In the last few weeks, the top leadership at Wells Fargo has justifiably come under furious criticism over the bank's fraudulent sales practices. Some of that furor should also be directed toward federal regulators.
The scale of the fraud at Wells Fargo's retail division was mind-boggling. Wells is accused of having created up to 2 million fake bank accounts or the equivalent of one fabricated account for every 121 adults in the United States. The bank clearly knew about the problem. Over 5,300 employees, or approximately 2% of Wells Fargo's entire workforce, were terminated for engaging in these activities. The Los Angeles Times uncovered the bank's malfeasance in an investigative story published in December 2013.
Still, no federal regulator ever stepped up to the plate to initiate a punitive investigation against the bank. In fact, the only reason why the Wells Fargo story is now in the news is because local law enforcement, the Los Angeles City Attorney, spearheaded an investigation that was later joined by the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency.
In recent congressional testimony, Comptroller of the Currency Thomas J. Curry and CFPB Director Richard Cordray acknowledged that their agencies knew about Wells Fargo's shady sales practices before the L.A. Times story broke, yet they failed to initiate any enforcement action on their own. Ultimately, the OCC fined Wells Fargo $35 million and the CFPB imposed its own penalty of $100 million. But it remains unclear whether the agencies would have ever imposed these penalties absent the investigative diligence of Los Angeles prosecutors. Something is clearly amiss when city prosecutors do a better job than federal regulators of policing nationwide banking fraud.
Admittedly, federal financial regulators face a daunting and unenviable task. Regulatory agencies suffer from constrained budgets and high levels of employee attrition to the private sector. The Dodd-Frank Act has imposed a heavy workload on the agencies, and the financial products that the agencies oversee have grown more complex and sophisticated every year. Federal regulators can understandably find themselves a step behind the financial industry's creation of the latest newfangled derivative or esoteric trading instrument.
But there is nothing especially complex about the creation of millions of fake retail banking accounts. Technology aside, Wells Fargo's creation of fake accounts would not have looked much different had it occurred 150 years ago during the Wild West period, when the bank helped fund the gold rush. This is a simple case of plain-vanilla banking fraud occurring on a monumental scale, and the federal regulatory response has been uninspired to say the least.
Congressional opponents of financial reform have excoriated the CFPB for its handling of the Wells Fargo scandal. These mostly Republican legislators are using this opportunity to push through "reforms" that would dilute the CFPB's effectiveness by turning it into a bipartisan commission and subjecting its funding to the congressional appropriations process.
But these attacks on the CFPB have nothing to do with the agency's structure. After all, the OCC, like the CFPB, is also headed by a single director and is not subject to congressional appropriations. Yet the congressional opponents of the CFPB rarely launch similar attacks on the OCC. Why not? The answer is politics: the CFPB has an excellent overall record of effective regulation, whereas the bank-coddling OCC has a poor one. The CFPB has been on the conservative chopping block since its very formation, and the Wells Fargo episode is now being used as a pretext to neuter the agency and thereby impede its ability to protect consumers.
Admittedly, the CFPB seems to have dropped the ball by failing to investigate Wells Fargo in a timely manner. But there are several mitigating factors in its favor. First, CFPB officials learned of the improper sales practices at Wells Fargo only in mid-2013. In contrast, the OCC was apprised of those practices as early as March 2012. Further, some of the fake accounts were created even before the CFPB was established or fully operational. And recent analysis shows that the CFPB did not receive disproportionately high numbers of complaints from Wells Fargo customers. From Jan. 1, 2015. to Sept. 20, 2016, the CFPB actually received more complaints from customers of Bank of America and Citigroup.
To be fair, Dodd-Frank aimed to put the CFPB, not the OCC, in the primary driver's seat for enforcing consumer protection at large institutions such as Wells Fargo. Yet as Wells Fargo CEO John G. Stumpf said during pointed questioning by members of Congress, the OCC has approximately 80 examiners embedded within the bank. And the agency has targeted risk management issues pertaining to consumer compliance. Clearly, the OCC was in position to act on concerns about the bank's sales practices sooner, even if it was simply to inform the CFPB.
How did Wells Fargo evade punishment, year after year, for two million instances of fraud, despite the presence of so many in-house OCC examiners?
The fact is that the CFPB has proven to be a consistent champion for consumers. In its mere five years of existence the agency has recovered $11.7 billion for more than 27 million disaffected consumers. Irate members of Congress would better focus their righteous indignation on the OCC, which has an unfortunate history of feeble bank supervision. The Wells Fargo debacle does little to change that history.
Curry's testimony during a recent Senate hearing is revelatory. His written testimony states that while OCC examiners were aware of Wells Fargo's shoddy sales practices for several years, the agency took no punitive steps and instead resigned itself to "continu[ing] dialogue with Bank management to supervise and monitor" Wells Fargo's compliance with the law. This overly passive approach is emblematic of the OCC's reputation as a soft regulator. Time and again, the OCC has proved to be more adept at "continuing dialogue" with regulated entities than at vigorously enforcing the nation's laws.
Perhaps the most troubling aspect of Curry's written testimony was his assessment of what additional actions are needed to prevent similar market abuses in the future. Instead of owning up to the OCC's glaring failure to regulate Wells Fargo, Curry attempted to create a smokescreen by claiming that upcoming regulations on incentive-based compensation under Section 956 of Dodd-Frank are the answer. But Section 956 was crafted to protect banks from excessive risk-taking by bonus-seeking managers and traders. It will do little to protect customers from dishonest retail banking practices like those perpetrated at Wells Fargo, especially where those practices do not rise to the level of threatening the overall fiscal health of the offending bank.
While the OCC is a prudential regulator charged with protecting national banks' shareholders, a vital component of its statutory mandate includes the public-oriented goal of ensuring "fair and equal access to financial services for all Americans." The Wells Fargo scandal demonstrates a stark failure by the OCC to live up to that mandate.
Akshat Tewary is an attorney practicing in New Jersey, a Financial Industry Regulatory Authority arbitrator and president of Occupy the SEC, a nonprofit advocating for financial reform. His Twitter handle is @akshattewary.
Corrected October 21, 2016 at 3:19PM: An earlier version of this article incorrectly said that a House bill would only affect the CFPB. It would also impact the Office of the Comptroller of the Currency and the Federal Housing Finance Agency by making them both into commissions.