Wells Fargo – The UDAAP Beat Down Continues
Accountability Joke – Wells Fargo Board of Directors? Get the Bums Out!
A Word From CFPB Director Rohit Chopra
Wells Fargo is one of the most powerful banks in the world. Unlike some other massive U.S. banks, Wells Fargo primarily concentrates on consumer banking. One in three American households are customers and are affected by its corporate culture and business practices.
In the CFPB’s eleven years of existence, Wells Fargo has consistently been one of the most problematic repeat offenders of the banks and credit unions we supervise:
- 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.
Put simply, Wells Fargo is a corporate recidivist that puts one third of American households at risk of harm. Finding a permanent resolution to this bank’s pattern of unlawful behavior is a top priority. Today, CFPB is announcing an important step toward that goal: restitution for victims of Wells Fargo’s widespread illegal activities.
Today, the CFPB is ordering 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 for which it has never been held to account. The bank’s illegal conduct led to billions of dollars in financial harm to its customers and, for thousands of customers, the loss of their vehicles and homes.
Between at least 2011 and 2022, consumers were illegally assessed fees and interest charges on auto and mortgage loans, had their cars wrongly repossessed, and had payments to auto and mortgage loans misapplied by the bank. Consumers were also charged unlawful surprise overdraft fees and had other incorrect charges applied to their checking and savings accounts.
Individuals affected by illegal conduct related to the bank’s auto finance business line will receive more than $1.3 billion; those affected by violations related to deposit accounts will receive more than $500 million; and mortgage servicing customers will receive at least $195 million.
This milestone in accountability and reform of Wells Fargo would not be possible without the cooperation and support from the broader law enforcement and regulatory community, including the Office of the Comptroller of the Currency and the Federal Reserve.
We see this as an initial step to bring relief quickly to families who had their cars illegally possessed, who were tricked into seeing their accounts drained by illegal junk fees, and who had their accounts frozen without cause.
While today’s order addresses a number of consumer abuses, it should not be read as a sign that Wells Fargo has moved past its longstanding problems or that the CFPB’s work here is done. Importantly, the order does not provide immunity for any individuals, nor, for example, does it release claims for any ongoing illegal acts or practices.
While $3.7 billion may sound like a lot, the CFPB recognizes that this alone will not fix Wells Fargo’s fundamental problems. Over the past several years, Wells Fargo executives have taken steps to fix longstanding problems, but it is also clear that they are not making rapid progress. We are concerned that the bank’s product launches, growth initiatives, and other efforts to increase profits have delayed needed reform.
We will continue our work with the other federal banking regulators to end the rinse-repeat cycle of consumer abuse at this firm. After the CFPB and law enforcement partners took action against Wells Fargo in 2016 for its fake account fraud, other agencies used their authorities to restrict Wells Fargo’s activities and hold certain executives accountable. As regulators, we must collectively consider whether additional limitations need to be placed on Wells Fargo to supplement the existing asset cap put in place by the Federal Reserve Board of Governors in 2018, as well as the Office of the Comptroller of the Currency’s mortgage servicing restrictions imposed in 2021. Our nation’s banking laws provide strong tools to ensure that insured depository institutions do not breach the public trust, and in the new year we expect to work with our fellow regulators on whether and how to use them.
In closing, I want to thank all of the individual consumers who filed complaints and the many individuals across the federal regulatory agencies who made this first step toward accountability and reform possible.
Consumer Financial Protection Bureau
BEHIND THE SCENES
Stakeholders Seek to End Appraisal Bias
The CFPB and other stakeholders are working to amend appraisal standards
“New research from Freddie Mac (2021) using census data finds 12.5 percent of appraisals for home purchases in majority-Black neighborhoods and 15.4 percent in majority-Latino neighborhoods result in a value below the contract price (the amount a buyer is willing to pay for the property), compared to only 7.4 percent of appraisals in predominantly white neighborhoods. This research corroborates prior observations that a neighborhood’s average appraised property value tends to decrease as the share of historically marginalized populations increases.” – PAVE Report
From the CFPB
“The CFPB participates with other agencies on issues of bias in home appraisals through the Property Appraisal and Valuation Equity (PAVE) Task Force. On March 23, 2022, the PAVE Task Force issued a report, “Action Plan to Advance Property Appraisal and Valuation Equity:
Closing the Racial Wealth Gap by Addressing Mis-valuations for Families and Communities of Color.”
