Wells Fargo Might Be Hit With Massive Fine By Regulator

Per a Reuters article, Wells Fargo & Company (NYSE:WFC) is likely to face penalty as large as $1 billion due to its wrongdoings in auto insurance and mortgage lending business by the Consumer Financial Protection Bureau (“CFPB”).

Brief on the Two Frauds

The San Francisco-based bank has been accused of pocketing commissions from pushing unnecessary auto policies on its customers. Per Wells Fargo's auto insurance policy terms, drivers who have borrowed money from the bank for a new vehicle, are supposed to carry a policy that would pay off the bank in case of a theft or damage.

However, the bank’s employees have been blamed of forcing such policies on about 570,000 customers, who were already under coverage. Wells Fargo has blamed the third-party vendor by stating that they wrongly layered insurance policies on its auto borrowers. The bank had investigated the matter thoroughly till 2005 and found that it would have to make refunds of about $145 million to borrowers and adjust account balances by another $37 million.

Regarding the mortgage lending probe, Wells Fargo was accused of charging extra fees to customers when their mortgage applications were delayed. The fees in question is rate-lock extension fees, which is supposed to be charged only when borrowers fail to submit documents on time or want to retain the interest rate that initially was quoted for the loan.

However, the bank’s officials levied fees on its customers even though the delay was caused by them. Last year, Wells Fargo had announced that it will refund fees to the affected customers, after a review of the matter.

CFPB Director’s Motive Behind Such Huge Penalty

CFPB’s acting director, Mick Mulvaney, is seeking to penalize the bank with an aim to duplicate the $100 million penalty that was imposed on it to settle the infamous fake accounts scandal in September 2016. The penalty, so far, is the highest the regulator has levied on a bank.

Also, it reiterates President Trump’s opinions on Wells Fargo’s misdeed, which he had voiced through a tweet last December, “Fines and penalties against Wells Fargo Bank for their bad acts against their customers and others will not be dropped, as has incorrectly been reported, but will be pursued and, if anything, substantially increased. I will cut Regs but make penalties severe when caught cheating!”

Road Ahead

Since revelation of the bogus account openings scandal, Wells Fargo has been getting involved in a number of probes. These legal hassles are likely to keep its cost base elevated.

However, the bank has diligently taken remedial measures and initiatives to keep afloat. Also, lower tax rates and rising rate environment might help it overcome the negatives.

Wells Fargo’s shares have lost 4.9% in six month's time versus 5.5% growth for the industry it belongs to.

The stock carries a Zacks Rank #3 (Hold).

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