Wells Fargo Faulted for 'Extensive' Discrimination' in OCC Review

Ed. Note: This article first appeared in Bloomberg

Wells Fargo engaged in an “extensive and pervasive pattern” of discriminatory and illegal lending practices for years, a U.S. regulator said in slashing a key rating of how the bank serves communities, triggering restrictions that may hamper its growth.

While examiners credited Wells Fargo for “excellent responsiveness” in meeting customers’ credit needs, 10 government inquiries over the past decade prompted the OCC to lower its overall score of the company’s compliance with community banking laws to “needs to improve.”

Enforcement cases cited by the OCC faulted the bank’s treatment of minority neighborhoods, military personnel and women who had recently given birth.

“Bank management instituted policies, procedures and performance standards that contributed to the violations for which evidence has been identified,” the OCC wrote in a report posted Tuesday by Wells Fargo.

Abuses occurred in “multiple lines of business,” the regulator said.

The findings risk further damage to Wells Fargo’s reputation as executives try to rebuild customer and investor trust in the wake of an account scandal that rocked the company and its stock price last year.

Yet, many of the cases cited by the OCC already were announced years ago in settlements, including some misconduct that predated the 2008 financial crisis.

CEO’s Disappointment

“We are disappointed with this rating given Wells Fargo’s strong track record of lending to, investing in and providing service to low- and moderate-income communities,” CEO Tim Sloan said in a statement.

“However, we are committed to addressing the OCC’s concerns because restoring trust in Wells Fargo and building a better bank for our customers and our communities is our top priority.”

Wells Fargo shares rose 1 percent to $55.96 in New York, the third-worst performance in the 24-company KBW Bank Index.

The bank has advanced 1.5 percent this year, lagging behind the 5.4 percent gain of the S&P 500 Index.

The grade “is an example of the ‘headline’ risk the company will be confronting throughout 2017,” Gerard Cassidy, an analyst at RBC Capital Markets, wrote in a note to investors.

It is the first time Wells Fargo hasn’t received a top mark in the periodic review since the ratings became public in 1994, he said.

The evaluation, focusing on the period from 2009 through 2012, looked at whether Wells Fargo lived up to the Community Reinvestment Act, which ensures banks actively lend to all types of credit-worthy borrowers in locations where they do business.

In many parts of the exam, Wells Fargo still earned top grades.

That included key tests of its performance in lending and investments. In a regional breakdown, it ranked “satisfactory” or better across all 54 states and metropolitan areas reviewed.

But a litany of sanctions over the past decade -- including last year’s scandal, in which employees under pressure to hit sales targets may have opened more than 2 million unauthorized accounts for customers -- led the OCC to lower the bank’s overall rating from its previous level, “outstanding.”
The new grade -- just one rung above the bottom level of “substantial noncompliance” -- threatens far-reaching effects on the bank’s business.
Authorities will consider the grade if the firm seeks approval for bank takeovers or to establish new branches, the San Francisco-based company said in a regulatory filing.

It also triggers limits on engaging in certain nonbank acquisitions.

The rating requires Wells Fargo to seek approval before engaging in a variety of activities, such as issuing or prepaying certain junior-ranked debts, moving branches or making some public welfare investments.

The bank won’t be eligible for expedited processing on some regulatory applications. And the rating may hurt its ability to do business with certain states, counties, municipalities or other public agencies, Wells Fargo said.

Wells Fargo said it’s already demonstrating commitment to the communities where it operates.

Over the past six years, the company said, it has arranged more home loans than any other bank in the U.S. to borrowers who are black, Asian, Hispanic, Native American or who have moderate means or live in poor communities.

Next Review

“Wells Fargo intends to ask the OCC to accelerate the timing of its next exam so that we may continue to serve most effectively the low- and moderate-income communities in which we operate,” Sloan said.

Bryan Hubbard, an OCC spokesman, declined to comment beyond the regulator’s report.

In the months after the account scandal last year, the OCC imposed other limits on some of Wells Fargo’s activities.

That included the bank’s ability to make major purchases, such as buying large loan portfolios or other companies, and to make golden-parachute payments to departing employees.

More fallout from that scandal emerged Tuesday as Well Fargo said it reached a $110 million settlement with customers to resolve a class-action lawsuit.

Wells Fargo also is wrangling with the Federal Reserve after failing a review last year of its plan to unwind its businesses in the event of a catastrophe.

If the bank doesn’t address those problems by March 31, assets in its broker-dealer and non-bank units will be capped.

Posted by: The Trust Advisor


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