The report outlines the historical role of racism in the valuation of property, examines the various forms of bias that can appear in residential property valuation practices, and describes how government and industry stakeholders will advance equity through concrete actions and recommendations. Aside from its involvement in PAVE, the CFPB is actively working with its interagency partners on issues of bias in home appraisals.
In February 2022, the CFPB, along with HUD, FRB, DOJ, OCC, FDIC, NCUA, and FHFA, submitted a letter to the Appraisal Standards Board regarding proposed changes to the 2023 Edition of the Uniform Standards of Professional Appraisal Practice. The Federal Financial Institutions Examination Council’s (FFIEC) Appraisal Subcommittee (ASC), comprised of designees from the CFPB and certain other federal agencies, provides federal oversight of state appraiser and appraisal management company regulatory programs, and a monitoring framework for the Appraisal Foundation.”
Changes under Evaluation Include:
- Expanded use of alternatives to traditional appraisals as a means of reducing the prevalence and impact of appraisal bias.
- Use of value estimate ranges instead of an exact amount as a means of reducing the impact of racial or ethnic bias in appraisals.
- The potential use of alternatives and modifications to the sales comparison approach that may yield more accurate and equitable home valuation.
- Public sharing of aggregated historical appraisal data to foster development of unbiased valuation methods.
Tip of the Week – Fair Lending is More than not Discriminating
Making a Difference One Household at a Time
In a significant way, MLOs and lenders serve as gatekeepers to entry-level homeownership. Few would argue against sustainable homeownership as the number one wealth-generation engine for the middle class. Because entry-level homebuyers require a mortgage, the mortgage industry is the de facto doorman to the American Dream. As such, the mortgage industry has a trust to maintain.
As much as it is upon mortgage professionals to do, the industry must endeavor to keep the sustainable homeownership door open to anyone qualified to approach it. Not just to those borrowers whose business is financially rewarding to providers but to all qualified borrowers. For this reason, for many Americans, the mortgage and housing industry is either an enabler of sustainable homeownership or a barrier to a better way of life. There is not much middle ground. Either one is part of the solution or part of the problem.
Mortgage discrimination includes a person’s absence of meaningful outreach or a failure to identify the needs of discrete communities or persons in its service area. When this neglect falls harder along protected class lines, that is generally unlawful and unethical. Persons subject to the Fair Housing and Equal Credit Opportunity Acts include individual MLOs and their handlers.
Bias can contribute to the failure to provide equal credit access. However, animus or bigotry is not necessarily the primary driver of the more widespread, pernicious, and entrenched mortgage discrimination problem. Mortgage discrimination stems from a holistic and fundamental neglect to address the more systemic forms of mortgage and housing discrimination. Exacerbating the issue are good old-fashioned human avarice, self-interest, ignorance, and a callous disregard for the well-being of others.
Lenders are full of verve when chasing down the most profitable business. Greater efficiency, better margins, and increased prosperity are had by targeting the most profitable business for the individual and the organization. Yet, it is no secret that an unbalanced approach to higher margins and more profits in mortgage lending may foster unlawful discriminatory practices.
A myopic focus on the bottom line blinds lenders to those persons or communities that don’t fit their profit model. Instead of blindly chasing the dollar, lenders must deliberately pursue mortgage business from less profitable communities with alacrity equal to those activities from which the highest profits are derived.
Lenders derive higher profits from greater loan volume. Therefore, bigger loans generally make for higher margins. Conversely, smaller loans make for lower margins. Efficiencies may also diminish with higher unit volume.
The term “disparate impact” generally refers to instances in which the policies or practices of a lender result in the offering of lesser credit products or services to particular communities along protected class lines. It is true that some disparate impacts may be unavoidable. For example, suppose the business is aware of a disparate impact but cannot mitigate the practice without going out of business. In that case, that disparate impact may not constitute unlawful discrimination. But realistically, is that ever the case? All or nothing?
