You’ve probably been hearing a lot about Wells Fargo over the last couple weeks. In early September, it was revealed that approximately 2 million deposit and credit card accounts were opened or applied for without customers’ knowledge over a four-year period.
And there have been more developments since. This week, there was news about executives being forced to forfeit some of their compensation, another hearing in Congress and indications that the scope of the investigation could be expanding—and even a report raising the possibility that other banks might have a cross-selling problem, too.
Here’s what you need to know and why it matters—even if you’re not a Wells Fargo customer.
How did this happen?
Wells Fargo employees were incentivized to convince existing customers to open new accounts at the bank—to talk a checking account holder into opening a credit card, for example. That’s called cross-selling, and it’s perfectly legal.
But Wells Fargo’s goal of getting customers to sign up for a total of eight products per household was extremely aggressive. And they sometimes skipped an important step: getting consumers’ consent. A culture evolved that led to the millions of unauthorized add-on accounts. In some cases, employees went so far as to create fake email addresses to handle the confirmation process, and moved money back and forth to make the accounts look real. While this sounds like identity theft, as far as we know, the employees didn’t take any money—though they did collect incentive pay.
So there was no harm to consumers?
There was the breach of trust, which CEO John Stumpf addressed during Congressional testimony, saying, “I want to apologize for violating the trust our customers have invested in Wells Fargo. And I want to apologize for not doing more sooner to address the causes of this unacceptable activity.”
But as a practical matter, the biggest harm likely involves consumers’ credit reports and credit scores. A new credit card could negatively affect someone’s credit score by bringing down the average age of accounts on his or her report. And in some cases, it appears the fraudulent accounts incurred fees and interest charges the customer didn’t know about.
To what degree that subsequently affected victims’ borrowing costs is almost unknowable, and it’s unclear how to fix it. If an account holder paid higher interest on a car loan three years ago because of the domino effect of an unauthorized account, how would that cost be calculated?
It’s also unclear what victims should do today, beyond making sure they’re not paying any fees they didn’t agree to incur. Although they may want to immediately close any unauthorized accounts, doing so at this point could actually lower their credit scores (because having more available credit improves your utilization ratio, for one).
But this only affects Wells Fargo consumers, right?
As far as we know, only Wells Fargo customers have been hit. But a report from S&P Global suggests all banking consumers should be on the lookout for add-on accounts. The report analyzed consumer complaints filed with the Consumer Financial Protection Bureau and found cross-selling complaints for many major banks. The complaints are merely claims, so it’s too soon to accuse other banks of using similar tactics. But it’s not too soon to consider the possibility.
How would I know if this happened to me?
Credit reports do a great job of itemizing all your accounts. Wells Fargo customers should have already checked their credit reports, which anyone can do for free at AnnualCreditReport.com. But really, all consumers should look carefully at their reports now. You might see an account at VeryBigBank, Inc. and think, “Yep, that’s my checking account.” But it could also be an unauthorized credit card, so it’s worth looking more closely.
How could this go on so long?
That’s the billion-dollar question. Lots of people argue that regulations on banks aren’t strong enough, and regulators don’t watch bank activity closely enough. Another culprit cited by consumer groups is the fine-print term in consumer contracts that prevents Wells Fargo account holders from taking legal action against the bank. Both a class action and an individual lawsuit were tossed out of court by a judge citing an arbitration clause. It’s also surprising that so much time has passed since the Los Angeles Times first broke the story of Wells Fargo cross-selling fraud at the end of 2013.
Where do things stand now?
The bank has fired more than 5,000 employees involved in the scandal, and agreed to pay $185 million in fees and penalties. Stumpf will temporarily forfeit his salary, as well as about $41 million in outstanding stock awards—a punishment known as a “clawback.” Former head of the retail banking division, Carrie Tolstedt, left the company months ahead of her scheduled retirement, without severance, and is giving up millions in stock, too.
In last week’s Senate hearing, at which Senator Elizabeth Warren recommended Stumpf resign and be criminally investigated for his role, Stumpf stated that the company’s cross-selling goals would be terminated at the end of this week, but denied any “orchestrated effort” to defraud customers.
On Thursday, he returned to Washington for a hearing in the House of Representatives, where he added that the bank is contacting customers who may have had unauthorized checking accounts, savings accounts or credit cards opened in their names, and apologized again, saying he’s accountable for “leading Wells Fargo as the company restores the trust of customers, team members and investors.” Texas Republican Rep. Roger Williams and other lawmakers at the hearing called for harsher punishments for top level executives, including Stumpf.