Phony Accounts Go Beyond Wells Fargo, Policymakers Fear

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WASHINGTON — Federal regulators and lawmakers raised concerns Tuesday that other institutions may be engaging in the same types of fraudulent activities that caught up Wells Fargo.

During a Senate Banking Committee hearing, policymakers repeatedly said that Wells' mistakes couldn't be blamed — as the company maintains —  on rogue employees who opened up some 2 million phony accounts in order to meet sales goals. Instead, they see a cultural problem at the San Francisco bank — and wondered whether it extended beyond Wells Fargo.

"This is the beginning of a lot of things," said Senate Banking Committee Chairman Richard Shelby. "A lot of us are worried that perhaps there's similar goings-on in other banks."

Regulators said they are actively searching for such behavior elsewhere.

"We've been looking at these problems in all of the banks and nonbank financial companies," said Richard Cordray, director of the Consumer Financial Protection Bureau.

Sen. Robert Menendez, D-N.J., asked regulators if cross-selling was to blame.

"How widespread is the issue of cross-selling, at least in the perverse way that it took place at Wells Fargo?" he said. "Do you have any sense whether this is a one-off or is this an industrywide concern?"

Comptroller of the Currency Thomas Curry said the agency was examining cross-selling, particularly incentive compensation practices.

"I have directed that we are to do a horizontal review so we will be looking specifically at sales practices at our largest banks and midsized banks," he said.

Cordray added that the CFPB will be "doing a joint action" with the OCC on sales practices but added that compensation structures generally will be under the magnifying glass.

"I would say the incentive compensation has been a problem we've seen across a number of different markets," Cordray said. "You should be focused on customer satisfaction, not on bare numbers. And there are monitoring systems that can be put in place."

Cordray also cited other issues that — while not exactly the same — nevertheless spoke to institutions forcing additional products onto customers that they either didn't want or didn't need.

Enforcement actions against credit card add-on products have "led to billions of dollars in relief for consumers," Cordray said.

Overall, Cordray portrayed the industry as rife with scandals that ultimately speak to a poor culture at banks.

"What we can see here is there's a very big job to be done to change the culture and practices at the banks," he said. "It doesn't happen oversight. This is on top of the robo-signing mortgage servicing scandal. It's on top of the mortgage origination scandals that led to the financial crisis. It will take considerable time for us to root out all of these things in the financial institutions, banks as well as nonbanks."

Regulators spent a chunk of the hearing reacting to testimony that came earlier in the day from Wells Fargo Chief Executive John Stumpf, who appeared at a separate panel. During the first part of the hearing, Stumpf said Wells Fargo told the Office of the Comptroller of the Currency about rogue employees opening false accounts as early as 2013 but neglected to tell the CFPB until 2015.

That admission clearly angered Cordray, who accused Wells of trying to play regulators off one another.

"We had known about these types of problems from our own sources, but if any institution feels that they can divide and conquer among the regulators, they should know that that is a mistake," he said.

Cordray also delivered a stark warning to other institutions not to follow Wells' example.

"When a bank does not come forward quickly, they should not assume that we are not hearing about it from employees and customers. We are," Cordray said. "It was a very late contact from Wells Fargo on this problem."

Still, there is no legal requirement that banks and financial companies report issues such as fraud to the CFPB.

In response to a question, Cordray said he could not publicly acknowledge whether the CFPB made a criminal referral to the Justice Department, but then proceeded to read a legal staff sheet describing the CFPB's duties to make a criminal referral, which was widely seen as an acknowledgement one was made.

Regulators also criticized Wells for failing to disclose the investigation as part of Securities and Exchange Commission filings. Earlier in the hearing, Stumpf said the bank felt it did not constitute a "material event."

But regulators didn't buy that argument.

"There's always difficulty when you try to define 'material,' " Curry said. "The OCC's standpoint [is] … the fact that 5,300 employees were terminated was material and that there were 2 million accounts — that would be material."

They also took issue with Stumpf's argument that the problems were not related to Wells' culture, but instead just a few thousand bad actors.

"After this extensive public review of the establishment of this high-pressure culture, why would the CEO, after working with you all and having these various letters and so forth, after paying a fine, come in here and say no such thing existed; these were just individual employees who had ethical lapses," asked Sen. Jeff Merkley, D-Ore. "Why possibly did we hear that testimony today?"

Cordray responded that he didn't know, while Curry said it was "inconsistent with our findings."

Jim Clark, the Los Angeles chief deputy city attorney, whose office filed a lawsuit against Wells in 2015, doubted Stumpf's claims that senior executives were not aware this activity was taking place.

"It's difficult to believe based on the information we developed in our investigation, both before and after we filed our complaint, that the knowledge of this sort didn't extend far beyond a regional manager level," he said.

Lawmakers also were outraged that Wells customers who asked to be refunded any fees from the phony accounts were forced into mandatory arbitration.

In May, the CFPB proposed banning the use of arbitration clauses that prevent consumers from bringing class-action lawsuits. The financial industry has fought the arbitration plan.

Since the proposal is not yet in effect, it appears Wells consumers would have no other redress.

"I believe an arbitration clause here might defeat a class action," Cordray said. "I think that's going to be litigated and courts will decide. But they have often decided that it bars relief on an individual scale through a class-action mechanism."

Senators also questioned why regulators had allowed Wells to agree to a $190 million settlement without the bank admitting wrongdoing.

Merkley asked whether it would be harder to hold senior executives accountable as a result.

"Why was Wells allowed to not admit wrongdoing?" Merkley asked. "Was that debated and wrestled with?"

Cordray appeared to punt on the question, saying the consent order against Wells "was very detailed."

But Clark said his office wanted to get relief to consumers as fast as possible.

"It would have taken years to litigate this case," Clark said. "And the practices had to stop."

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