No Response: One Call Could Have Avoided It All for Wells Fargo

Dennis Singleton was preparing to deploy to Afghanistan for Operation Enduring Freedom in 2013, when he learned that his 2011 Ford Escape, which he financed nearly a year-and-a-half earlier for $20,000, had been repossessed by his lender — Wells Fargo & Co.

It was only later, when Singleton returned from the Middle East, that his legal advisor informed him of his rights under the Servicemembers Civil Relief Act (SCRA) and that the car was illegally taken. The lawyer contacted Wells Fargo to resolve the problem, but the call went unanswered. His lawyer then filed a complaint with the Department of Justice. 

Yes, the Wells Fargo settlement with the DOJ — announced Sept. 30 — stemmed from one unanswered call.

“There was an opportunity to fix this one problem, but there was no response,” Jon Seward, principal deputy chief in the Housing and Civil Enforcement Section of the Civil Rights Division of the DOJ, said at the 2016 Auto Finance Summit in early October. “So I encourage anyone in this business to be responsive when you have a small problem that can be fixed.”

An investigation under the DOJ and Comptroller of the Currency gathered data from 2008 to 2015 that resulted in a $24 million consent order, including $4.1 million that will serve as $10,000 payments to the 413 affected servicemembers.

Yet, when the company went to apologize during its third-quarter earnings call, there was a separate, much larger scandal to address — the highly publicized fraudulent bank accounts scandal.

As the new CEO, my immediate and highest priority is to restore trust in Wells Fargo,” newly minted Chief Executive Timothy Sloan began the bank’s mid-October earnings call. “We let down our customers, our shareholders, and our team members. We simply failed to fulfill our responsibility to all our stakeholders.”

Long-time CEO John Stumpf was removed from his post because “his leadership had become a distraction,” his successor said on the call. Now, Sloan is tasked with steering the bank through this crisis of consumer confidence following a $185 million fine with the Consumer Financial Protection Bureau and other agencies for the fraudulent accounts.

The company also settled a $50 million home loan case just before this issue of AFN went to print. The bank was allegedly padding appraisal fees for 250,000 homeowners. The bank said it stands by its practices but wanted to settle the case to avoid litigation.

So the question on the minds of investors, consumers, and industry professional is: How will this affect Wells Fargo’s auto business?

Analysts, lawyers, and regulators told Auto Finance News there is little evidence of a connection between the accounts scandal and the auto segment. Furthermore, a company spokeswoman with Wells Fargo Dealer Services told AFN the auto division has few plans to change its operations in regards to the national scandals, beyond increasing servicemember compliance.

However, analysts remain concerned that this failure of culture permeates the entire company, and Wells Fargo itself has been forthright, saying something needs to change.

Wells Fargo was cooperative with the investigation of servicemember repossessions, the DOJ’s Seward said. “They took proactive steps to improve what they were doing in compliance measures in the space before we were even finished with our investigation,” he said.

The OCC, in regards to Wells’ SCRA compliance, said the bank “exhibited deficiencies and weaknesses that contributed to the violations of law.”

The regulatory consent order requires the company to appoint a three-member compliance committee to oversee the SCRA program. Members must submit an “action plan” and progress reports that include deadlines for corrections. The action plan must meet a minimum list of

requirements, including a process to accurately identify consumers eligible for SCRA protections and a way to reliably notify members of approval or denial of the benefits, two areas the company said it has already strengthened in its compliance department.

Wells Fargo’s spokeswoman also said it enacted some measures that go beyond the OCC’s requirements, such as forming the consumer lending group Center of Excellence in 2015, before the official consent order was made public.

The center is led by Air Force veteran George Chung, who has “centralized our work and expertise around SCRA to create a consistent experience for our servicemember customers,” the spokeswoman said.

Wells Fargo Dealer Services also offers life-of-loan interest rate caps for servicemembers, and “conducts daily checks” of the Department of Defense’s database to ensure SCRA compliance. However, the spokeswoman, as well as other lenders, have expressed concerns as to how well this database is maintained.

Does the Fraudulent Accounts Scandal Cross Over to Auto?

By now there aren’t many in the financial sector that don’t know the story: Wells Fargo employees, who were pressured by incentive quotas and the culture of the company, created fake checking accounts for customers who didn’t ask for them and weren’t even aware of their existence.

The $100 million fine leveled against Wells Fargo by the CFPB is the largest ever for the regulatory agency.

“As a former federal enforcement attorney, you would see different [company] cultures that could tell you a lot about what you’re looking for,” said Braden Perry, partner at Kennyhertz Perry LLC. Compliance and ethics start at the top, he added, so it’s “not surprising” that where there was one scandal, another was found.

The first scandal could have adverse effects on the company’s banking to the tune of up to $8 billion over the next year-and-a-half, according to a recent study done by consulting firm cg42.

However, Wells Fargo Dealer Services operates largely through an indirect channel.

There is no connection to the accounts scandal and the company’s indirect auto lending practice, given that sales are driven by dealers rather than by Wells Fargo employees, the spokeswoman explained.

