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Wells Fargo to Pay Record CFPB Fine to Settle Allegations It Harmed Customers

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Wells Fargo

WFC -1.04%

& Co. reached a $3.7 billion deal with regulators to resolve allegations that it harmed more than 16 million people with deposit accounts, auto loans and mortgages.

The settlement with the Consumer Financial Protection Bureau includes a $1.7 billion penalty, the agency’s largest-ever fine, and more than $2 billion in consumer restitution, the regulatory agency said Tuesday.

The consumer watchdog agency said the bank illegally assessed fees and interest charges on loans for cars and homes. Some consumers had their vehicles illegally repossessed while others had overdraft fees unlawfully applied, the agency said.

Wells Fargo’s regulatory troubles continue to ripple through the bank more than six years after its fake account scandal burst into public view. Other problems later surfaced across the San Francisco-based bank, including in its lending and deposit-taking businesses.

The CFPB settlement resolves a major penalty hanging over Wells Fargo but leaves it handcuffed by other regulators. The Federal Reserve has had a cap on the bank’s asset growth in place for nearly five years. Politicians continue to target the bank, and investors have filed a series of class-action lawsuits.

“Wells Fargo is a corporate recidivist,” said CFPB Director

Rohit Chopra,

on a call with reporters Tuesday. He said the settlement “should not be read as a sign that Wells Fargo has moved past its longstanding problems.”

The bank had been negotiating with the CFPB for months in an effort to lump as many outstanding issues into the settlement as possible, according to people familiar with the matter. 

Much of the $2 billion remediation included in the settlement has already been doled out to customers. The bank, for example, has paid $1.3 billion to 11 million customers who had auto-loan servicing issues, the CFPB said.

Wells Fargo has been working for years to resolve a series of regulatory matters stemming from a fake-accounts scandal in 2016. Afterward, other problems surfaced across the bank, including in its mortgage and auto-lending businesses.

The CFPB said the bank’s actions span over a decade. Wells Fargo incorrectly applied auto-loan payments because of technology and compliance failures from 2011 through 2022, the agency said. Errors in its home loan modification process went on from 2011 to 2018, the agency said.

The bank sometimes charged overdraft fees even when a customer had enough funds available to make a debit-card transaction or ATM withdrawal, CFPB said. Wells Fargo is required to refund customers about $205 million in fees since the beginning of last year that weren’t yet reversed. CFPB will oversee that process.

Mr. Chopra, an appointee of President Biden, has said he plans to target repeat offenders. “Corporate recidivism has become normalized and calculated as the cost of doing business,” he said in a speech earlier this year. He has also sought to make his agency more adversarial toward financial firms.

The CFPB said Wells Fargo has accelerated efforts to clean up its act since 2020. Tied to the settlement, the agency will terminate one of the consent orders it had placed on the bank in 2016 and clarify that a 2018 consent order will terminate in no more than three years.

Wells Fargo, led by CEO Charlie Scharf, had signaled for months that it expected another large regulatory penalty.



Photo:

Drew Angerer/Getty Images

“This far-reaching agreement is an important milestone in our work to transform the operating practices at Wells Fargo and to put these issues behind us,” Chief Executive

Charlie Scharf

said in a statement.

Mr. Scharf was brought in to clean up the bank in 2019. He has overhauled the top executive ranks, cut its workforce and gave priority to remaking the bank’s back-end systems for managing internal controls and risk. 

The bank had signaled for months that it expected another big regulatory penalty, and it took a $2 billion charge in the third quarter tied to resolving long-running legal and regulatory issues. The bank said Tuesday that it expects an operating losses expense of $3.5 billion in the current quarter.

Shares of the bank fell about 1.5%.

Write to Ben Eisen at ben.eisen@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Better.com Misled Investors Ahead of Stalled SPAC Deal, Former Executive Alleges

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A former senior executive at Better.com alleged in a lawsuit that the online mortgage lender misled investors in financial filings and other representations it made as it attempts to go public.

Sarah Pierce,

Better.com’s former executive vice president for sales and operations, alleged in the suit that Chief Executive

Vishal Garg

and the company misrepresented Better.com’s business and prospects to keep investors onboard with a planned merger with a special-purpose acquisition company, or SPAC. The deal was agreed to last May and has yet to close.

Ms. Pierce said in the suit that she was pushed out of her role at the company in February in retaliation for raising these issues. She has also filed a complaint alleging retaliation with the Occupational Safety and Health Administration under the Sarbanes-Oxley Act, according to a footnote in the suit.

“We have reviewed the claims in the complaint and strongly believe them to be without merit,” Better.com said in a statement after the initial publication of this article. “The company is confident in our financial and accounting practices, and we will vigorously defend this lawsuit.”   

