Editor’s Note: InsideSources has co-published this article with the Huffington Post.
Wells Fargo, the banking giant that defrauded its own customers by opening checking accounts they didn’t want, got a pointed lecture from the chairman of the House Financial Services Committee last Thursday.
It was about the business that the San Francisco-based bank, led by CEO John Stumpf, dominates.
“I have a mortgage with your bank,” Rep. Jeb Hensarling, a Texas Republican, told Stumpf at the hearing Thursday. “I wish I didn’t. I wish I was in the position to pay it off because you have broken my trust as you have broken the trust of millions and it’s going to take a long time to earn it back.”
Regulators and law enforcement around the country are plugging away on the Wells case to determine exactly how long the fraudulent practices went on, and whether the bank violated labor laws by firing whistleblowers and people who failed to meet unrealistic targets without committing fraud. Last week, lawmakers also began to focus on whether there could be misconduct related to Wells Fargo’s mortgage business, or whether previous settlements over mortgages were a leading indicator of trouble elsewhere.
At a political level, the Wells Fargo case is undermining the case bigger banks are making in Washington as they seek to influence the course of the next administration. “The headlines surrounding the news will hang around for a long time,” said Brian Gardner, an analyst with investment bank Keefe, Bruyette & Woods.
Stumpf Survival at Stake
Perhaps most ominously for the CEO who is in the eye of the storm, bank lobbyists are privately speculating whether Stumpf becomes the first big casualty of public outrage at big banks ― Wall Street, broadly speaking ― since the 2008 financial crisis.
Mike Mayo, a prominent banking analyst with CLSA, a unit of the French bank Credit Agricole, wrote a scathing note to investors of Stumpf’s performance so far, calling it “reactionary versus leading.” He hinted that the CEO’s exit may come as a consequence of the scandal.
“We believe Wells Fargo is bigger than the CEO, notwithstanding a good financial track record during his tenure, and there should be no more excuses for the lack of answers to key questions,” Mayo wrote.
Earlier this month, Wells agreed to pay $185 million in fines and restitution to federal regulators after employees opened about 1.5 million accounts customers didn’t want, and perhaps 500,000 undesired credit cards. Wells fired over 5,000 people over the practices.
For Wells, the consequences are only beginning to unfold.
Damaged Credit Reports
The bank may have created black marks on its customers’ credit reports by saddling them with card or checking accounts of which they were unaware, creating a fertile ground for class-action lawsuits. It may have driven up customers’ interest rates on mortgages, or other loans, said Ira Rheingold, executive director of the National Association of Consumer Advocates.
“Theoretically all those fake accounts could and should be deleted from people’s credit reports and that would solve the problem moving forward,” Rheingold said. “Of course, it may not be simple, and more likely will only be done on an individual basis when a consumer discovers” what Wells did.
From a policy standpoint, the Wells Fargo case is playing directly into the hands of Wall Street critics, notably Sen. Elizabeth Warren, the Massachusetts Democrat who accused Stumpf of “gutless leadership” at a recent Senate hearing, and called for his resignation.
If Hillary Clinton, the Democratic nominee for president, captures the White House in November, the Wells Fargo scandal will have put wind in Warren’s sails at precisely the moment when a new president will be making decisions about her top economic policy personnel.
Lawmakers Ask About Mortgages
“Warren is succeeding in establishing herself as the chief financial policymaker in a potential Clinton White House,” said Jaret Seiberg, managing director with the Cowen Group, a research firm. “She is using the bully pulpit to shape the debate over the Wells Fargo cross-selling controversy. To us, this spells trouble on the policy front for big banks next year.”
At the House hearing, some lawmakers honed in on prior legal settlements Wells had over mortgage fraud. In 2011, around the time regulators believe the bulk of the checking-account fraud began, Wells paid $85 million to settle claims by the Federal Reserve that its employees falsified loan documents and steered customers into more expensive loans.
Wells is the 800-pound gorilla of the U.S. mortgage market. It controlled 12.7 percent of the market in 2015, about twice its nearest rival, JPMorgan Chase, according to the industry publication mortgage daily.
At the hearing last week, Hensarling said the problems back in 2011 seemed “eerily like the retail banking division” where the checking account problems occurred. “If you saw the problem in one area of the business why didn’t you investigate in another area?” Hensarling said.
“You got caught doing it five years ago,” he added. “You got caught doing it again.”
Rep. John Carney, a Delaware Democrat, asked how Wells ensures that fraudulent practices don’t occur in the mortgage business.
“We have a terrific team on the mortgage side,” Stumpf responded. “We are trying every day to get better.”
Wells also paid $335 million in 2013 to settle allegations of misleading disclosures on mortgage bonds it sold Fannie Mae and Freddie Mac.
Senate Democrats, having grilled Stumpf in a hearing recently recently, put new questions to him in writing that ask, among other things, how confident he is that misconduct isn’t taking place in the mortgage business.
Future of Fannie and Freddie
One area of concern for Wells will have to be the future of Fannie Mae and Freddie Mac, the two mortgage-guarantee giants that the federal government seized in 2008. Congress has deadlocked over the details of reforming Fannie and Freddie even as a very vague consensus has formed around creating a system that keeps private capital in the mortgage market while having the federal government provide a backstop in case of catastrophic losses.
Smaller banks have stayed alert to the possibility that a system might privilege bigger banks ― notably Wells ― that aggregate huge numbers of mortgages, said Ron Haynie, senior vice president for mortgage finance policy at the Independent Community Bankers of America. “If you’re a big guy, you don’t need aggregators,” Haynie said.
Housing finance policy has been a particular focus of Wells Fargo’s lobbying efforts in Washington. According to disclosure forms, it has lobbied on approximately a dozen bills related to housing finance since 2013, to include efforts that would give large banks a bigger role in the mortgage market. From 2008 to 2011, Wells more than doubled its outlays for lobbying to $7.8 million, according to the Center for Responsive Politics, and since then it has spent about $6 million each year.
With this case, Wells has handed its opponents in Washington some valuable ammunition, said Rob Zimmer, principal at TVDC, a public affairs firm that has small lenders as clients. He said that if big banks try, in the next administration, to claim the role of Fannie and Freddie for themselves, anything small lenders don’t like will get called “the Wells Fargo provision.”
“Are they in the penalty box? Yes,” Zimmer said. “Is that the end of the world for their lobbying? Certainly not.”
Arbitration Clauses
In this Congress, lawmakers in the Senate have considered some minor changes to Fannie and Freddie, issues on which Wells has lobbied. But so far, the provisions have been part of a broader regulatory relief bill sponsored by Sen. Richard Shelby, the Alabama Republican who chairs the Senate Banking Committee.
The case may undermine the banking lobby’s effort to fight plans by the Consumer Financial Protection Bureau, one of Wells Fargo’s auditors, to restrict the use of arbitration clauses in financial contracts. These clauses require consumers to submit disputes to arbitration, and forestall class-action lawsuits.
The Center for Capital Markets Competitiveness, a part of the U.S. Chamber of Commerce, has promised to fight the plan to ban arbitration clauses.
However, information is now trickling out that Wells used the clauses to force customers who sought redress from the fake accounts out of court and into arbitration, which is also confidential. In the recent hearing, Senators pressed Stumpf to stop enforcing arbitration rules, a request that he brushed off.
Sens. Sherrod Brown of Ohio, the top Democrat on the Banking Committee and Patrick Leahy, the senior Democrat with the Judiciary Committee, subsequently called on Wells to formally abandon the practice.
“The ability to force customers into secret arbitration proceedings allowed Wells Fargo to continue its outrageous practices with impunity for far too long,” they wrote Stumpf.
