By order of the Federal Reserve, Wells Fargo must limit its growth this year and beef up compliance oversight.
Battered by a string of scandals in recent years, Wells Fargo received a stunning blow earlier this month after the Federal Reserve slapped the bank with a number of harsh penalties. Under the Federal Reserve’s orders, the bank cannot grow its assets beyond the $1.95 trillion it held at the end of 2017 for the remainder of the year. The Federal Reserve also demanded that Wells Fargo strengthen its compliance and risk management oversight.
The rare action was the last undertaken by former Federal Reserve Chair Janet Yellen, who said in a statement that Wells Fargo’s transgressions were so “pervasive and persistent” that the government wanted to ensure that consumers would not again be harmed by the bank’s misconduct.
Wells Fargo’s misdeeds date back to 2016, when it was hit with a $190 million fine for permitting its employees to open nearly 3.5 million consumer accounts before obtaining permission from the customers. The bank then acknowledged last summer that it had made unauthorized changes to mortgages that extended the terms of the loans while subsequently increasing the repayment total.
Insurance figured into some of the bank’s lapses, as well. Last summer, Wells Fargo agreed to refund $80 million to as many as 570,000 customers for charging them for auto insurance even though they already owned a policy. About half of the auto loan customers were forced into delinquency, and some 20,000 had their cars repossessed.
Late last year, California opened an investigation into whether the bank sold renter’s insurance and term life policies to some 1,500 customers without their knowledge between 2008 and 2016 and then charged premiums for them. The state could decide to suspend or revoke the bank’s insurance license in California in response.
That decision, however, may not have much impact on Wells Fargo. The bank effectively exited the insurance business last year after it announced that it would end its personal insurance lines by the beginning of this year. It continued by selling its commercial insurance unit to USI Insurance Services in December.
New Board Members
Since Wells Fargo also agreed to appoint four new board members by the end of the year, the New York Times speculated that the Federal Reserve wants stronger oversight by the boards of financial institutions. Yellen’s replacement, Jerome H. Powell, said as much in a speech last year: “Across a range of responsibilities, we simply expect much more of boards of directors than ever before.”
Although the Trump administration has long expressed an interest in relaxing financial regulations, President Trump criticized Wells Fargo for “cheating” in a December tweet: “Fines and penalties against Wells Fargo Bank for their bad acts against their customers and others will not be dropped...but will be pursued and, if anything, substantially increased.”
Wells Fargo has 60 days to submit a revamped compliance and risk management plan to the Federal Reserve, which specifically asked the bank’s board to more intently oversee and punish senior managers who violate government regulations or bank policies. In particular, the Fed pointed to the bank’s compensation programs as a factor in its many scandals.After the announcement, Wells Fargo’s stock price dropped, and the bank’s temporary restrictions on growth gives competitors a chance to expand at its expense. In the short term, however, the bank may not suffer too much. The bank said that the penalties will cut earnings by between $300 million and $400 million this year, which represents just 2% of its 2017 earnings of $22 billion.