Better.com was a major winner of the boom in housing prices and mortgage refinancing that accompanied the pandemic and low interest rates. The company grew revenue nearly 10-fold to $876 million in 2020 from the year prior, posted a profit of $172 million and hired thousands as it rushed to keep up with the market, company filings said. It raised $500 million from

SoftBank Group Corp.

last spring and weeks later said it planned to go public at a valuation of $7 billion.

Better.com has since been rocked by the rise in interest rates and resulting sharp pullback in refinancings and a highly publicized controversy when Mr. Garg laid off 900 workers via a Zoom call in December. He took a brief leave after the call sparked an uproar. The company has laid off thousands more as the market for SPAC deals has also cooled. 

In the aftermath of the December layoffs, Mr. Garg said in a public letter that he took responsibility for the decision to lay off the staff but “blundered the execution.” He began a leave the following day, and Better.com said it hired an outside company to assess its culture and leadership. Mr. Garg returned to his position in January, according to an email sent to employees.

In her complaint, filed Tuesday in federal court in Manhattan, Ms. Pierce says Mr. Garg and the company’s alleged misrepresentations were made in an effort to keep its merger on track. Ms. Pierce’s complaint alleged Mr. Garg and Better.com’s treatment of her constituted unlawful retaliation, defamation and intentional infliction of emotional distress.

The company lost $304 million last year, according to company filings. Last winter, Mr. Garg allegedly told the company’s board and investors that the company would become profitable again by the end of the first quarter in 2022, according to the lawsuit. Ms. Pierce said her operations team, in partnership with the company’s finance department, had presented internal projections to Mr. Garg that showed the company couldn’t expect to break even until at least the second half of this year. 

The lawsuit contains colorful remarks allegedly made by Mr. Garg. He allegedly replaced one of the words in the acronym for the accounting phrase, GAAP, or “generally accepted accounting principles” with a profanity. He told other executives at Better.com that interest rates would stay low because President Biden would contract Covid-19 and die, according to the suit. Another former Better.com executive said they also remembered the GAAP comments and Mr. Garg’s expectations that unforeseen events would keep rates low.

Ms. Pierce also alleges in the suit that the company had overstated the strength of its brand in financial filings relating to its potential merger.

In the prospectus for its SPAC deal, Better.com said it believed that 30% of its loans made directly to consumers came through internet traffic that wasn’t generated by paid marketing efforts. That compared favorably to other large financial brands despite lower advertising spending. In her complaint, Ms. Pierce says that company’s internal data showed that number to be no more than 12%.

Ms. Pierce raised concerns about the alleged misrepresentation to Mr. Garg and Better.com ahead of the filing’s publication, according to the lawsuit.

Mr. Garg allegedly repeatedly defied advice from other executives regarding the mass Zoom layoff in December, leading the company to likely violate the California Worker Adjustment and Retraining Notification Act which requires employees receive 60 days notice in advance of mass layoffs, the suit said.

Write to Ben Foldy at ben.foldy@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

As Fed signals a 25-basis point hike later this month, here’s what that means for your credit-card bill, savings and mortgage repayments

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Federal Reserve Chair Jerome Powell is telegraphing his first punch in the fight against inflation — his intention to support a 25 basis-point increase on a benchmark interest rate, the first in a number of potential rate hikes this year.

Now it’s time for consumers to make their own maneuvers, particularly those who are planning to pay down credit-card debt or build up their savings in 2022.

By itself, a quarter-percentage-point increase will not make a big difference to a credit card’s annual percentage rate (APR) or their savings account’s annual percentage yield (APY), experts say. But stack several rate increases together and consumers will start to feel the pinch, they note.

In Congressional testimony Wednesday and Thursday, Powell previewed what’s he’s considering at a crucial policy meeting scheduled for mid-March. That way, markets do not have to wait in the lurch when there’s already so much uncertainty — due to Russia’s invasion of Ukraine — and they aren’t blindsided when the increase happens to the federal funds rate now near zero.

“I do think it will be appropriate to raise our target range for the federal funds rate at the March meeting in a couple of weeks. And I’m inclined to propose and support a 25-basis-point rate hike,” he told lawmakers Wednesday.

On Thursday, he reiterated plans for a 25-basis-point increase and said he supports a “series” of 2022 hikes. If price inflation rates stay high, the Fed would be ready with rate hikes exceeding a quarter percentage point, Powell said.

Markets liked the certainty, and it’s a helpful heads up for consumers because the federal funds rate strongly influences a credit card’s APR and a savings account’s APY. Here’s more on that relationship:

Added credit-card costs

If a rate hike does comes this month, it could be April or May when credit-card holders see the higher APR reflected on their bill, said Matt Schulz, chief credit analyst at LendingTree. For anyone with credit-card debt, “any rise in rates is unwelcome, but the truth is that the Fed’s move in March isn’t likely to rock most people’s financial world, if it is only a quarter-point increase. The danger comes if the rate increases keep coming — and in bigger chunks.”

