A Friday-afternoon-in-August disclosure. Here’s its rap sheet of ongoing official scandals.
Friday afternoon, when no one was supposed to pay attention, Wells Fargo filed its 10-Q quarterly report with the SEC. It’s under “Note 13: Legal Actions,” which starts on page 122 and drags on for four small-print pages. “Note 13” contains Wells Fargo’s long rap sheet of disclosed ongoing government investigations and law suits in alphabetical order. The new item is on page 123:
Various unnamed government agencies – it didn’t disclose how many agencies or which agencies – are probing a new matter related to how the bank does business, this time its use of low-income housing tax credits (LIHTC), which is a multi-billion-dollar business for Wells Fargo.
Wells Fargo was exceedingly parsimonious with how much it disclosed about this “inquiry” by unspecified “federal government agencies”:
Federal government agencies have undertaken formal or informal inquiries or investigations regarding the manner in which the Company purchased, and negotiated the purchase of, certain federal low income housing tax credits in connection with the financing of low income housing developments.
That’s all it said about the inquiry. But the numbers are not inconsequential. As of June 30, the bank carried $10.4 billion in low-income housing tax credit investments on its books.
“We invest in affordable housing projects that qualify for the LIHTC, which is designed to promote private development of low-income housing,” it says in the section that discusses these investments on page 99. And it adds:
“These investments generate a return mostly through realization of federal tax credit and other tax benefits.”
The LIHTC, created under the Tax Reform Act of 1986, hands out incentives (paid for by taxpayers) to the private sector to fund the development or rehabilitation of housing aimed at low-income Americans. “Tax credits” means that Wells Fargo saves this amount dollar-for-dollar on its income taxes and thus increases by that amount its after-tax net profit.
Wells Fargo did not say what it was doing in its LIHTC business that aroused the curiosity and/or ire of “federal government agencies,” but typically with these Wells Fargo revelations, it starts out small and then snowballs.
So here is my summary of Wells Fargo’s rap sheet of ongoing “matters” under “Note 13: Legal Actions.” You will notice several matters with allegations of retaliation against “former team members.”
“ATM access fee litigation”: Class action against Wells Fargo, Visa, MasterCard, and other banks filed in 2011. It wound its way to Supreme Court, which in November 2016 returned the case to lower courts, where it is still dragging on.
“Automobile Lending Matters”: This euphemism describes a scandal that blew into the open in July 2017. Wells Fargo admitted packaging unneeded “automobile collateral protection insurance” (CPI) and “guaranteed automobile protection” (GAP) into hundreds of thousands of auto loans, with customers not even knowing about it. In many instances, the higher-than-expected payments, when set up on automatic payment, led to accounts being overdrawn and payments bouncing, triggering many repossessions.
The bank entered into consent orders with the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB). It has also been subjected “to formal or informal inquiries, investigations, or examinations from federal and state government agencies, including a multi-state attorneys general group that is conducting an investigation into CPI and GAP.” And:
Multiple putative class action cases alleging, among other things, unfair and deceptive practices relating to these CPI policies, have been filed against the Company and consolidated into one multi-district litigation in the United States District Court for the Central District of California.
A putative class of shareholders also filed a securities fraud class action against the Company and its executive officers alleging material misstatements and omissions of CPI-related information in the Company’s public disclosures.
Former team members have also alleged retaliation for raising concerns regarding automobile lending practices.
Allegations related to the CPI and GAP programs are among the subjects of shareholder derivative lawsuits pending in federal and state court in California.
And it’s not all out in the open yet: Wells Fargo “anticipates it may continue to identify and remediate issues related to historical practices concerning the origination, servicing, and/or collection of consumer automobile loans.”
“Consumer Deposit Account Related Regulatory Investigation”: “The CFPB is conducting an investigation into whether customers were unduly harmed by the Company’s procedures regarding the freezing (and, in many cases, closing) of consumer deposit accounts after the Company detected suspected fraudulent activity (by third parties or account holders)….” And this:
A former team member has brought a state court action alleging retaliation for raising concerns about these procedures.”
“Fiduciary and Custody Account Fee Calculations”: The fee-overcharging scandal at Wells Fargo’s Wealth and Investment Management (WIM) blew into the open in March 2018, and is now being investigated by “federal government agencies.” Wells Fargo “has determined that there have been instances of incorrect fees being applied to certain assets and accounts, resulting in both overcharges and undercharges to customers.”
“Foreign Exchange Business”: The bank overcharged clients on foreign exchange rates. This scandal blew into the open in November 2017.
Wells Fargo said: “Federal government agencies, including the United States Department of Justice, are investigating or examining certain activities in the Company’s foreign exchange business,” it says. Wells Fargo has set aside some amounts “to remediate customers….”
