Fed Grants Wells Fargo Temporary Reprieve From Penalties To Help Distribute Aid

By:
Chris Gaetano
Published Date:
Apr 8, 2020
The Federal Reserve has temporarily lifted capital restrictions that it had imposed on Wells Fargo—to punish the bank for its phantom accounts and auto loans scandals—so that it can help distribute loans to small businesses as part of the CARES Act, said CNN.

The sham accounts scandal involved the bank signing customers up for checking accounts, credit cards and debit cards with neither their knowledge nor their consent. Some of these customers were then assessed fees and penalties, including overdraft fees from linked accounts, monthly service fees for failing to maintain a minimum balance, annual credit card fees and interest charges. Bank employees signed customers up using email addresses not belonging to consumers to enroll them in programs without their knowledge or consent. 

The auto loan scandal had a similar character. As part of the terms of its auto loan program, customers had to have insurance. The bank's policy was that anyone taking out a car loan would automatically be signed up for insurance if they didn't already have it. The problem, however, was that the bank was signing people up for insurance even if they already had coverage from another company, and these policies were generally more expensive than the ones customers had already obtained on their own. As a result, 274,000 Wells Fargo customers went into delinquency, and almost 25,000 had their cars wrongfully repossessed.

In response, the Federal Reserve in 2018 punished the bank by preventing it from growing any further than it had in the previous year, until the central bank was confident that its practices had improved. This restriction, however, is said to have limited the bank's ability to participate in the Paycheck Protection Loan program, with the bank announcing earlier  that it would offer only $10 billion of these loans to avoid going past the asset cap, a limit that it reached almost instantly.

This is why the Federal Reserve has temporarily lifted that asset cap, although this reprieve will only apply to loans made through CARES Act provisions. Once these programs are inactive, the central bank said the cap will go right back.

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