Federal Reserve lifts key Wells Fargo consent order tied to customer account scandal

The Federal Reserve Board has determined that Wells Fargo & Co. has resolved the regulatory issue at the heart of its customer fraudulent account scandal.

The board announced Thursday the termination of its 2018 enforcement action against Wells Fargo "following its determination that the bank had met all required conditions."

The bank released a brief statement Thursday acknowledging the Fed's lifting of the consent order.

The Fed established the consent order in February 2018, foremost being an asset cap of $1.97 trillion on Wells Fargo, in response to the scandal that erupted in September 2016. For banks, loans are considered assets.

Although the bulk of the 3.53 million fraudulent accounts were established in California and Arizona, there were media reports of at least 38,722 unauthorized customer accounts being established in North Carolina and 23,327 in South Carolina.

"Under the 2018 enforcement action, the bank was required to demonstrate that improvements to its governance and risk management program made the program effective, and completed two third-party reviews of these improvements," according to the Fed statement.

"This remediation work spanned nearly a decade."

Wells Fargo said in June it had spent at least $2.5 billion on risk management and regulatory resolution functions. It has 10,000 more employees in those areas than it did in 2018.

Fed Chairman Jerome Powell said in 2021 the asset cap would remain until the Fed is confident that Wells Fargo has resolved a series of internal governance and risk-control issues.

The Fed lifted the asset cap in June.

At that time, the Fed said that "the removal of the growth restriction reflects the substantial progress the bank has made in addressing its deficiencies, and that the bank has fulfilled the conditions required for removal of the growth restriction."

The Fed added, though, that other provisions in the 2018 enforcement action would remain in place "until the bank satisfies the requirements for their termination."

Competitive disadvantage

The asset cap put Wells Fargo at a competitive disadvantage for more than seven years compared with its national peers JPMorgan Chase & Co., Bank of American Corp. and Citigroup.

Over the past seven years, JPMorgan Chase has emerged as the nation's largest bank at $4.36 trillion, while Bank of America is at $3.35 trillion and Citigroup at $2.57 trillion.

Since the removal of the asset cap, Wells Fargo's total assets have reached $2.1 trillion as of Dec. 31.

Wells Fargo chief executive Charlie Scharf was hired in late 2019 in large part to guide the bank through resolving altogether 14 regulatory consent orders.

"The Federal Reserve's decision to lift the asset cap marks a pivotal milestone in our journey to transform Wells Fargo," Scharf said in June. "We are a different and far stronger company today because of the work we've done."

As part of resolving the 14 consent orders, Scharf said Wells Fargo has "changed and simplified our business mix, and we have transformed the management team and how we run the company."

"We have been methodically investing in the company's future while improving our financial results and profile."

Scharf said on May 28 that Wells Fargo addressed the customer account scandal by "literally scaling back almost everything that we were doing to drive growth in the retail system, and then rebuild it from the bottom up to drive growth in the retail system ... so when we turn things back on that we can grow properly."

Scandal explained

During the 14-year active period of the fraudulent customer account scandal, Wells Fargo collected millions of dollars in fees and interest to which it was not entitled, harmed customers' credit ratings, and unlawfully misused customers' sensitive personal information.

Examples of fraudulent accounts included: using existing customers' identities — without their consent — to open accounts; forging customer signatures to open accounts without authorization; creating PINs to activate unauthorized debit cards; and moving money from millions of customer accounts to unauthorized accounts.

Other examples included: opening credit cards and bill pay products without authorization; altering customers' contact information to prevent customers from learning of unauthorized accounts and to prevent Wells Fargo employees from reaching customers to conduct customer satisfaction surveys; and encouraging customers to open accounts they neither wanted nor needed.

Wells Fargo has admitted that from 2002 to 2016, the sales pressure of trying to increase the number of product accounts per customer known as cross selling led Community Bank personnel — primarily tellers and other branch employees — to open millions of accounts and other financial products that were unauthorized or fraudulent.

"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," former CFPB director Rohit Chopra said in a statement.

"The list could go on and on, from defrauding the government to labor abuses and more."

In February 2020, the bank agreed to pay $3 billion to settle U.S. Justice Department and Securities and Exchange Commission investigations into fraudulent sales practices by its Community Bank division.

Total penalties from a series of regulatory and other federal fines add up to at least $11.14 billion.