Redlining is one of those practices resulting in disparate impacts. Redlining in the 21st century is different from the mid-20th century form. In its original iteration, redlining refers to identifying geographical boundaries on a map representing “less desirable” lending opportunities. What denoted lesser opportunities were frequently the locale’s racial, ethnic, or religious composition.
Redlining is somewhat less obvious here in the “enlightened” 21st century. For example, a mortgage company expands its physical presence into a new region by opening three new branches. To achieve the highest return on its dollar, the mortgage company locates its branches in areas with lofty per capita income and the highest average mortgage amounts, thereby magnifying its potential profits. The problem with that is that these branches are likely located in predominantly white neighborhoods. Should the mortgage company simultaneously open three branches in majority black neighborhoods, who could complain – but they usually don’t.
Demographic data underscores an entrenched and severe challenge facing this nation: people of color overrepresent Low-Moderate-Income (LMI) households in every metro in the nation. Due to the failure to exploit opportunities to serve lower-income communities, the mortgage company makes it more difficult for people of color to obtain financing on terms equal to higher-income communities. Instead, LMI households get a ride in the back of the financial services bus.
Stakeholders target the most profitable business, which white folks overrepresent. In doing so, stakeholders pursue business from white folks with greater verve than business from people of color.
As such, the “unintended discrimination” or “disparate impact” resulting in racial discrimination is due to the pervasive and unyielding “wealth gap” between people of color and white folks here in the U.S.A.
Lower rates of sustainable homeownership among people of color are a silent killer of wealth-building opportunities. As a result, the wealth gap between white folk and people of color due to lower homeownership rates is singularly one of the most harmful national problems.
Regulators look for effective outreach in establishing patterns of mortgage discrimination. For example, a lender with a significant presence in Atlanta, GA, with over 100 MLOs in the area, might be mindful of the racial composition of the origination staff. No black folks on staff? Okay, on the surface, that would be odd, but not necessarily evidence of a fair lending violation (significant swaths of Metro Atlanta are majority-minority areas, with over 50% black or African American populations).
However, there may be a problem if there are few black people on staff, and the lender underperforms their lending peers in loan originations to black folks in the geographical service area.
No radio spots targeting people of color is not necessarily evidence of a fair lending violation. No radio spots targeting people of color while underperforming their lending peers in originations to people of color may be a problem.
An origination organization underperforms its peers in loan originations with people of color. The organization provides scant evidence of low-moderate income (LMI) program implementation or recruiting talent to target the underserved community. Surprise! No senior leader owns the implementation. That is a problem.
What is also of concern is the peer-to-peer comparison (chiefly flawed and dated HMDA data) which Regulators primarily use to gauge whether an organization is engaged in discriminatory origination practices. Sadly, what the lender’s peers are doing to serve underbanked LMI communities may be an absurdly low bar.
However, lenders and MLOs shouldn’t be expected to attack the homeownership challenge alone. It’s a national problem. Obviously, there are other stakeholders that contribute to the problem and hence must be part of the solution. Federal and local governments, real estate companies, listing agents, and sellers are part of the system that contributes to unsuccessful LMI mortgage programs.
Some businesses get away with profits above all else—most businesses. But the mortgage industry is not one of those businesses. The industry is more than just business. The mortgage industry is positioned to champion and protect the American Dream, including sustainable homeownership.
Not the contemporary American Dream of hedonistic pursuits, which is fast becoming our national nightmare, but the American Dream this nation was founded on.
As the historian, James Truslow Adams stated amid the Great Depression, “Not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.”
Aside from legal and ethical obligations, housing professionals’ patriotic duty is to serve the underserved. It’s the American Way.
This housing crisis is an all-hands-on-deck challenge and requires both a bottom-up and top-down effort.
Don’t wait for the other guy. You can help, even if it is just one household at a time.
But you can’t do it alone. Look for LMI implementation tips in future editions of the Journal.
Be part of the solution.