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October, 2016   
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Welcome to the seventeenth edition of DiCom's e-newsletter!  We use this tool to keep you informed of the latest credit risk and loan review industry updates.  This month we focus on the swirl surrounding Wells Fargo and what it might mean for the rest of the banking industry.

As always, your input on topics for future newsletters, as well as suggestions for enhancements to our suite of credit risk management software solutions is heartily encouraged!
Just When You Think It Can't Get Any Worse - The Wells Story....

The Wells Fargo nightmare actually began a while ago.  Back in early May of 2015 (that is not a typo, it was well over a year ago), the City of Los Angeles filed a civil suit against the bank, for its reported practice of opening unauthorized accounts.   

The city attorney found this issue to be within his jurisdiction due to the impact on consumers in his market area, many of whom are Mexican immigrants, or others with limited means.  (The discussion about city attorney's taking on the role of bank regulators will be saved for another day.)  Social media even played a role in this drama, in the form of a posting in the Nextdoor website soliciting Los Angeles area consumers who had been impacted and asking them to contact the City Attorney's office. 2   And in fact the first crack in the case came in 2013, when the  Los Angeles Times did an investigation into Wells sales practices, which highlighted the 'smoke' which the others would soon follow, although there is some evidence that dates back much further. 3   

The Wells Fargo footprint is bigger than the city limits of Los Angeles, and quickly a consumer who had been impacted in San Francisco filed his own suit, alleging the same type of fraudulent conduct by the bank, which resulted in this particular individual having seven accounts opened, which he had not authorized. 4  All indicators point to the sales tactics of the bank which are focused on 'cross-selling' to the extreme.  Interviews with employees conducted as part of the investigations corroborate that unauthorized accounts were opened regularly. 5 

It didn't help that the bank's internal marketing of the cross-selling strategy was labeled "going for gr-eight", with the apparent goal being that the average customer would have eight different accounts with the bank. 6  Wells drew further ire from the Los Angeles City Attorney based on its lack of responsible action when it found these abuses by its sales force.  The attorney specifically charged it had 'known about and encouraged these practices for years', and the evidence from former and current employees to date seems to substantiate this claim. 7   The attorney's lawsuit stated that the bank not only failed to inform customers of breaches, but refused fee refunds, when these fees were drawn from legitimate accounts to pay fees incurred by the unauthorized accounts, and went so far as to place customers into collections when funds were insufficient for those fees. 8

Now at this point, even the most stoic banker is starting to get disgusted.  How many of these innocent people were impacted by the resulting lower credit scores and who could calculate the life penalty that caused them?

As added fuel, former Wells Fargo employees joined into lawsuits for wrongful termination, and there are plenty of them, since Wells has indicated that they terminated over 5,000 of their over 260,000 employees over a five-year period for falsifying sales and opening over 2 million bogus accounts. 9  In fact, there was a case filed in 2014 by nine former employees who are claiming wrongful termination due to sales quotas, among other things 10  (That 2014 case is still being resolved and the expectation is that it will settle with a mediator or go to trial in 2017). 11

Fast forward to September  2016, and mainstream press is finally made aware of the issue when the settlement of the Los Angeles case is announced.  The settlement included consent orders from regulators, specifically the CFPB and the OCC, which provide further substantiation of the claims made.  Wells will pay $185 million in penalties, and yet there is no admission of wrongdoing by the bank that is part of the settlement.

So why should other banks get concerned about this issue with Wells?  For starters, one of the techniques that Wells uses has customers agree to arbitration for the settlement of issues, which is something many banks do as standard practice.  In this situation, where multiple customers are obviously wronged in a material way, that arbitration requirement has been a major factor in their inability to be compensated.  The market reaction to that may make the use of arbitration clauses much less acceptable, and as a result, many banks may have to reconsider their processes here.  And it could go further than that, as regulators react and the trickle-down effect of those reactions reaches into every community bank. 12  The ICBA is one of the industry trade groups that is already working to address just these types of regulatory reactions, but their efforts alone may not be enough. 13  The concept of tiered regulation and differentiating between the SIFI banks and other sizes needs to be a focus of the reaction here.

Of course, it got very publicly ugly when the Wells Fargo CEO performed poorly in front of the Senate panel and the House Financial Services Committee in late September.  And few tears were cried when the company announced that Stumpf would forfeit over $40 million in stock and salary, and other executives would forfeit multi-millions in unvested stock.  I will also point out here that according to public filings, there are four senior executives who received compensation packages of close to $10 million in 2015, while Stumpf was compensated with almost $20 million in 2015. 14  After the presentations he made, the calls for his head got louder, coming from all angles, and the crowning blow may have been when the leading California democrat, Representative Maxine Waters, called for the breakup of Wells Fargo, stating that after hearing the presentations, she had concluded that Wells Fargo 'is too big to manage.' 15  And after acknowledging that senior management learned of the fraud in account openings in 2013, Stumpf continued to defend the bank culture and the cross-selling approach that they used, and which they were still using even as he testified.

It came as little surprise then, when just before Stumpf was due to make yet another appearance on behalf of the bank, this time to the state of California's legislature, that it was announced he had resigned.  When the state meeting convened, it was David Galasso, a regional president in California for Wells, who was on the hot seat.  And now there was a heckler in the crowd.  After Galasso made remarks, there was a public comment period, and a former Wells Fargo employee was in attendance and made his presence known.  Nathan Todd Davis reported that he personally had spoken to Human Resources during his time at Wells, and filed ethics complaints, but that the result for him was harassment and intimidation. 16  It was subsequent to this fiery session that a comment was made by a representative of the California State Treasurer's office, which implied some concern for overlapping regulatory responsibilities of multiple regulators, and perhaps contribution as a result to the cracks through which these issues had apparently fallen in prior years. 17

The industry will obviously be chastised repeatedly for these issues and others, to a certain extent deservedly so, and of course, it doesn't help that it is an election year.  Some of the first arrows came on Thursday from William Dudley, the president of the Federal Reserve Bank of New York, when he spoke at the bank's annual conference on bank culture - talk about timing.  Dudley called on regulators to play a role in upholding ethical standards, which happens to be in line with proposals he has made previously. 18  The California Department of Justice is already working on a case for criminal identity theft, and US Attorneys is several metropolitan areas around the country are ready to jump into the fray. 19  As the reactions reach regulatory levels and creep into each conversation between banks who have done no wrong, and regulators who have no choice, hopefully, a voice of reason can prevail, but there is a lot of dust left to settle before we can hope for that.

19 http://www.americanbanker.com/news/law-regulation/calif-ag-investigates-wells-fargo-for-criminal-identity-theft-1092008-1.html

If you missed any of our prior newsletters and want to review, they are maintained on our website here.  If you have questions about any of the information in this newsletter or about DiCom's suite of Credit Risk Management products, please do not hesitate to contact us at 407-246-8060, or via the 'contact us' option on our website.
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