The embattled bank faces consequences of its widespread illegal activity
Fitch Ratings has placed credit negative implications on banking giant Wells Fargo amid allegations from the Consumer Financial Protection Bureau (CFPB) that it mistreated millions of customers for years – actions that will cost the bank $3.7 billion.
The CFPB on Tuesday ordered Wells Fargo to pay more than $2 billion in redress to over 16 million consumers and a $1.7 billion civil penalty for widespread illegal activity across its major product lines. According to the bureau, Wells Fargo charged illegal fees and interest on auto loans and mortgages and incorrectly applied overdraft fees against saving and checking accounts.
“In the CFPB’s 11 years of existence, Wells Fargo has consistently been one of the most problematic repeat offenders of the banks and credit unions we supervise,” said CFPB director Rohit Chopra. “In 2015, CFPB ordered Wells Fargo to pay $24 million in penalties for its role in an illegal mortgage kickback scheme. In 2016, it paid $4 million to the CFPB for scamming student loan borrowers. A few months later, the CFPB fined Wells Fargo $100 million for its fake account fraud. In 2018, the CFPB assessed a $1 billion fine for illegal fees and insurance practices in its auto lending and mortgage lending business.
“The list could go on and on, from defrauding the government to labor abuses and more. The Department of Justice, state attorneys general and other federal regulators have obtained billions more in forfeitures, including civil and criminal fines.”
According to Fitch, the financial implications on the bank weakened its financial profile and reduced its rating headroom. Wells Fargo said it expects to book an additional $3.5 billion accrual for operating losses in the fourth quarter of 2022, in addition to the $2.2 billion taken in the third quarter.
“The 2022 CFPB Order lays out steps for remediation of many legacy issues related to WFC’s auto loan servicing, home mortgage servicing and treatment of consumer deposit accounts,” the rating agency said in a statement. “While this announcement is viewed as credit negative, the expiry of a 2016 CFPB consent order related to student loan servicing, as well as greater clarity on the timeline and path to termination of the 2018 CFPB order, are viewed as key steps in WFC’s attempt to resolve its outstanding regulatory issues. These are offset by identifying new issues under the order (e.g., surprise overdraft fees), which Fitch views negatively from a ratings perspective.”
With the negative credit rating and Fitch’s outlook, the impact of Wells Fargo’s operating loss will be manageable from an earnings standpoint, and the bank’s CET 1 ratio will remain above 10%.
“Fitch will continue to assess the firm’s ability to manage regulatory risk and its ability to improve earnings performance,” Fitch said. “However, we view the disclosure of the additional enforcement action as broadly negative from a ratings perspective and reduces ratings headroom.”
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