Wells Fargo scandal

In order to meet performance quotas, employees of Wells Fargo opened 1,534,280 deposit accounts (checking & savings) without the consent of the customers whose names were on the accounts. Additionally, 565,443 credit cards were opened without customer consent. The checking/savings accounts accrued $2 million in fees and the credit cards accrued $403,000 in fees.

The bank was fined $185 million for the fraud and has fired 5,300 employees. That's an enormous number of dishonest employees, even by bank standards. Why would the employees resort to such criminal activity?

Quote: Bloomberg News

The Los Angeles City Attorney, which got $50 million (the Office of the Comptroller of the Currency got the other $35 million), explained the employees' grievances in a complaint last year:

"Wells Fargo has strict quotas regulating the number of daily "solutions" that its bankers must reach; these "solutions" include the opening of all new banking and credit card accounts. Managers constantly hound, berate, demean and threaten employees to meet these unreachable quotas. Managers often tell employees to do whatever it takes to reach their quotas. Employees who do not reach their quotas are often required to work hours beyond their typical work schedule without being compensated for that extra work time, and/or are threatened with termination."

The quotas imposed by Wells Fargo on its employees are often not attainable because there simply are not enough customers who enter a branch on a daily basis for employees to meet their quotas through traditional means.

So they resorted to non-traditional means. Like:

In the practice known at Wells Fargo as "pinning," a Wells Fargo banker obtains a debit card number, and personally sets the PIN, often to 0000, without customer authorization. "Pinning" permits a banker to enroll a customer in online banking, for which the banker would receive a solution (sales credit). To bypass computer prompts requiring customer contact information, bankers impersonate the customer online, and input false generic email addresses such as 1234@wellsfargo.com, noname@wellsfargo.com, or none@wellsfargo.com to ensure that the transaction is completed, and that the customer remains unaware of the unauthorized activity.

I think the $185 million fine was way, way too low for a bank which set up 1.5 million dummy checking accounts using real customer names. Their net income in 2015 was over $22 billion. I think a $20 billion fine makes sense, and it should be distributed to the customers whose names were used.

Is that too harsh?

Quote: reno

Is that too harsh?

You mean other than fining the company into bankruptcy and making it non-existent. 'Cause that might be my other choice.

What always bugs me about corporate malfeasance is if I steal $50 from you, they likely will cart me down to the police station. Big money entities just usually pay some fines and often consider it business.

Quote: reno

The bank was fined $185 million for the fraud and has fired 5,300 employees. That's an enormous number of dishonest employees, even by bank standards. Why would the employees resort to such criminal activity?

Same reason it always happens. Same reason for the VW scandal. Same reason my old company was under investigation by a dozen of so AGs. Same reason at that company one of my old bosses plead to a misdemeanor to keep his tail out of the can.

Unrealistic expectations!

In my aforesaid company, it was technically impossible to do the job right in the time allotted. We always shook our heads, but eventually it fell down around everything. But back to banking.

Pre-1980s, banking was boring. Managers built their branches by knowing their customers. Happened slowly, but you added Christmas Club accounts for grandchildren here, a car loan there. Slow and steady won the race. But the race was not a huge race, regional banks flourished, 4-6-4 was the rule to live by. Simple.

Then some banks had the idea that you had to cross-sell to keep customers and grow. Of course on the surface it was a good idea and had been happening for years, quietly. But rules came down to ask every customer on every transaction for more business! Cross-sell goals were made and they were often high. Once the good teller was the one who balanced their till right and gave suckers to the kids in tow with their mothers. Then a good teller was the one who kept asking for more business.

Now, it is true that asking for the sale gets you the sale. But it is also true that most bank visits are repeats, and you can ask only so many times. People get pissed off. But the sales goals are there and they can mean your job, really mean your job if you are the manager. So you cut a few corners.

Growing a big business is actually incredibly tough. But the pressure to get 1% more on your stock for the average 401(k) investor never ends.

I'm biased because I have my own recent history with Wells Fargo.

Last year, the wife & I were shopping for a refinance, and Wells Fargo had offered us a competitive rate so we chose them. After submitting all of financial documents and signing piles of paperwork, they informed us they would only proceed with the refinance only if we opened up a Wells Fargo checking account. We told them we already had 2 checking accounts with other banks, the last thing we needed was a new checking account. Nor did we want to invest time into canceling direct deposits and closing the existing accounts. Life is too short.

So they walked away from the deal! They refused to do business with us.

We couldn't believe it. What's the profit margin on a mortgage? We'd be paying them $900 in interest every month! What's the profit margin on a checking account? $12 per month?

