Compliance Blog

Written by André B. Cotten, Regulatory Compliance Counsel, NAFCU

Wells Fargo is in the news again, accused of  giving its customers the short-end of the stick As most of you probably saw, Wells Fargo was hit with a 1 billion dollar fine because of its widespread, egregious behavior. While the kinds of practices identified as problematic by the CFPB are far from credit unions' member-focused practices, a review of the Wells Fargo consent order is a helpful reminder of some key rules.

In its consent order, the CFPB reviewed the following Wells Fargo practices: 1) charging fees for rate-lock extensions in connection with residential-mortgage lending; and 2) force-placing collateral-protection on consumers' vehicles for auto loans. In its review, the CFPB determined that Wells Fargo unfairly failed to follow its mortgage-interest-rate-lock process, and it also administered its force-placed insurance program in an unfair manner.

Mortgage-Interest Rate-Lock Policies and Practices

Mortgage loans fail to close within the initial rate-lock period for many reasons, including delays caused by unforeseen property issues, delays in requesting or receiving necessary information, and delays caused by a lender's internal processing. A borrower's rate lock choice can materially impact how much it costs to obtain a mortgage loan. Wells Fargo expected its loan officers to advise prospective borrowers about all of the available rate-lock options, to help borrowers select the option best suited to their needs, and to clearly explain its rate-lock process to prospective borrowers. 

According to the CFPB's consent order, in September 2013, Wells Fargo enacted a policy change that provided if a rate-lock extension was made necessary by borrower-caused delays, or by certain delays related to the property itself, the borrower could be charged an extension fee. Conversely, if there were lender-caused delays, Wells Fargo would extend the rate-lock period without charging borrowers a fee.  

Within days of rolling out the September 2013 policy, Wells Fargo acknowledged in internal communications that its guidelines for loan officers were inadequate. Wells Fargo instructed employees that extension fees would be charged based on the factor primarily responsible for the delay without any further explanation. Subsequently, an October 2016 internal audit found that Wells Fargo inconsistently applied its policy and charged borrowers extension fees in situations where respondent was responsible for the delay in the loan's closing. 

Unfair Acts and Practices Relating to Interest-Rate Locks

The Bureau defines an unfair act or practice as one that causes or is likely to cause substantial injury to consumers that is not reasonably avoidable and is not outweighed by countervailing benefits to consumers or competition. 

Between September 2013 and February 2017, Wells Fargo's loan officers were instructed to explain its rate-lock process to borrowers. There are also findings that indicate Wells Fargo sometimes charged borrowers extension fees in situations where the bank should have absorbed the fees. 

The CFPB concluded that Wells Fargo's conduct caused and was likely to cause substantial injury to consumers. The injury was not reasonably avoidable by consumers and was not outweighed by any countervailing benefits to consumers or competition. The Bureau found that Wells Fargo engaged in unfair acts or practices during the period of time between September 2013 and February 2017. 

Force-Placed Automobile Insurance Practices

The consent order was not limited to mortgages, but also addressed consumer loans. As a course of practice, when Wells Fargo's borrowers obtained an auto-secured loan, the borrower signed an agreement that required the borrower to maintain insurance that would cover physical damage to the vehicle, which served as collateral for the loan. Wells Fargo used a vendor to monitor borrowers' insurance coverage. As is common with an auto loan, if a borrower did not meet the contractual obligation to maintain adequate insurance on the vehicle, Wells Fargo was able to protect the collateral by acquiring force-placed insurance on the borrower's behalf and charging the borrower for the insurance premium paid plus interest. If Wells Fargo's vendor was unable to verify that borrowers maintained the required insurance for their vehicles through policy information obtained directly from insurance companies, the vendor was required to communicate with the borrower before force placing insurance. 

According to the CFPB's consent order, since 2005, Wells Fargo forcibly placed insurance for the vehicles of about 2 million borrowers who secured auto loans with the bank. According to Wells Fargo's own analyses, it forcibly placed duplicative or unnecessary insurance on hundreds of thousands of those borrowers' vehicles. In addition, for some borrowers, after appropriately placing force-placed insurance policies, Wells Fargo improperly maintained force-placed insurance policies on the borrowers' accounts after the borrowers had obtained adequate insurance on their vehicles and after adequate proof of insurance had been provided. If borrowers failed to pay the amounts Wells Fargo charged them for the force-placed insurance, they were charged additional fees and, in some instances, experienced delinquency, loan default, and even repossession. 

The consent order also indicates that if the borrower provided evidence that insurance coverage had been in effect, Wells Fargo had a process to cancel the force-placed insurance and to refund premiums. However, Wells Fargo did not sufficiently monitor its vendor and internal process, resulting in control and execution weaknesses. 

According to the Bureau's findings, from 2011 to 2016, Wells Fargo caused hundreds of thousands of consumers to be charged substantial premiums, typically just over $1,000 a policy, for unnecessary or duplicative force-placed insurance. Although Wells Fargo refund premiums after receiving proof of adequate insurance, the refunds did not cover other related charges, such as repossession, late, deferral, and NSF fees. Wells Fargo also acknowledged that the additional costs of force-placed insurance could have contributed to a default that resulted in the repossession of their vehicle. 

Unfair Acts and Practices Relating to Force-Placed Insurance

The CFPB determined that Wells Fargo's conduct caused substantial injuries to consumers because it required them to pay for Force-placed insurance premiums and interest that they should not have owed, to incur fees, and, in some instances, to be subject to defaults on their auto loans and repossession of their vehicles. These injuries are not reasonably avoidable by consumers and were not outweighed by countervailing benefits to consumers. From July 2011 to September 2016, the Bureau found that Wells Fargo engaged in unfair acts or practices. 

Conclusion

In review, it seems the critical flaw with Wells Fargo's policies is that they lacked consistent application. A comprehensive compliance management system is a correlation of policies, procedure and people. Moreover, it seems like Wells Fargo lacked accountability in its vendor management program. The key takeaway from this consent order would definitely be to put out the fire when you first smell smoke, not when the entire kitchen has become engulfed. 

Have a great weekend, folks!