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Following Bloomberg’s report on an unfavorable development in Wells Fargo & Company’s (WFC - Free Report) previous sales practice scandals, shares of the fourth-largest bank in the country closed 5.6% lower in the prior day’s trading.
Bloomberg reported that per people with knowledge of the situation, the Office of the Comptroller of the Currency (“OCC”) and the Consumer Financial Protection Bureau (“CFPB”) have privately indicated that the bank might face new sanctions, ensuing unsatisfactory progress on remedial efforts and fulfilling its obligations.
The efforts include compensating scandal victims and improving internal controls. People familiar with the matter said that the banking giant, which signed consent orders with the agencies three years ago, has heeded the warning and requested for some time to follow through with its obligations and actions.
While Wells Fargo has remitted payments to millions of consumers (making a vast majority of its victims), identifying the affected customers and calculating the extent of the customer hardship have emerged as a challenge and have likely resulted in the delay.
Other possible actions by the regulators might include issuing another consent order, replacing the earlier order with a new one or keeping in place the asset cap restrictions that will limit its ability to escape the shackles of the Federal Reserve-imposed restrictions.
Prior Developments
In February, it was reported that Wells Fargo’s plans to address governance and risk-management loopholes were accepted by the Fed, marking significant progress toward lifting the restriction.
The scandal unveiled Wells Faro’s sales malpractices, wherein employees opened 3.5 million phony accounts in customers’ names without their knowledge to artificially meet internal sales targets. In 2016, the company reached a $190-million settlement with the CFPB, the OCC and a Los Angeles prosecutor regarding the same.
However, troubles continued to haunt the company as in 2018, the Federal Reserve slapped Wells Fargo with a restriction to keep its assets below $1.95 trillion until it improves governance and risk controls. It also entered a consent order with the OCC and CFPB to pay an aggregate $1 billion in civil money penalties related to the selling of mortgage and auto insurance products.
Our Take
With the company seemed to have been making decent progress on corrective efforts, the new setback comes as an unexpected turn of events, with a significant ramification on the company’s share price.
Admittedly, the asset cap constraint is the biggest concern for the company, limiting its ability to offer new loans and grow loan balances. Hence, if regulators are unsatisfied with the company’s efforts, the penalty could be here to stay for an extended period. Any additional sanctions could also hurt the bank's prospects.
Nonetheless, of late, the company has been shifting its focus to rebuilt capabilities by investing in businesses core to its consumers and the corporate client base, while monetizing stake in less attractive ones. The efforts have started to bear fruits by boosting efficiency, strengthening the balance sheet and leading to significant cost savings.
Shares of the company have jumped 90% over the past year compared with 60.1% growth recorded by the industry.
Several other banks continue to encounter legal hassles and are charged with huge sums of money for business malpractices. Recently, the U.S. Court of Appeals in New York reinstated the $343.1-million claw-back lawsuit against Citigroup (C - Free Report) , filed by Irving Picard, the trustee given the responsibility to recoup the estimated $17.5 billion for Bernard Lawrence Madoff’s victims, which they had lost in his Ponzi scheme.
This May, Bank of America (BAC - Free Report) agreed to pay a penalty of $75 million in order to settle an excessive fee probe.
The U.S. Department of Justice stated in May that State Street Corporation (STT - Free Report) entered a deferred prosecution agreement and agreed to pay a criminal fine of $115 million to settle charges of deceiving its clients by secretly overcharging them for back-office expenses.
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Wells Fargo's (WFC) Slow Remedial Moves Might Prompt Sanctions
Following Bloomberg’s report on an unfavorable development in Wells Fargo & Company’s (WFC - Free Report) previous sales practice scandals, shares of the fourth-largest bank in the country closed 5.6% lower in the prior day’s trading.
Bloomberg reported that per people with knowledge of the situation, the Office of the Comptroller of the Currency (“OCC”) and the Consumer Financial Protection Bureau (“CFPB”) have privately indicated that the bank might face new sanctions, ensuing unsatisfactory progress on remedial efforts and fulfilling its obligations.
The efforts include compensating scandal victims and improving internal controls. People familiar with the matter said that the banking giant, which signed consent orders with the agencies three years ago, has heeded the warning and requested for some time to follow through with its obligations and actions.
While Wells Fargo has remitted payments to millions of consumers (making a vast majority of its victims), identifying the affected customers and calculating the extent of the customer hardship have emerged as a challenge and have likely resulted in the delay.
Other possible actions by the regulators might include issuing another consent order, replacing the earlier order with a new one or keeping in place the asset cap restrictions that will limit its ability to escape the shackles of the Federal Reserve-imposed restrictions.
Prior Developments
In February, it was reported that Wells Fargo’s plans to address governance and risk-management loopholes were accepted by the Fed, marking significant progress toward lifting the restriction.
The scandal unveiled Wells Faro’s sales malpractices, wherein employees opened 3.5 million phony accounts in customers’ names without their knowledge to artificially meet internal sales targets. In 2016, the company reached a $190-million settlement with the CFPB, the OCC and a Los Angeles prosecutor regarding the same.
However, troubles continued to haunt the company as in 2018, the Federal Reserve slapped Wells Fargo with a restriction to keep its assets below $1.95 trillion until it improves governance and risk controls. It also entered a consent order with the OCC and CFPB to pay an aggregate $1 billion in civil money penalties related to the selling of mortgage and auto insurance products.
Our Take
With the company seemed to have been making decent progress on corrective efforts, the new setback comes as an unexpected turn of events, with a significant ramification on the company’s share price.
Admittedly, the asset cap constraint is the biggest concern for the company, limiting its ability to offer new loans and grow loan balances. Hence, if regulators are unsatisfied with the company’s efforts, the penalty could be here to stay for an extended period. Any additional sanctions could also hurt the bank's prospects.
Nonetheless, of late, the company has been shifting its focus to rebuilt capabilities by investing in businesses core to its consumers and the corporate client base, while monetizing stake in less attractive ones. The efforts have started to bear fruits by boosting efficiency, strengthening the balance sheet and leading to significant cost savings.
Shares of the company have jumped 90% over the past year compared with 60.1% growth recorded by the industry.
Image Source: Zacks Investment Research
Wells Fargo currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Several other banks continue to encounter legal hassles and are charged with huge sums of money for business malpractices. Recently, the U.S. Court of Appeals in New York reinstated the $343.1-million claw-back lawsuit against Citigroup (C - Free Report) , filed by Irving Picard, the trustee given the responsibility to recoup the estimated $17.5 billion for Bernard Lawrence Madoff’s victims, which they had lost in his Ponzi scheme.
This May, Bank of America (BAC - Free Report) agreed to pay a penalty of $75 million in order to settle an excessive fee probe.
The U.S. Department of Justice stated in May that State Street Corporation (STT - Free Report) entered a deferred prosecution agreement and agreed to pay a criminal fine of $115 million to settle charges of deceiving its clients by secretly overcharging them for back-office expenses.