Senator Warren Calls on Fed to Break up Wells Fargo

By:
Chris Gaetano
Published Date:
Sep 15, 2021
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Sen. Elizabeth Warren (D-Mass.), in response to the latest of a very long series of scandals from troubled bank Wells Fargo, called on Jerome Powell, the chair of the Federal Reserve, to break up the bank entirely, CNN reported.

The latest scandal is connected with two previous ones. The first involved the bank charging certain mortgage loan customers "interest rate lock extension" fees that should have been its own responsibility. The second involved signing up hundreds of thousands of customers for car insurance plans that they didn't ask for, resulting in tens of thousands having their cars repossessed. Both were part and parcel with a more general finding that the financial institution lacked proper compliance risk management procedures. The Office of the Comptroller of Currency in 2018 ordered Wells Fargo to pay a $1 billion penalty in response. 

The OCC, earlier this week, fined the bank an additional $250 million for failures to comply with the order. It said Wells Fargo has not fully implemented and maintained adequate loss mitigation practices and related independent risk management practices; that it still has inadequate loss mitigation decision tools; that, the deficiencies have continued to negatively affect borrowers; and that bank still has deficient internal audit controls surrounding loss mitigation activities. In more simple terms, as reported by Yahoo Finance, the bank has not paid back its customers and has not fixed the problems that led to the initial fine in the first place. 

With this in mind, Senator Warren wrote a letter to the Federal Reserve saying that Wells Fargo should be broken up. 

She said that this is within the central bank's power, noting that, under the Bank Holding Company Act, financial holding companies (FHCs) such as Wells Fargo are required to be “well capitalized” and “well managed.” When these requirements fail to be met, she said, the Fed is required to provide notice to the FHC and give the institution on opportunity to correct its deficiencies. If the holding company fails to correct its deficiencies within 180 days, the Fed may require the FHC to “divest control of any subsidiary depository institution,” or, if the FHC instead chooses, “to cease to engage in any activity” that is not permissible for a bank holding company. 

Warren noted that, for regulatory purposes, "well managed" means earning  at least satisfactory scores on its CAMELS [Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity] composite and management ratings used by banking supervisors. While these scores are confidential, Warren noted that Wells Fargo's ratings were downgraded in 2017. She said it is "inconceivable" that the bank would have improved its ratings since then, given the sheer number of scandals. 

Not only is it within the Fed's power to break up Wells Fargo, the senator said it is imperative that it do so in order to protect banking customers. 

"Every single day that Wells Fargo continues to maintain these depository accounts is a day that millions of customers remain at risk of additional negligence and willful fraud," she said. "The only way these consumers and their bank accounts can be kept safe is through another institution—one whose business model is not dependent on swindling customers for every last penny they can get." 

Without mentioning her by name, the bank responded by pointing out all the work it has done to meet regulators' demands in the wake of the scandals. 

Wells Fargo has been rocked by a series of major scandals over the past few years, many of which are tied to the bank's incentive system that heavily pushed upselling customers on other products. They include: 

* Directing investors to actively trade investments meant to be held for the long-term
* Opening depository and charge accounts for millions of customers without their knowledge or consent and charging them associated fees in order to meet sales goals. 
* Retaliating against whistleblowers who reported this behavior. 
* Overcharging foreign exchange customers in order to fatten executive bonuses. 
* Overbilling small business customers for processing credit card transactions. 
. * Signing up customers for Prudential insurance products without their knowledge or consent. 
* Making modification to loan terms without customers' knowledge or consent. 
* Violating ERISA by pushing clients to roll their 401(k) plans into more expensive IRAs that were bad for the customer but good for Wells Fargo.    
* Charging hundreds of thousands of customers for add-on products like pet insurance that they neither asked for nor needed.    
* Issuing home loans with misstated income details and misrepresented the quality of these mortgages to investors. These investors then packaged them into mortgage-backed securities, which themselves played a key role in the crisis.

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