“Biggest Fine Ever”: Wells Fargo To Announce $1BN Settlement On “Risk Management”

In a story that sounds suspiciously similar to another report published by Reuters roughly two weeks ago, the Wall Street Journal said Thursday that Wells Fargo is nearing a $1 billion settlement on its risk management with the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency; that would be the largest fine ever levied by the CFPB. The deal could be announced as soon as tomorrow, the WSJ said, citing an unspecified number of “people familiar with the matter.”

For the Warren Buffett’s favorite scandal-plagued bank, the settlement won’t just be a monetary punishment, but also the latest public reminder of its myriad criminal misdeeds.

What’s worse, it would also come with increased oversight of how the bank – which was officially chastised by the Fed in Janet Yellen’s last action as Fed chair – compensates its employees. The latter issue appears to be a reaction to the bank’s unusual incentives system, which employees said had encouraged them to open millions of fraudulent accounts during the Wells’ now-infamous cross-selling scandal.

However, even though the phrase “largest fine ever” will find its way into headlines about the settlement (yes, it’ll be the largest fine ever levied by the agency in its six years of existence but nowhere near the $14 billion slapped on Deutsche Bank by the Department of Justice), a $1 billion fine for Wells, which we doubt will be all cash, is still little more than a slap on the wrist.

In a comical twist, the CFPB’s previous “largest fine ever” was ALSO levied against Wells back in 2016. The price tag? $185 million.

And it won’t be the first – or even the first this year: The Federal Reserve in February barred the bank from growing beyond $1.95 trillion in assets. Fortunately, Wells has seen its once industry-leading portfolio of mortgage loans decline year-over-year, so the probability of it getting caught in further malfeasance is somewhat limited.

The events that led to the fine all center around sales practices that frequently crossed into criminal territory. They include the cross-selling scandal, overcharging mortgage borrowers, and forcing auto loan borrowers to buy insurance they didn’t need (as well as wrongfully repossessing a occasional car because of it). The bank was also recently criticized by regulators after being downgraded during an assessment of its “CAMELS score.”

More details from the WSJ:

Wells Fargo disclosed last week that the CFPB and the OCC had offered to the resolve civil investigations for $1 billion. The final terms of the settlement couldn’t be determined. The settlement would be another blow to Wells Fargo and follows an unprecedented enforcement action by the Federal Reserve in February that barred the bank from growing past the $1.95 trillion in assets it had at the end of 2017. The Fed cited “widespread consumer abuses” in its rebuke.

It also would far exceed a $185 million fine the two financial regulators and a city official imposed on Wells Fargo in 2016 after finding the San Francisco-based bank had opened as many as 3.5 million accounts without customers’ knowledge or consent.

Wells Fargo has been under investigation by federal and state regulators across different businesses since the sales practices scandal erupted in 2016. At the root of some of the problems is the bank’s risk-management framework, which it has been changing in the past several months as regulators intensified their pressure.

The settlement is one of the first major enforcement action against a financial institution brought during the Trump era, which is significant, because the media – in what’s now a memorable example of fake news – had reported the CFPB head Mick Mulvaney was planning on quashing the investigation in a blatant giveaway to the banks. Instead, he has allowed the CFPB to proceed by levying roughly the same penalty that would’ve been brought under the CFPB’s former leader, Richard Cordray.

But not only did Mulvaney vociferously deny these claims and insist that he had no intention of letting up on Wells, President Trump also chimed in.

Wells CEO Tim Sloan had hinted at a settlement when he said on the bank’s earnings call last week that it would have an update in its quarterly securities filing. The bank’s annual shareholder meeting is set for April 24. The bank is also facing a potential criminal probe over suspected gouging by its foreign exchange desk.

Meanwhile, it is unclear if the bank has already provisioned for the hit to earnings. CEO Sloan did not say during the bank’s April 13 earnings call if Wells had included any provisioning for the potential settlement in its Q1 results.

He said the bank likely would have updates on the negotiations in its quarterly securities filing that typically is disclosed a few weeks after it reports earnings.

Ahead of the legal action, the bank had also been beefing up its internal oversight.

Wells Fargo and the OCC have negotiated for months over how the firm assesses risks and over a potential settlement, The Journal has reported. The OCC also sent the bank’s board a letter in November about these issues.

The company in recent months hired a consultant to try to revamp its procedures and revisited structural changes made in response to the sales-practices scandal.

The bank also said its chief risk officer Mike Loughlin would retire and that it will hire someone to replace him in “the next few months.” The bank hasn’t named a replacement but has been interviewing outside candidates, people familiar with the process said.

The bank has also been roundly criticized by Democrats – notably Massachusetts Sen. Elizabeth Warren, for offering compensation to the customers it has wrong via an “opt-in” program which virtually guarantees some former customers will never receive their settlements.

The news didn’t have much of an impact on shares after hours. We’ll see if there’s a different reaction when the settlement is officially announced.

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