Indirect lending leaves little opportunity to crosssell at a bank, and it’s often not the bank’s employees who are making the sale, an unnamed analyst told AFN.

“It’s not a natural cross-sell,” the analyst said. “You walk in, you tell them you want to order a checking account, [and Wells Fargo] is more likely to ask you if you want to open a savings account, rather than if you need a car loan.”

The company reported total auto outstandings of $62.9 billion in its 3Q earnings report. That figure is up 6% year over year, and nearly all the growth is on the indirect side, which accounted for more than 95% of its overall auto portfolio that quarter. That leaves just $2.6 billion on the direct side.

Earning statements from previous quarters show a decline in direct auto sales since their peak in 4Q 2014 when they topped $3 billion. Between 2011 and 2016 — the period of activity for which the CFPB is fining the bank — direct auto outstandings only grew 1.17% during the five-year span.

However, direct auto loans and refinancing were two of the tools, along with opening bank accounts, that employees could use to fill their high-pressured quotas. One consumer has reported their Wells Fargo mortgage data was used to create a fraudulent line of credit.

Although the company conducts regular review internally of its auto finance business, there has not yet been additional investigation in regards to a connection between consumer’s auto loan data and the accounts scandal, the bank’s spokeswoman told AFN.

The company’s spokeswoman said there is “no indication” that accounts were faked using data obtained from an auto origination.

Furthermore, the OCC, DOJ, and CFPB could not comment beyond the official order, which does not mention Wells Fargo Dealer Services directly.

Even if there isn’t a direct link between the accounts settlement and the servicemember consent order as the above numbers and analysis suggest, they both stem from a broken corporate culture.

“The practice of incentivizing employees for certain behavior can bleed over,” Perry said. “The main issue was starting bank accounts for people who weren’t aware of them. That could certainly bleed over into [auto] financing if there was incentive for an employee to be aggressive and potentially unethical in the way they did business.”

Fixing the Culture

Both of these scandals should be a wake-up call for other lenders, Perry said.

“I assume most lenders are scrambling to ensure that they have the protections in place that Wells Fargo did not,” Perry said. “Whenever there are fines of this magnitude, and issues this blatant, I think it’s a reminder to all the lenders out there that you need to review your compliance, ensure that you have procedures in place to really protect yourself from becoming the next Wells Fargo — and not only [from] a financial hit, but also [from] an extremely heavy reputational hit.”

Wells Fargo is not the first company to face fines for violation of SCRA. HSBC Finance Corp. agreed in August to pay $434,500 in a settlement with the DOJ to resolve allegations that the lender violated the SCRA. That investigation stemmed from an earlier SCRA scandal involving Santander Consumer USA Inc. in February 2015, in which the company paid $10.5 million in compensation for repossessions.

In early October, Navy Federal Credit Union entered into a $28.5 million CFPB consent order for illegal collection practices forced on servicemembers — however the order does not specifically call out its auto portfolio.

“At the Justice Department, we have actually doubled the number of resources that focus on the servicemember civil liberty act matters,” Seward said at AFS. “We think this is an area that lenders need to increase their compliance.”

Companies have been “drastically” increasing their compliance for years, so it’s not necessarily a change for Wells Fargo, but rather an allocation of resources, an unnamed analyst told AFN.

“When you have an error as [Wells Fargo] did, the response is to typically throw bodies at it,” the analyst said. “Even if the mistake is relatively small in scope, the amount of compliance resource that’s put into resolving that is substantial.”

So far, the biggest cultural change at the company has been the elimination of sales quotas, which are widely seen as the driving incentive for the faked accounts scandal.

“It’s our intention to be successful in providing all of our customers with what they need in terms of financial products through a service-oriented model,” CEO Sloan said during the 3Q earnings call. “So that’ll take some time to develop and to describe for people.”

Although Sloan admitted there is “clearly something wrong” with the culture at Wells Fargo, he does not plan to solve it through outside executive hires.

“That’s already really happened, from my perspective,” Sloan said, in reference to executive changes put in place post-recession. The board is “comfortable with, and very supportive of, the management team,” he said.

The spokeswoman declined to comment on new hires within Wells Fargo Dealer Services.

Fixing the culture is something that goes beyond apologies and meeting minimum requirements of the DOJ and CFPB, Perry said. “It’s the detail of how they do it that’s really the most difficult,” he said. “With an organization that size, and with operations of that magnitude, it will be extremely difficult to change the culture they had, and change in the way they need to be, to limit further wrongdoing.”

Even though Wells Fargo was ordered to restore Singleton’s and other servicemembers’ impacted credit scores, the damage has already been done. Singleton said he had to scrape together savings when he returned from Afghanistan to purchase a new car, and used his wife’s credit to mortgage a home.

“She signed for the house, these cell phones we have, everything. I can’t do anything because of my bad credit,” Singleton said in an interview with CNN. “I wish they would take into account that it wasn’t just a repossession that it was a trickle-down effect of everything that’s happened in the last two and a half years.”