CNBC said: “The malpractice is said to be tied to the bank’s unusual policy, where traders’ compensations were tied to how much revenue they brought in.”
“Inadvertent Client Information Disclosure”: “In July 2017, the Company inadvertently provided certain client information in response to a third-party subpoena issued in a civil litigation….”
“Interchange Litigation Plaintiffs”: This class action on behalf of merchants, regarding the fees of Visa and MasterCard transactions, involves Wachovia, which collapsed and was absorbed by Wells Fargo during the Financial Crisis. The litigation has by now made its way to the Supreme Court and back down to lower courts.
“Low Income Housing Tax Credits”: The new item – see above.
“Mortgage Bankruptcy Loan Modification Litigation”: This class action dating back to the mortgage crisis alleges that “Wells Fargo improperly and unilaterally modified the mortgages of borrowers who were debtors in Chapter 13 bankruptcy cases…. The amended complaint asserts claims based on, among other things, alleged fraud, violations of bankruptcy rules and laws, and unfair and deceptive trade practices.”
“Mortgage Interest Rate Lock Related Regulatory Investigation”: In April 2018, Wells Fargo, in consent orders with the OCC and CFPB, agreed to pay $1 billion “in civil money penalties to the agencies” and to remediate its affected customers. The order involves two items: the above-mentioned auto loans and “fees for mortgage rate lock extensions requested from September 16, 2013, through February 28, 2017.” And among others:
A class action has been filed against Wells Fargo, “alleging violations of federal and state consumer fraud statutes relating to mortgage rate lock extension fees.” And claims of retaliation:
In addition, former team members have asserted claims, including in pending litigation, that they were terminated for raising concerns regarding mortgage interest rate lock extension practices.
“Mortgage Related Regulatory Investigations”: This dates back to the mortgage crisis. Federal and state government agencies, including the Department of Justice, “have been investigating or examining” the “origination, underwriting, and securitization of residential mortgages, including sub-prime mortgages.” The new item: Wells Fargo has agreed to pay $2.09 billion just to resolve the Department of Justice investigation.
“OFAC Related Investigation”: Wells Fargo says that “certain foreign banks utilized a Wells Fargo software-based solution to conduct import/export trade-related financing transactions with countries and entities prohibited by the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury.” It has made “voluntary self-disclosures” to OFAC and is “cooperating” with the Department of Justice.
“Order of Posting Litigation”: This scandal arose because banks posted the largest debit-card transactions first so that they’d drain the account. Small transactions that in fact had come before would then overdraw the account, thus triggering steep account overdraft fees each time, which further overdrew the account. This is an insidious trick that has proven to be immensely profitable.
The class-action law suits date back to the Financial Crisis. Eventually, “Wells Fargo moved to compel arbitration of the claims of unnamed class members,” which the court denied in October 2016, and the bank appealed to the United States Court of Appeals for the Eleventh Circuit. The new item: In May 2018, the court ruled in Wells Fargo’s favor, allowing it to “compel arbitration.” But “Plaintiffs have filed a petition for rehearing to the Eleventh Circuit.”
“RMBS Trustee Litigation”: In November 2014, a group of institutional investors, including BlackRock, filed a class action against Wells Fargo in “its capacity as trustee for a number of residential mortgage-backed securities (RMBS) trusts,” alleging that it “caused losses to investors” due to its, “among other things,… alleged failure to notify and enforce repurchase obligations of mortgage loan sellers for purported breaches of representations and warranties, notify investors of alleged events of default, and abide by appropriate standards of care following alleged events of default.” The situation ballooned and continues to drag on in the courts.
“Sales Practices Matters”: This is the euphemism to describe the mega-scandal of the so-called fake accounts – or “certain products or services provided without authorization or consent for the time period May 1, 2002 to April 20, 2017,” as Wells Fargo puts it.
Just about everyone has been investigating this: the CFPB, the OCC, the Department of Justice, the SEC, the Department of Labor, state attorneys general, prosecutors’ offices, and Congressional committees. Wells Fargo has settled with some of them. State law whistleblower actions have been filed with the Department of Labor. Numerous class action and single-plaintiff lawsuits are in the works, including Sarbanes-Oxley Act complaints, plus one class action “on behalf of team members who allege that they protested sales-practice misconduct and/or were terminated for not meeting sales goals.”
“Seminole Tribe Trustee Litigation”: More excess-fees litigation. “The Seminole Tribe of Florida filed a complaint in Florida state court alleging that Wells Fargo, as trustee, charged excess fees in connection with the administration of a minor’s trust and failed to invest the assets of the trust prudently….”