The Wells Fargo fake account scandal, first uncovered by the Los Angeles Times in 2013, is growing. Perhaps that is not surprising, given how egregious the scheme was and the tepid response from the bank. In creating a boiler-room sales environment, the bank failed its investors and front-line employees, but it also failed its customers and communities.
While the Wells Fargo board faces an important decision about whether or not to fire CEO John Stumpf (it should), this scandal also makes it clear that the results of the Community Reinvestment Act exam of Wells Fargo from 2012 must be made public, and regulators should downgrade their CRA rating of the bank.
We're approaching the 40th anniversary of the CRA, passed in response to communities of color being redlined. The CRA is one of the primary ways regulators measure if and how a bank is meeting the credit needs of its local communities. This can include financing for affordable housing, lending to small business owners, philanthropy and more. Bank regulators conduct a CRA exam and typically release the bank's CRA rating shortly thereafter.
However, Wells Fargo has not had a new CRA rating released since 2008, even though its last CRA exam occurred in 2012. The absence of a recent CRA rating for Wells Fargo raises questions about enforcement of the CRA, including accountability for harmful practices.
The public is encouraged to give feedback during a CRA exam, and advocates from around the country weighed in during Wells' 2012 exam. Citing the many negative impacts from Wells' lending, mortgage servicing and foreclosure practices, they urged a downgrade in Wells Fargo's rating from "Outstanding" to "Needs to Improve."
As one example, advocates urged regulators to consider the "deposit advance" loans which Wells offered until 2014 in which loan repayments were connected to a customer's checking account. This arrangement meant high profits for Wells that were low-risk. But it meant financial harm to customers like Annette Smith, a senior on a fixed income from Rocklin, California. As Smith testified to a U.S. Senate committee, the high cost and short terms on a $500 loan were similar to a payday loan and translated into repeated renewals and her paying almost $3,000 in fees over a five-year period.
While the 2012 exam results still haven't been released, what we have seen since that exam is Wells Fargo having to pay well over a billion dollars for alleged violations — regulator settlements and class-action lawsuits related to overdraft fees, student loans, homeowners steered into costlier mortgages, a settlement over Federal Housing Administration loans, and failures to comply with several of the requirements in a 2011 mortgage servicing consent order with the Office of the Comptroller of the Currency.
While most of these settlements and violations have been public, the bank has tried to keep others quiet in the same way that the bank leadership decided the account fraud problem was "not material" enough to let shareholders (or the public) know about it. As an example, in 2012, the bank quietly mailed checks to roughly 10,000 homeowners as a refund for allegedly steering them into more costly mortgages. The letters came to light only after a homeowner shared a copy of his letter from Wells Fargo with the Los Angeles Times. Homeowners could cash the checks — but only if they agreed not to sue the bank.
Nearly four years after Wells Fargo's CRA exam, people are wondering when its CRA rating will be released. It may well be that the OCC, the regulator that conducted the 2012 exam, will release it soon. We hope so. It is high time a more comprehensive assessment of Wells Fargo's community track record is made public by the people in charge of regulating the banks.
The harmful effects Wells' activities have had on consumers and communities since the 2008 exam should mean a downgrade in its rating. In response, a good first step for Wells Fargo would be to start talking about concrete plans to chart a new course that doesn't include settlements, violations and lawsuits. Given the well-founded anger about executives retaining bonuses while lower-level employees were fired, Wells should voluntarily implement incentive-based pay changes that would mandate clawbacks and that would better align the financial interests of senior executives at the bank with the financial health of the company, employees and customers. Given the role that forced arbitration clauses may have played in hiding this scandal for so long, another obvious step would be for the bank to voluntarily drop those clauses.
Regardless of what happens with the leadership at Wells, the OCC should move quickly to release Wells Fargo's rating, and explain to the public what role the numerous settlements and violations played in determining the rating. This would send a clear signal to the public and to banks that there are significant consequences for banks engaging in harmful behavior. The Community Reinvestment Act can only be as effective as the banks that follow it and the regulators who enforce it. This is a rare and important opportunity to demonstrate that strength.
Paulina Gonzalez is the executive director of the California Reinvestment Coalition.