Federal report blasts Wells Fargo
A federal regulator criticized Wells Fargo for engaging in unfair and deceptive practices and failing to manage risks, and said it had not set aside enough money to pay back the customers it harmed.
The confidential report, prepared by the Office of the Comptroller of the Currency and reviewed by the New York Times, criticizes Wells Fargo for forcing hundreds of thousands of borrowers to buy unneeded auto insurance when they took out a car loan, as well as its handling of the problems once they were detected.
The regulators’ report, sent to the bank this week, is preliminary. Still, it represents the latest blow to the reputation of Wells Fargo, the United States’ third-largest bank and one that was once regarded as being among the best run in the country. The bank is still trying to recover from a scandal in which its employees created millions of credit card and bank accounts that customers had not requested, eventually leading to the ouster of the bank’s chief executive and millions of dollars in regulatory fines.
Wells Fargo is facing turmoil across the company. On Friday, the bank said that four foreign-exchange bankers in its investment banking unit had left and another executive had been reassigned. The moves were first reported by the Wall Street Journal, which said, citing anonymous sources, that they were part of a regulatory investigation into the bank’s foreign-exchange operations.
While Wells Fargo has
one of the largest consumer banking businesses in the United States and is the country’s largest mortgage lender, it has a comparatively small investment bank and trading operation. Those operations were mostly inherited from Wachovia, which Wells bought in a fire sale transaction at the height of the financial crisis.
The comptroller’s findings on unneeded auto insurance could have a significant impact on Wells Fargo. The report stated that the bank had most likely underestimated how much it would cost to reimburse harmed customers. And it could force the bank to curb, or at least more closely monitor, its practices across the entire company.
Wells Fargo’s improper auto insurance practices came to light in July, after the Times obtained an internal report prepared for the bank’s executives. That analysis showed that more than 800,000 people who took out car loans from Wells Fargo were charged for auto insurance they did not want or need, typically because they already had coverage.
That internal report said the costs of the unneeded insurance, which covered collision damage, had caused some 274,000 Wells Fargo customers to fall behind on their car loans, and almost 25,000 vehicles were wrongly repossessed. Customers on active military duty were among those hurt by the practice.
In the comptroller’s report, regulators said management at the bank’s auto loan unit, Wells Fargo Dealer Services, had ignored signs of problems in the business such as consumer complaints, focusing instead on sales volume and performance. The report described its management of compliance risk — essentially the ability to abide by regulations and best practices — as “weak.” It noted that Wells Fargo in 2015 had characterized the risks associated with this business as “low.”
Wells Fargo has set aside $80 million to compensate the 570,000 customers it said were harmed by receiving auto insurance they didn’t want. The comptroller’s office said that the amount was inadequate and that the bank might have to pay out substantially more as additional victims were identified — partly because Wells Fargo’s analysis of how much money it needed to set aside excluded many years when the insurance was being imposed.
The report does give Wells Fargo’s management credit for taking action after identifying the problems at the auto loan unit, such as hiring legal and consulting firms to assess customer harm, changing staff at the operation and notifying regulators.
The comptroller’s findings are likely to affect how Wells Fargo does business, not just in the auto lending operation but across the bank. The comptroller’s office said it would require Wells Fargo to ensure that all of its business units had effective systems in place to identify and prevent risky practices.
Catherine Pulley, a Wells Fargo spokeswoman, said in a statement that the bank had made significant changes in recent months to strengthen controls and oversight of insurers and outside vendors with which it does business.
“We are also working to enhance our customer care program and improve complaints resolution,” she said. “We will continue to work with regulators on the remediation and make improvements to our auto lending business to build a better Wells Fargo.”
Wells Fargo stopped the auto insurance program in September 2016.
Once the Office of the Comptroller of the Currency makes its findings formal, Wells Fargo will have time to correct the problems. A spokeswoman for the comptroller’s office declined to comment on the report.
The report did not mention penalties or fines. The comptroller can impose penalties for violations of laws or unsound business practices in an attempt to deter violations and encourage corrective measures.
Last year, the comptroller’s office came under scrutiny for its own failures to supervise Wells Fargo. A report in April by the office’s ombudsman concluded that the agency “must continue our efforts to improve and refine the agency’s supervisory program, to sharpen our early warning processes, and to enhance our supervisory capabilities.”