In a highly anticipated and unprecedented move, Wells Fargo will pay $1 billion to settle charges brought by the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) for practices deemed to be unsafe, unsound and unfair.
The penalty, 10 times bigger than the previous largest assessed in the bureau’s history, comes as a response to the bank’s practice of forcing auto loan borrowers to pay for collateral-protection insurance, as well as for failing to follow the mortgage-interest-rate-lock process it explained to some prospective borrowers. Both activities were found to violate the Consumer Financial Protection Act (CFPA).
By applying “forced-placed” insurance to approximately 2 million auto loan borrowers since 2005, Wells Fargo also violated the Federal Trade Commission Act, according to a separate action filed by the OCC ordering the bank to pay a $500 million penalty.
The CFPB said in a press release that payment of the half-billion-dollar fine assessed by the OCC will count toward the penalty assessed by the bureau. However, the CFPB confirmed to Dodd Frank Update that because the respective agencies initiated actions separately, calling for $1 billion and $500 million, the total assessed settlement amount is $1.5 billion, although Wells Fargo only will have to pay $1 billion.
“I am especially pleased that we were able to work closely and effectively with our colleagues at the OCC, and I appreciate the key role they played in the negotiations,” CFPB acting director Mick Mulvaney said in the release. “As to the terms of the settlement: we have said all along that we will enforce the law. That is what we did here.”
The case marks the CFPB’s first enforcement action initiated since Mulvaney took over for former Director Richard Cordray in November 2017 on an interim basis.
The charges the bureau levied are based on its authority under the Dodd-Frank Act statute prohibiting unfair, deceptive or abusive acts or practices (UDAAP). Mulvaney has been critical of the CFPB’s past use of its UDAAP authority to engage in what Cordray termed “regulation by enforcement,” a practice Mulvaney said would cease under his leadership.
“For more than a year-and-a-half, we have made progress on strengthening operational processes, internal controls, compliance and oversight, and delivering on our promise to review all of our practices and make things right for our customers,” Wells Fargo President and CEO Timothy Sloan said in a statement. “While we have more work to do, these orders affirm that we share the same priorities with our regulators and that we are committed to working with them as we deliver our commitments with focus, accountability, and transparency. Our customers deserve only the best from Wells Fargo, and we are committed to delivering that.”
The CFPB consent order states that a vendor, working on behalf of Wells Fargo, illegally applied forced-placed insurance to auto loan borrowers in instances where the vendor could not verify that a borrower had obtained physical damage insurance for their vehicle.
“If [Wells Fargo’s] vendor was unable to verify that borrowers maintained the required insurance for their vehicles through policy information it obtained directly from insurance companies and from other data aggregators, the vendor was required to communicate with the borrower multiple times before force-placed insurance was acquired,” the consent order states. “Under [Wells Fargo’s] contract with its vendor, the vendor was required to send written notices to the borrower, as well as attempt to call the borrower and the borrower’s previous insurance agent or insurance carrier to request evidence of insurance. If, following this outreach, the vendor was unable to obtain evidence of the required insurance, [Wells Fargo] caused force-placed insurance to be issued to the borrowers.”
The consent order also notes that borrowers were charged additional hardships if they did not account for the forced-placed insurance in their payments.
“According to [Wells Fargo’s] own analyses, it forcibly placed duplicative or unnecessary insurance on hundreds of thousands of those borrowers’ vehicles,” the consent order states. “In addition, for some borrowers, after appropriately placing force-placed Insurance policies, [Wells Fargo] improperly maintained force-placed Insurance policies on the borrowers’ accounts after the borrowers had obtained adequate insurance on their vehicles and after adequate proof of insurance had been provided. If borrowers failed to pay the amounts [Wells Fargo] charged them for the force-placed Insurance, they faced additional fees and, in some instances, experienced delinquency, loan default, and even repossession.”
The OCC determined Wells Fargo’s “improper placement and maintenance of collateral protection insurance policies on auto loan accounts and improper fees associated with interest rate lock extensions,” as well as “deficiencies in the bank’s enterprise-wide compliance risk management program” to be “unsafe and unsound,” in violation of the FTC Act, according to an OCC press release.
The issues with Wells Fargo’s rate-lock extension fees began after a change in the bank’s rate-lock extension program between 2012 and 2013, stemming from “inadequate” guidance provided to loan officers regarding the circumstances under which the rate-lock would apply, according to the CFPB consent order. The bank acknowledged internally that the guidance was not sufficient to prevent errors.
“During the rate-lock relevant period, [Wells Fargo] trained its loan officers to inform prospective borrowers that they would be responsible for paying extension fees under circumstances where the delay was caused by the borrower or related to the property itself, including when the borrower does not timely return necessary documentation, the borrower disputes a low appraisal, previously undisclosed liens are uncovered, sellers or builders delay the process, the sale is not timely approved by a condo project or co-op board, or the borrower’s credit score changes,” the consent order states. “Within days of rolling out the new policy, [Wells Fargo] acknowledged in internal communications that its guidelines for its loan officers were inadequate. [Wells Fargo] instructed employees that extension fees would be charged based on the factor primarily responsible for the delay, without further guidance as to what that meant.”
Nearly three years after Wells Fargo first identified the risks for consumer harm relating to improperly assessed extension fees during an internal audit, another internal audit, conducted in October 2016, uncovered evidence that the bank “inconsistently applied its policy and charged borrowers extension fees in situations where [Wells Fargo] was responsible for the delay in the loan’s closing.”
The 2016 internal investigation occurred the month after Wells Fargo was fined $185 million for opening millions of fake accounts in customers’ names without their consent. That total included a $100 million penalty levied by the CFPB, which was, at the time, the largest assessed in the bureau’s history.
Internal investigators also determined that during the rate-lock relevant period, Wells Fargo inappropriately charged certain borrowers rate-lock-extension fees that the bank should have absorbed under its policy.
The bank changed its extension fee practices on March 1, 2017, to address the inconsistent fee allocations.