On Friday, Janet Yellen’s last day as chair of the Federal Reserve, the central bank imposed harsh penalties on Wells Fargo—the nation’s fourth-largest bank and its leading home lender—as punishment for its long-term abuse of consumers and employees. Much more than a slap on the wrist, the Fed announced that it would replace four members of Wells Fargo’s 16-member board, which it accused of failing to oversee the bank and fix problems that have transformed it from a corporate icon to a public disgrace. It also prohibited Wells Fargo from growing any larger than its current asset size ($2 trillion) until the regulator is persuaded that the bank has changed its ways. That means that Wells Fargo won’t be able to keep pace with rival banks engaged in mergers and acquisitions with other financial firms.
“We cannot tolerate pervasive and persistent misconduct at any bank,” said Yellen.
The Fed’s decision was unprecedented, but it was also the last hurrah for Yellen, whom President Trump replaced with Jerome Powell, a former partner at the private equity firm The Carlyle Group. More than any other Fed chair, Yellen had held banks accountable for their racial bias, abusive consumer practices, and mistreatment of employees. Whether Powell, who has served on the Fed board for five years, will follow Yellen’s example or change course remains to be seen.
What triggered the Fed’s action was the latest in a series of abuses the bank had engaged in for more than a decade. From 2009 through 2015, in order to boost the bank’s stock price, Wells Fargo’s top managers pressured low-level employees to secretly foist more than wo million unauthorized checking and credit-card accounts on customers, without their knowledge.
A few weeks after both the Senate and House held hearings on the scandal in September 2016—where Wells Fargo CEO John Stumpf faced tough grilling from Republicans and Democrats alike—the bank’s board fired him, rescinded $41 million of unvested stock he had been awarded, and replaced him with Tim Sloan, a 30-year veteran of the San Francisco-based bank. Carrie Tolstedt, who headed the bank's community banking unit responsible for the fake accounts scandals, was forced to forfeit about $19 million and was pushed out of the bank. Wells Fargo has already ousted about half of its board members. After four more directors are replaced as a result of the Fed’s ruling, only three directors who were on the board during that scandal will still be on the board.
Even so, not one of the bank’s board members or top executives was criminally prosecuted, and none have served time in prison, which many bank reformers believe would be a more effective way of pushing Wall Street to behave more responsibly.
The timing of the Fed ruling was particularly ironic, given the Trump administration’s see-no-evil attitude toward the banking industry. Trump not only failed to reappoint Yellen to her Federal Reserve post, but also replaced Richard Cordray, the tough consumer-oriented director of the Consumer Financial Protection Bureau (CFPB) with Mick Mulvaney, the White House budget director who has close ties to the financial industry.
The New York Times put the story of the Fed’s unprecedented action against Wells Fargo on its front page on Saturday, but its report—like those of other mainstream newspapers and other media outlets—ignored the community activist groups that have been protesting Wells Fargo’s abusive practices for years, and that blew the whistle on the fake accounts scandal.
Those practices first came to light in 2013, when bank employees—most of them tellers and call center employees who assist customers with their personal or business banking needs—shared their concerns with the media, government regulatory agencies, and members of Congress.
The employees were brought together by the Committee for Better Banks (CBB), an advocacy group supported by the Communications Workers of America. The CBB worked in tandem with community organizing groups like the Alliance of Californians for Community Empowerment, New York Communities for Change, and Minnesotans for a Fair Economy, which for over a decade had challenged Wells Fargo’s predatory lending and foreclosure practices, particularly in low-income and minority communities.
The Los Angeles Times broke the story in 2013 after talking with Wells Fargo workers affiliated with the CBB. It reported that low-level employees—who earned between $10 and $12 an hour—feared for their jobs if they didn’t make strict quotas for opening new customer accounts. To meet these quotas, employees were pressured to open unneeded accounts for customers, without their knowledge, and forged the clients’ signatures. Wells Fargo management called this practice “cross-selling,” but employees called it “sandbagging” and a “sell or die” quota system. Once the scandal hit the media, Wells Fargo fired 5,300 low-level employees, blaming them for the misdeeds.
But CBB persisted in drawing attention to the issue with petitions and protests at Wells Fargo offices and shareholder meetings. Along with the National Employment Law Project, the CBB released a report, “Banking on the Hard Sell,” in June 2016, which revealed that while Wells Fargo provided the most flagrant example, many other banks also pressured their employees to open unwanted accounts for customers.
Following the initial revelations, Wells Fargo agreed to pay almost $200 million in fines to the CFPB, the Office of the Comptroller of the Currency, and the city of Los Angeles.
But that didn’t mollify Wells Fargo’s critics. The turning point in the Wells Fargo controversy was Stumpf’s appearance before Congress in September 2016.
“You should resign,” Senator Elizabeth Warren told Stumpf at a Senate Banking Committee hearing. “You should be criminally investigated.”
Warren also demanded both the Department of Justice and Securities and Exchange Commission criminally investigate Stumpf for the bank’s high-pressure sales practices. She noted that during the years that Wells Fargo engaged in this “scam,” Stumpf’s own portfolio of company stock increased by $200 million.
“So, you haven’t resigned, you haven’t returned a single nickel of your personal earnings, you haven’t fired a single senior executive,” Warren told Stumpf.
