Wells Fargo’s scandal has damaged their credit scores
SAMIR Hanef exited his Durham, North Carolina, home late last year to find his 2010 Honda Civic missing. The police told the clinical social worker that the car was not stolen, as he thought, but repossessed.
Hanef is one of about 20,000 Wells Fargo customers whose cars were allegedly seized in recent years after the bank improperly charged them for auto insurance they did not need, driving some into delinquency.
The San Francisco megabank has apologised and promised to refund him and other customers US$ 80 million. But that is not be enough for Hanef. After paying hundreds of dollars to get his car back, he discovered that the incident had lowered his credit score by 100 points, crippling his chance at economic opportunities.
“I am more concerned about that” than the money, Hanef said. “Your credit dictates how you can live your life.”
Wells Fargo, one of the largest banks in the country, has been rocked by scandal since last year after it admitted that it had opened millions of bank and credit card accounts its customers didn’t need or want, some of which ended up in default. It’s already replaced is chief executive and dismissed other leaders, and it was assessed a fine of US$ 100 million ( RM450 million).
But the scope of the problems continues to expand. The bank acknowledged earlier this month that there may be “significantly” more than the two million unauthorised accounts it initially estimated. And last month, it reported that 570,000 auto loan customers had been charged for insurance they didn’t need, sometimes leading to their cars being repossessed.
The bank’s efforts to move beyond the tumult is being hamstrung by the collateral damage from its mistakes: Fixing the damaged credit scores of potentially millions of customers.
The potential damage varies, but Goldman Sachs estimated last year that the more than 500,000 Wells Fargo customers for whom the bank opened unauthorised credit cards may have ended up paying an extra US$ 50 million to borrow money because of their damaged credit. Industry experts say the affect on customers whose cars were repossessed is likely more catastrophic - similar to losing your home in a foreclosure or declaring bankruptcy - and could last for years.
A low credit score can make it more difficult to get a loan, a mortgage or even a job. “Employers use it, home insurers use it, even if you are trying to rent an apartment the landlord may check your credit,” said Chi Chi Wu, staff attorney at the National Consumer Law Center with a focus on credit reporting and scoring. “That kind of collateral damage could be significant.”
Wells Fargo acknowledges the problem and lists the solution as a “work in progress” on its website. The bank is researching how its activities impacted customers credit scores, Wells Fargo chief executive Tim Sloan said in a March speech. “We want to make sure we make that right for our customers if they had been affected.”
Part of the problem is that fixing the issue requires the cooperation of the notoriously opaque credit rating bureaus - TransUnion, Equifax and Experian. “The whole thing is a black box,” said Ira Rheingold, executive director of the National Association of Consumer Advocates, whose members include attorneys, law professors and law students. “How do you compensate someone from the time and effort to correct those reports?”
Hoping to resolve the matter, Wells Fargo has reached a US$ 142 million ( RM639 million) preliminary settlement to compensate the possibly millions of customers who had unauthorised accounts opened in their name.
The settlement, which still needs final approval by a judge, includes a complicated formula for addressing the effect the sham accounts had on customers credit scores.
The amount of the payment will depend on how much the customer’s credit score declined as well as other factors, according to court documents.
“It took a lot of thought and careful work with experts so that we could make sure we were untangling the impact of the credit impact of fake accounts,” said Derek Loeser, a partner at the law firm Keller Rohrback and lead attorney for the plaintiffs in the case. — WP-Bloomberg