to overcharging some of its mortgage customers.

In a harshly worded letter sent earlier this month, the Office of the Comptroller of the Currency, one of the bank’s chief regulators, said Wells Fargo had willingly harmed its customers in those two business lines and had until Nov. 24 to respond, according to people familiar with the matter. The letter said the bank repeatedly failed to correct problems in a broad range of areas, not just the auto-insurance and mortgage-lending units, the people said.


Wells Fargo declined to comment on the letter or its response. In a statement, the bank said there “is still work to be done,” and that it “is dedicated to making things right, fixing the problems, and building a better bank.”


The bank said it is making changes “across our risk management functions and line of business operations to rebuild the trust of our customers and team members.” An OCC spokesman declined to comment on an ongoing regulatory matter.


The OCC’s letter to the Wells Fargo directors centers on irregularities in two of the bank’s operations - auto insurance and mortgage lending - both of which have emerged this year.

Typically, notifications like this are a formality: Nine times out of ten, the regulator follows up with an enforcement action, typically a fine and a promise for the bank to take certain agreed-upon steps to strengthen its internal controls while making restitution to the customers it wronged.

The bank has also said it charged some customers improper fees to extend the interest-rate commitments they received from Wells Fargo on their mortgage applications. In October the bank said it is reaching out to around 110,000 customers who paid a total of $98 million in such fees, and expects refunds to be lower than that total because, the bank said it “believes a substantial number of those fees were appropriately charged under its policy.”


The enforcement action being weighed against Wells Fargo is a cease-and-desist order, the people familiar with the matter said. Also known as a consent order, it is among an array of formal enforcement proceedings the OCC can take when it determines that deficiencies in a bank’s operations are severe, uncorrected, unsafe or unsound. The issuance of a consent order typically includes steps the bank’s board or management must take to correct the deficiencies and a time period for doing so.


The OCC’s letter underscores the continuing challenges faced by Wells Fargo as it seeks to emerge from a widespread scandal that came to a head last year. It involved disclosures that Wells Fargo had created as many as 3.5 million accounts using fictitious or unauthorized customer information. Any new sanction by regulators could further dent the bank’s reputation and could provide ammunition for private lawsuits against the company.


Last year’s disclosure about the unauthorized accounts led the OCC to issue Wells Fargo a cease-and-desist order. The regulator levied penalties of $35 million in that September 2016 action, stipulating that Wells Fargo’s board “achieves and maintains an enterprisewide risk-management program designed to prevent and detect unsafe or unsound sales practices.”

While the OCC has broad power to restrict acquisitions and the bank’s other activities, it has for whatever reason been reluctant to use them. Even though there was rarely a moment over the last five years where the bank wasn’t taking advantage of its customers in some way, it has only been assessed a grand total of $55 million in fines by the OCC – a pittance compared to the $4.6 billion net profit the bank earned last quarter.

The enforcement letters, however, have at least one utility: Plaintiffs who were wronged by Wells can use it to justify a lawsuit. And we imagine many consumers will take advantage of this opportunity: After all, imagine how angry you’d be if a bank wrongly repossessed your car? Customers could lose their jobs. All because of a bank’s negligence.

For what it’s worth, the bank appears to have found its scape goat. As WSJ reports, earlier this month, the bank dismissed Franklin Codel, the head of consumer lending. Codel was purportedly responsible for cleaning up questionable practices with auto lending and mortgages in that unit of the bank. He was dismissed for reportedly making disparaging comments about the bank’s regulators, according to people familiar with the matter. Wells Fargo said it would replace Codel by the end of the year. Codel previously said in a brief interview that he was “proud of my career with Wells Fargo” but declined to comment on details of his firing, saying additional questions should be directed to the bank.  

In its consent letter to Wells, the OCC “identified irregularities” in its insurance operations and accused the bank of having “weak” compliance risk.

The report also said the bank had underestimated the amount of restitution it owed to wronged customers. Of course, if this were the bank’s first warning, this language might seem appropriate. But keep in mind: Despite the public outrage that the bank’s cross-selling scandal elicited, the organization itself came away with a slap on the risk.

Maybe – just maybe – when banks are allowed to gouge and mistreat customers with minimal repercussions, they’re never forced to adjust their assessment of just how far to push questionable behaviors.

But then again, who are we to say? Perhaps letter number six will make all the difference.