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Restored Republic via a GCR: Update as of July 19, 2018

Restored Republic via a GCR: Update as of July 19, 2018 Compiled 19 July 12:01 am EST by Judy Byington, MSW, LCSW, ret. CEO, Child Abuse R...

Monday, August 7, 2017

How Wells Fargo's Troubles Turned from Bad to Worse

How Wells Fargo’s Troubles Went From Bad to Worse

By Kartikay Mehrotra, Laura J Keller, and Margaret Cronin Fisk
August 7, 2017, 12:00 AM EDT

Wells Fargo Investors Fret Recent Scandals

Wells Fargo & Co.’s campaign to repair its reputation post-scandal has run into a problem: more scandal. A year ago, the San Francisco-based bank acknowledged creating millions of accounts without consumer consent. Since then, it’s made refunds to customers and paid fines totaling $185 million. But in July it disclosed yet another snafu, this time over insurance for auto loans, and it’s been accused of malfeasance related to mortgage lending and consumer-overdraft fees. It also faces discrimination complaints and fraud allegations related to shareholder losses. Investors aren’t happy.

1. What are the new allegations against Wells Fargo?

America’s third-largest lender has been accused by customers of making unauthorized changes to mortgages, even extending them by decades. Some borrowers allege the practice sent them into bankruptcy. The bank has faced 26 suits seeking class-action status in federal court that claim the bank manipulated its overdraft fees system to bolster revenue. Separately, a group of Latino plaintiffs and a civil rights group allege Wells Fargo’s credit policies are discriminatory. A federal judge said the bank must face the claims, filed under a 150-year-old civil-rights law. Other lawsuits, filed as class actions in federal court in California and New York, allege that the bank forced more than 800,000 customers to buy unnecessary auto insurance that sent about 250,000 of them into delinquency.

2. Has the original fake-account scandal been put to bed?

Not yet. The bank is seeking a federal judge’s final approval of a $142 million settlement with some 3.5 million consumers over its practice of “cross selling,” which pushed staff to open multiple accounts per customer. Some employees tried to meet sales goals by opening up bogus accounts. More than 5,000 employees were fired, and John Stumpf resigned as chief executive officer. That settlement, even if approved, won’t resolve claims by shareholders who say the bank touted the cross-selling program even after realizing it was a problem. Other investors filed derivative suits, on behalf of the company, against managers and directors of Wells Fargo, claiming they were responsible for the aggressive sales culture. Wells Fargo employees have filed an action for losses in their 401(k) plan, and some former employees say they were wrongfully fired.

3. How is the market reacting?

Wells Fargo lost (to JPMorgan Chase & Co.) its status as the world’s most valuable bank about a week after the fake-accounts scandal came to light in September 2016. Since then, it’s lagged behind the performance of its peers based on its price-to-book ratio. It’s continued to underperform since acknowledging the auto-insurance issues in July, and hasn’t been this cheap relative to U.S. rivals since 2011.

4. Who’s investigating?

The U.S. Department of Justice, U.S. Securities and Exchange Commission, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Financial Industry Regulatory Authority and Department of Labor have all inquired into the bank’s consumer practices during the past 11 months. Most recently, Finra started asking questions after a lawyer for Wells Fargo inadvertently released thousands of customer names, Social Security numbers and brokerage account information to a former financial adviser involved in a legal battle with his brother, who works at the bank. Wells Fargo said in a regulatory filing Aug. 4 that issues in its auto-lending business may spark investigations.

5. Don’t banks get in trouble all the time?

U.S. banks have paid huge sums to settle all sorts of allegations related to market-rigging and investor-fleecing, many involving mortgage-backed securities. But those settlements are almost always related to wholesale banking, as opposed to retail. Wells Fargo’s current scandals are different because they deal with customers in the consumer division. That’s more unusual, and a more politically sensitive problem.

6. How much might this cost Wells Fargo?

The bank doesn’t make it easy to determine what the fake-account scandal has cost. A Bloomberg News analysis finds the bank has spent at least $525 million on fines, remediation, consultants and litigation, plus related costs. Chief Financial Officer John Shrewsberry told investors in April that the firm expects to spend$70 million to $80 million per quarter for at least the next several quarters. The car insurance scandal and the mortgage-rate claims will add to those bills.

7. Are more firings coming?

None have been disclosed in the auto-loan case so far, though two senior managers of the bank’s auto-lending division left earlier this year. Wells Fargo’s new head of community banking, Mary Mack, has been busy reorganizing the retail bank that housed the accounts scandal since taking over last year. She collapsed her top-ranking regional deputies from three positions to two and, just last month, reduced the number of regional and area presidents to 91 from 160. With this reorganization of the community bank, about 40 percent of the 58 regional executives senior enough to be listed in the firm’s last public filing of key employees have left their roles.

8. Is Wells Fargo’s business hurting?

The division Wells Fargo calls its community bank posted a string of declines starting in the fourth quarter of 2016, when profit fell 14 percent. Wells Fargo reported that credit card applications in February dropped 55 percent -- the most since the accounts scandal began -- and retail customers opened 43 percent fewer checking accounts. The lender has stopped reporting statistics about card applications and new and closed checking accounts.

9. Who benefits from Wells Fargo’s missteps?

There’s not much evidence to indicate exactly where fed-up customers are moving their business. But on the jobs side, it’s clear other financial firms are benefiting. LPL Financial Holdings Inc., one of the largest brokerage houses not connected to a bank, said about 20 percent of the financial adviser teams it hired in the second quarter came from Wells Fargo Advisors.

The Reference Shelf

  • A look at how Wells Fargo’s ambitious sales culture led to trouble.
  • A story on the lawsuit by shareholders over the bank’s cross-selling scandal.
  • Wells Fargo settled a suit over loans to veteransjust days ago.
  • A QuickTake Q&A on why financial firms want to keep customers out of court.
Source: Bloomberg



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