Community Bank Regulatory Environment Post Wells Fargo
By now it is well known that Wells Fargo Bank, N.A. entered a Consent Order regarding improper sales practices such as (1) engaging in “simulated funding” where employees opened deposit accounts without consumers’ knowledge or consent and then transferred funds from consumers’ authorized accounts to temporarily fund the unauthorized accounts in order to qualify for incentives rewarding bankers for opening new accounts; (2) submitting applications for and obtaining credit cards without consumers’ knowledge or consent; (3) using email addresses not belonging to consumers to enroll consumers in on-line banking services without their knowledge or consent; and (4) requesting debit cards and creating personal identification numbers (“PINs”) to activate them without the consumers’ knowledge or consent.
Employees opened 1,534,280 deposit accounts that may not have been authorized and roughly 85,000 of such accounts incurred about $2,000,000 in fees, some of which were overdraft fees on accounts already owned by consumers. There were 565,443 credit card accounts opened without consumers’ knowledge or consent and roughly 14,000 of those accounts incurred over $400,000 in fees.
As with the fallout of the Great Recession in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act, community banks can expect to deal with heightened scrutiny in two areas from the transgressions of a money center bank. First, community banks can expect increased scrutiny of employee incentive plans to test the purpose and results of the incentives, the policies and procedures for policing incentives and the vulnerability of the incentive plan to manipulation. It would not be a surprise if clawback provisions are extended to cover incentive compensation plans. Cross-selling products, already difficult under the Fair and Accurate Credit Transaction Act of 2003, will become more difficult and subject to greater scrutiny of fees paid and methodology.
Secondly, any form of access to a consumer account without explicit consumer approval will come under increased scrutiny. Therefore, banks should assess policies, procedures and controls with respect to transfer of funds from or to a customer account as well as applications for other deposit related banking services without customer knowledge or consent.
The Wells Fargo Consent Order follows on the heels of the Consumer Financial Protection Bureau Monthly Complaints Snapshot for August 2016, focusing on bank accounts and services, particularly overdraft fees, confusion about availability of funds and frustration with error resolution procedures. Any community bank facing a compliance exam over the next year should focus on its employee incentive policies and procedures, its policies and procedures for transferring funds or enrolling in services for consumer accounts, and its complaint resolution mechanism in advance of such examination.