“Instead, evidently, your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership.”
When Stumpf appeared before the House Financial Services Committee, he got a similar reception.
“Fraud is fraud and theft is theft. What happened at Wells Fargo over the course of many years cannot be described any other way,” said Republican Representative Jeb Hensarling, the committee chair. Democratic Representative Carolyn Maloney said that Wells Fargo had turned into a “school for scoundrels.” Democrat Gregory Meeks said Stumpf was running a “criminal enterprise.” “Why shouldn’t you be in jail?” asked Democrat Michael E. Capuano. “When prosecutors get hold of you, you are going to have a lot of fun.”
Stumpf was gone as CEO within weeks, and his replacement, Tim Sloan, pledged to clean up the mess. But as Sloan knew well, the fake consumer accounts scandal was just the tip of the iceberg in terms of Wells Fargo’s long history of misconduct.
The bank has been repeatedly sued by consumer watchdog, civil rights, and community organizing groups around the country, as well as by Baltimore and other cities, for violating laws against racist mortgage lending and consumer rip-offs. The bank has a long and sordid history of discrimination against low-income consumers and communities of color in its lending practices and a terrible track record of aggressive foreclosures and high-risk predatory loans.
In 2006, before the subprime bubble started to burst, Wells Fargo originated or co-issued $74.2 billion worth of subprime loans, making it one of the top subprime lenders in the country. By June 2010, Wells Fargo had $17.5 billion worth of foreclosed homes on its books, making it one of the nation’s three top banks in foreclosure activity. Despite getting a $37 billion taxpayer bailout, Wells Fargo resisted kicking and screaming before reluctantly agreeing to participate in the federal government’s Home Affordable Modification Program.
Since 2000, Wells Fargo has been hit with more than $11 billion in fines, penalties, and settlement agreements with government agencies—including the Federal Reserve, the Department of Justice, the CFPB, the Department of Housing and Urban Development (HUD), Fannie Mae, and the Office of the Comptroller of the Currency (OCC)—for violating a wide range of laws. These include falsifying income information on loan applications, steering black and Hispanic borrowers into costlier subprime mortgages with higher fees while white borrowers with similar credit risk profiles received regular loans, charging abusive mortgage default fees, submitting false and misleading court documents, processing unlawful foreclosures, engaging in mortgage appraisal and origination fraud, robo-signing mortgage documents, exceeding the 6 percent interest rate limit for loans to members of the military and failing to get a court order before repossessing their vehicles. The bank was also penalized for charging more than 800,000 people for auto insurance they didn’t need or want when they took out car loans from the bank.
Activists have also criticized Wells Fargo for its role in financing companies that build and manage for-profit prisons and financing the controversial Dakota Access Pipeline.
Wells Fargo has been so concerned about demonstrations at its offices and its top executives homes that it has taken to playing cat and mouse by moving its annual shareholder meeting to a new location every year in a bid to evade protesters.
Last year, responding to public pressure, the governments of New York City and Seattle voted to pull municipal funds out of Wells Fargo. Elected officials in Los Angeles, New Haven, and other cities have proposed similar laws.
Wells Fargo is anything but unique when it comes to consumer rip-offs, racial discrimination, and employee abuse. But the Fed’s punishment of Wells Fargo may be the last such action we’ll see during the Trump administration.
Bank reform activists will be watching closely to see if Powell lets Wells Fargo off the hook from the prohibition against increasing its assets until it cleans up its act. Compared with the conservative Wall Street bankers, corporate tycoons, and billionaires that Trump appointed to his cabinet, Powell is considered a moderate. But policing the banking industry and holding it accountable requires vigilance not only by the Federal Reserve, but also by the OCC, the Justice Department, HUD, and the CFPB, which are now headed by right-wingers with an aversion to government regulation of corporate America and a sycophantic view of Wall Street.
Under Mulvaney, the CFPB recently reversed a rule that had imposed tight restrictions on short-term loans from the usurious payday lending industry. According to The New York Times, Mulvaney halted a case against a group of Kansas payday lenders accused of charging interest rates of nearly 1,000 percent. He also recently ended an investigation into the marketing and lending practices of World Acceptance Corporation, a South Carolina lender.
World Acceptance Corporation had contributed $4,500 to Mulvaney’s congressional campaigns. Since 2010, payday lenders have donated more than $13 million to members of Congress, mostly Republicans (including almost $63,000 to Mulvaney). In April, the payday lending industry will hold its annual retreat at Trump’s National Doral Golf Club in Florida.
Payday lenders are viewed as the bottom-feeders of the financial industry. They locate their offices in neighborhoods that lack conventional banks and prey on poor and minority consumers by charging high interest rates for short-term loans. But more respectable commercial banks, like Wells Fargo, are the payday lenders’ accomplices, providing them with the financing they need to operate their businesses. A 2010 study found that Wells Fargo financed more payday lenders than any other big bank, including six of the eight largest payday lenders.
Six years ago, activists around the country organized Occupy Wall Street protests to draw attention to the banking industry’s misdeeds in crashing the economy, putting millions of homeowners in financial jeopardy, and engaging in risky and racist lending practices. Now, despite the Fed’s new sanctions on Wells Fargo, it appears that Wall Street has occupied the Trump administration.