Consider this scenario:

A person carries a balance of $5,000 and makes $250 monthly payments, with a 16.44% APR (the average credit card interest rate in 2021’s fourth quarter, according to the Fed). To pay off the balance, the person will pay $884 in interest, Schulz said.

In comes a 25-point basis point increase:

That would bring the APR to a potential 16.69% because the prime rate — which issuers use to make their credit-card rates — historically absorbs the full amount of the federal funds rate increase, Schulz said. Now the same person is paying $900 in interest to pay down the balance, a $16 increase over the life of the loan, he said.

And another 25-basis-point increase:

With an APR of 16.94%, that turns into $917 in interest, an additional $32 during the loan’s duration.

If there are six, quarter-percent rate increases — which isn’t out of the ballpark when some observers say there could be seven hikes — that turns into a 1.5% rise for APR, Schulz said. Now the borrower has to pay $985 in interest, he said. That’s $101 extra during the life of the loan.

In a time of high inflation, an extra $101 being paid to interest instead of groceries or gas will be a tough reality for families living paycheck to paycheck. Average hourly earnings were flat from January to February, but up 5.1% year-over-year according to Friday’s jobs report.

Americans had approximately $860 billion in credit-card debt during 2021’s fourth quarter, according to the Federal Reserve Bank of New York. Borrowers had an average $4,857 in credit-card debt during the third quarter, according to TransUnion
TRU,
+2.13%,
one of the big three credit bureaus.

It’s worth noting that some rates will be higher depending on a cardholder’s credit history. In February, the average rate for all new card offers was 19.53%, according to LendingTree.

Higher savings-account yields

“The good news about interest-rate hikes is that consumers who put their money in high-yield savings accounts will grow their money faster so continuing to shore up savings this year will yield more returns than last year,” said Gannesh Bharadhwaj, general manager of credit cards at Credit Karma
INTU,
-1.64%.

Savings accounts are a place to safely store easy-to-access cash, rather than to reap large returns. Extra interest yields after a rate hike will be modest at first but can pile up depending on how many rate increases occur, said Ken Tumin, founder and editor of DepositAccounts.com.

Right now, an online savings account has an average 0.49% APY, he said. Historically, rate increases haven’t all been passed along to the APY, at least at first, Tumin said.

A 25 basis point hike could mean a potential average APY around 0.55% – 0.6%, he estimated. If a savings account has $10,000, that little step up bears an extra $10, Tumin said.

But the talk is of multiple rate increases. If there are six, quarter-percentage-point increases, that same $10,000 account could produce an extra $100 in a year, he estimated.

Online savings accounts are the places to find the elevated APYs, not the “brick and mortar” banks, Tumin said.

During the previous rate-hike cycle from 2015 to 2018, there were three, quarter-point increases “before the average high-yield savings account APY had any significant gain,” he noted. “The rise may be faster this time due to high-yield savings account rates that have fallen to levels much lower than the bottom levels before 2015.”

‘A marginal impact’ for mortgage rates

“For housing, the Fed’s short-term rate has a marginal impact on mortgage rates,” said George Ratiu, senior economist and manager, economic research at Realtor.com.

There’s a different Fed action connected to those rates, he said. Along with dropping the federal funds rate during the pandemic’s early days, the central bank also bought up Treasury debt and agency mortgage-backed securities. The central bank has decided it’s a good time to end that.

From 2020 to 2021, those Fed purchases injected liquidity and sent mortgage rates to the basement, Ratiu said. “As the Fed announced it planned to finalize its tapering of [mortgage-backed securities] purchases later this month, we have seen rates surge to highs not seen since mid-2019.”

So prospective homeowners are already paying for Fed actions. The average 30-year fixed mortgage rate hit 3.76% this week, Freddie Mac
FMCC,
-1.41%
said. To put that in context, the 30-year fixed mortgage rate was closer to 2.7% a year ago.

One basis point is equal to one-hundredth of a percentage point. It’s major shift from just a few weeks earlier when the average rate for the 30-year loan jumped to the highest level since May 2019, close to 4%.

February’s median listing came to $392,000, according to Realtor.com. Compared to a year ago, a buyer would pay $278 more on their monthly mortgage, Ratiu noted. That’s more than $3,300 added to the buyer’s yearly financial burden.

“Additional increases in mortgage rates will further squeeze buyers’ budgets and may limit first-time buyers’ ability to qualify for a mortgage, especially with prices continuing to advance,” he said.

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