In the fall of 2016, the Consumer Financial Protection Bureau came out with what was termed a “sea change” settlement action. The bureau levied a record $100 million civil penalty against Wells Fargo, part of an enforcement action that included the Office of the Comptroller of the Currency and the city of Los Angeles which in total amounted to $185 million in civil penalties.
“Today’s action should serve notice to the entire industry,” then-CFPB Director Richard Cordray said at the time.
Less than two years later, the CFPB and OCC announced something 10 times stronger, a $1 billion settlement with the bank over violations of mandatory insurance related to auto loans and how it charged certain borrowers for mortgage interest rate-lock extensions.
Citing violations of the Consumer Financial Protection Act, the CFPB assessed a $1 billion penalty against the bank and credited the $500 million penalty collected by the OCC toward the satisfaction of its fine. That means Wells settled for a total of $1.5 billion -- $1 billion with the CFPB and $500 million with the OCC -- but will only have to pay a total of $1 billion penalty because of the bureau's crediting of the OCC assessment.
“I am especially pleased that we were able to work closely and effectively with our colleagues at the OCC, and I appreciate the key role they played in the negotiations,” CFPB acting director Mick Mulvaney said in a release. “As to the terms of the settlement: we have said all along that we will enforce the law. That is what we did here.”
Wells Fargo President and CEO Tim Sloan said the settlement was the result of continued efforts to improve compliance at the bank.
“For more than a year-and-a-half, we have made progress on strengthening operational processes, internal controls, compliance and oversight, and delivering on our promise to review all of our practices and make things right for our customers,” Sloan said in a release. “While we have more work to do, these orders affirm that we share the same priorities with our regulators and that we are committed to working with them as we deliver our commitments with focus, accountability, and transparency. Our customers deserve only the best from Wells Fargo, and we are committed to delivering that.”
What does the suggestion that the CFPB is pushing for such a harsh penalty mean? RESPA News talked with Richard Horn, principal at Garris Horn PLLC, first about the impact the 2016 settlement announcement had on the industry and compliance discussions.
“I think the size of the penalty itself causes conversation and brings attention to an issue. If, for example, the penalty were $10,000, many would view that as not a big deal. But at $100 million, people say ‘wow, there is real risk here’ and it gets a lot of attention at the important levels in an organization,” Horn said. “So yes, the original penalty brought attention to the issues cited in the consent order about incentives and compliance management in an organization, and safety and soundness in general.”
Although few institutions could imagine being subject to a penalty of $100 million or $1 billion, Horn said the headlines would catch the eyes of all industry participants.
“Although most institutions wouldn’t face such a large penalty, because they aren’t large enough to absorb it, the size of the penalty gets their attention and better deters the problems cited in the order,” he said.
Would a settlement 10 times larger than the bureau’s previously largest penalty cause another sea change? Horn said at those amounts, the difference between $100 million and $1 billion might not have the impact you’d expect.
“Anything in the hundreds of millions is going to be in the conversation that executives at banks and other financial institutions are having, so the difference may not be driven by the deterrent effect,” he said. “Probably what makes the difference here is repeated violations of harming consumers with fake products, services, and fees and, because Wells is such a large institution, a larger number of transactions that are at issue.”
Horn said among the factors in calculating civil money penalties are how much a company can absorb and how much it can hurt an institution – short of putting a company out of business.
Yet one of the criticisms then-Wells CEO John Stumpf faced in congressional appearances was why the bank did not feel compelled to disclose a potential $100 million settlement as a material event in filings with the SEC.
“It was not a material financial event,” Stumpf told the Senate Banking Committee at the time.
Horn said that past could have come into play as regulators weighed discussions on potential settlement terms this time.
“That might be information the CFPB weighed in calculating this potential penalty – in addition to factoring in repeated violations and a large volume of transactions, the CFPB might have wanted the penalty to hurt more,” he said.