No other business would have done that. If the car dealer is about to sell you a car that would make them a $10,000 profit, they're not going to cancel the deal because you refused to pay an extra $200 for floor mats. If you offer to pay Ceasars Palace the full price for their $10,000 per night suite, they're not going to refuse to let you sleep there because you ate a $200 dinner at Bellagio.

We refinanced with a different bank who matched Wells Fargo offer, (minus the checking account.)

Quote: reno

I'm biased because I have my own recent history with Wells Fargo.

Last year, the wife & I were shopping for a refinance, and Wells Fargo had offered us a competitive rate so we chose them. After submitting all of financial documents and signing piles of paperwork, they informed us they would only proceed with the refinance only if we opened up a Wells Fargo checking account. We told them we already had 2 checking accounts with other banks, the last thing we needed was a new checking account. Nor did we want to invest time into canceling direct deposits and closing the existing accounts. Life is too short.

So they walked away from the deal! They refused to do business with us.

We couldn't believe it. What's the profit margin on a mortgage? We'd be paying them $900 in interest every month! What's the profit margin on a checking account? $12 per month?

No other business would have done that. If the car dealer is about to sell you a car that would make them a $10,000 profit, they're not going to cancel the deal because you refused to pay an extra $200 for floor mats. If you offer to pay Ceasars Palace the full price for their $10,000 per night suite, they're not going to refuse to let you sleep there because you ate a $200 dinner at Bellagio.

We refinanced with a different bank who matched Wells Fargo offer, (minus the checking account.)

That is strange, and possibly laws were violated. A credit union of course can do this, but never heard of it at a bank. Maybe a subprime outfit, not sure even then. BTW: WFC would not be getting that $900 in interest, just a small servicing fee.

Quote: AZDuffman

WFC would not be getting that $900 in interest, just a small servicing fee.

I was just pulling numbers off the top of my head.

But here's a real world example:

$300,000 loan at 4%, fixed for 30 years. If the monthly payment is $1158, the portion going towards principle is a measly $376. The rest, $781, is interest for the bank. Mortgages are extraordinarily profitable.

Quote: reno

I was just pulling numbers off the top of my head.

But here's a real world example:

$300,000 loan at 4%, fixed for 30 years. If the monthly payment is $1158, the portion going towards principle is a measly $376. The rest, $781, is interest for the bank. Mortgages are extraordinarily profitable.

It has nothing to do with numbers. The mortgage will be sold to the secondary market, Fannie or Freddie, who will then collect the interest. WFC will service it, charging a fee for that servicing, as after all we are not communists. WFC will get their profit from various fees charged the buyer and some kind of commission for the sale. If something happens to cause the mortgage to have to be warehoused on WFC books there will be hell to pay. Trust me.

Quote: AZDuffman

That is strange, and possibly laws were violated.

We're not alone. They'd rather have checking account customers instead of mortgage customers. Here's a Yelp review from some random Wells Fargo customer who had the same experience:

Quote: Yelp review

...and then out of the blue, the loan officer calls my wife and told her she needed to open a new checking account with Wells, from which the mortgage payment was to be auto-debited?? This was NEVER disclosed to us prior to and during the closing process, and my wife kindly pointed this out to the officer. Nevertheless, she apologized and stated we couldn't get the loan processed under the great rate, but that the loan interest rate would go up .5 a point if we didn't. SO, we caved and my wife did the online account opening option.

If they lose the mortgage contract because the customer refuses to open a checking account, so be it. They don't care.

Quote: AZDuffman

The mortgage will be sold to the secondary market, Fannie or Freddie, who will then collect the interest. WFC will service it, charging a fee for that servicing, as after all we are not communists. WFC will get their profit from various fees charged the buyer and some kind of commission for the sale.

As we all learned from the 2008 crash, what you're saying is basically true-- that mortgages are resold to other lenders. This makes sense for risky subprime mortgages.

Serious question: what about the low risk loans to high income buyers with excellent credit? Don't the banks keep those loans for themselves?

Example: a high income customer (doctor or lawyer) with excellent credit pays $900,000 for a beautiful house in a desirable neighborhood. The customer makes a downpayment of 50%, so the loan amount is only $450,000. Over the course of 30 years at 4%, that loan brings in a whopping $323,412 in compounded interest. Surely no bank would pass up on the opportunity to earn $323,412 in interest on a low risk loan. Worst case scenario: the guy loses his job and stops paying the mortgage, forcing the bank to take possession of the property. Even if it were a perfect storm of bad luck with the housing market crashing 30% or 40%, the bank still wouldn't lose a penny since the downpayment was 50%.

Keeping this low risk loan is a no-brainer, so under these circumstances would the bank still sell the loan to a third party? Why?