Wells Fargo and the CFPB: A Cautionary Tale

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Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

On April 20, 2018, the Bureau of Consumer Financial Protection (CFPB) assessed a $1 billion penalty against Wells Fargo Bank as a result of: (1) unfairly failing to follow the mortgage-interest-rate-lock process it explained to some prospective borrowers; and (2) operating its force-placed insurance program in an unfair manner. According to the consent order, issued in coordination with the Office of the Comptroller of the Currency (OCC), the $1 billion owed to the CFPB would be reduced by $500 million upon Wells Fargo’s payment of that same amount to the OCC to satisfy penalties assessed by that agency for related conduct. This record-breaking penalty comes in the wake of a $100 million penalty issued by the CFPB against Wells Fargo in September 2016 stemming from its widespread practice of opening deposit and credit card accounts for consumers without their authorization in order to meet sales targets and earn compensation incentives.

While a consent order is not binding on other institutions, it can provide valuable insight into what the CFPB perceives as unfair, deceptive or abusive acts or practices.

Mortgage Interest Rate-Lock Fees
The first part of the consent order addresses a mortgage interest rate lock policy in effect from Sept. 16, 2013 through Feb. 28, 2017. The policy provided that, whenever a mortgage loan didn’t close within its initial interest-rate-lock period, and the borrower chose to extend the interest-rate-lock period, an extension fee could be charged to the borrower if the primary cause of the delay was attributable to the borrower or related to the property itself. If, however, the primary cause of the delay were attributable to Wells Fargo, the extension fee would not be charged to the borrower and instead absorbed by the lender.

Wells Fargo loan officers were trained to inform prospective borrowers that they would be responsible for paying the extension fee when the delay was caused by the borrower (e.g., failure to timely return necessary documentation, disputing a low appraisal) or related to the property itself (e.g., uncovering previously undisclosed liens, seller or builder delays, failure of a condo project or co-op board to timely approve the sale, borrower’s credit score changes).

Almost immediately after the policy was implemented in 2013, Wells Fargo acknowledged that employees were provided insufficient guidance. While it informed loan officers that extension fees would be charged based on the factor primarily responsible for the delay, it provided no other guidance. An internal investigation and loan reviews revealed that the inconsistent application of this policy resulted in certain borrowers being charged extension fees that should have been absorbed by Wells Fargo. The policy was changed in 2017 to address these concerns.

Force-Placed Automobile Insurance
Wells Fargo auto loan agreements typically require the borrower to maintain adequate insurance to cover physical damage to the vehicle. Failure to do so would authorize the lender to protect itself by acquiring force-placed insurance and charge it to the borrower.

Wells Fargo contracted with a third-party vendor to monitor its borrowers’ insurance coverage using information obtained from insurance companies and data aggregators. Under the vendor agreement, if unable to verify coverage, the vendor was required to attempt to communicate with the borrower both by written notice and by phone, as well as call the borrower’s previous insurance agent or insurance carrier to request evidence of insurance. If these efforts failed, Wells Fargo would proceed with acquiring force-placed insurance coverage.

Wells Fargo’s records revealed that, of the roughly 2 million borrowers for whom force-placed insurance was obtained, hundreds of thousands of those borrowers were given duplicative or unnecessary insurance. In some cases, properly obtained forced-place insurance was maintained on the accounts long after the borrowers obtained and provided proof of their own insurance. Failure to pay the force-placed insurance charges could result in the assessment of additional fees, delinquency, default, and repossession.

While a process existed to cancel force-placed insurance if the borrower presented evidence of insurance, the CFPB noted that Wells Fargo did not sufficiently monitor its vendor and internal processes, and failed to provide information to its vendor that could have allowed it to be more effective. There was no process in place to evaluate whether a refund of fees was appropriate or to review and respond to borrower complaints. Refunds only covered interest charged for flat cancels (i.e., borrowers who never had a lapse in required coverage), while other fees and charges (e.g., repossession fees, late fees, deferral fees, NSF fees) were often not refunded. Despite the vendor providing regular information about the high rate of force-placed insurance cancellations and information (e.g., roughly 28% of force-placed policies since 2005 were canceled as a result of duplication), Wells Fargo failed to address the problem. The available information should have raised concerns that the lender and vendor processes were insufficient.

Wells Fargo acknowledged that, between 2011 and 2016, the additional cost of forced-place insurance could have contributed to a default resulting in repossession for at least 27,000 borrowers.

Unfair, Deceptive or Abusive Acts and Practices (UDAAP)
Under 12 U.S.C. § 5531 (commonly referred to as the UDAAP provision), the CFPB is authorized to take action to prevent a covered person from “committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.” An “unfair” act or practice is defined under §5531(c) as one that is “likely to cause substantial injury to consumers which is not reasonably avoidable by consumers” and “such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”

The CFPB determined that Wells Fargo’s conduct in connection with the administration of its rate-lock policy caused and was likely to cause substantial injury to consumers. In addition, Wells Fargo’s conduct in requiring consumers to pay for force-placed insurance premiums and interest they should not have owed, incur fees, and in some cases face default and repossession of their vehicles, caused or was likely to cause substantial injuries to consumers. In both cases, the CFPB found that these injuries were not reasonably avoidable by consumers and were not outweighed by countervailing benefits to consumers or to competition.

Considerations for Credit Unions
In addition to civil monetary penalties, the consent order requires Wells Fargo to create a remediation plan for harmed consumers and take specified steps to strengthen its risk management and compliance management processes. All plans must all be submitted to the lender’s board for review. A culture of compliance must be organization-wide.

It is important to note that, in the case of rate-lock extension fees, the finding of unfairness was not in the policy itself but rather in the failure of the organization to adequately train staff and ensure that the policy was properly and consistently implemented. A policy is only as effective as those who carry it out. With regard to forced-place insurance, the failure was in both the lack of adequate controls as well as the lack of oversight by those to whom information was provided. While vendors can provide valuable expertise, the organization remains responsible to ensure that policies and procedures are compliant and effectively carried out.

Article by Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

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