Earlier this week, Wells Fargo Bank admitted that it accidentally foreclosed on nearly 400 homeowners it shouldn't have due to a "software glitch." The San Francisco Business Times reported:
"Nearly 400 Wells Fargo customers lost their homes when they were accidentally foreclosed on after a software glitch denied them the ability to modify their mortgages as they sought federal aid, the bank disclosed in a regulatory filing... The bank apologized and has set aside $8 million to compensate those affected by the glitch, which occurred from 2010 to 2015... the software mistake miscalculated customers' eligibility for mortgage modifications. The error caused about 625 customers to be denied loan modifications they sought from a federal program to help homeowners avoid foreclosures."
The $8 million set aside is one small step towards rebuilding consumers' trust. It seems that the bank and its executives have a nasty habit of alleged wrongdoing that often results in fines and settlement agreements. Earlier this month, the U.S. Department of Justice announced a $2 billion settlement agreement where:
"... Wells Fargo Bank, N.A. and several of its affiliates (Wells Fargo) will pay a civil penalty of $2.09 billion under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on the bank’s alleged origination and sale of residential mortgage loans that it knew contained misstated income information and did not meet the quality that Wells Fargo represented. Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in residential mortgage-backed securities (RMBS) containing loans originated by Wells Fargo... The United States alleged that, in 2005, Wells Fargo began an initiative to double its production of subprime and Alt-A loans. As part of that initative, Wells Fargo loosened its requirements for originating stated income loans – loans where a borrower simply states his or her income without providing any supporting income documentation... despite its knowledge that a substantial portion of its stated income loans contained misstated income, Wells Fargo failed to disclose this information, and instead reported to investors false debt-to-income ratios in connection with the loans it sold. Wells Fargo also allegedly heralded its fraud controls while failing to disclose the income discrepancies its controls had identified."
Sadly, there's plenty more. In April, federal regulators at the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) assessed a $1 billion fine against the bank for violations of the, "Consumer Financial Protection Act (CFPA) in the way it administered a mandatory insurance program related to its auto loans..."
Since 2016, the bank paid a $185 million fine for alleged unlawful sales practices where its employees created phony accounts to game an internal sales compensation system. While the bank's CEO was let go and 5,300 workers were fired due to that scandal, bad behavior and poor executive decisions seem to continue.
In August of 2017, the results of an internal investigation of auto insurance policies sold from 2012 to 2016 found that thousands of the bank's customers were forced to buy unneeded and unwanted auto insurance.
The latest incident raises more questions:
- How does a "software glitch" go undetected and unfixed for five years -- or longer?
- Where was the quality assurance and software testing processes?
- The post implementation audits failed to detect errors?
- Were any employees reprimanded, demoted, or fired? And if none, why?
- What specific changes are being implemented to prevent future software glitches?
- How will the damaged credit histories of foreclosed homeowners be repaired?
Often, all or a portion of the settlement agreements are tax deductible. This both lessens the fines' impacts and shifts the burden to taxpayers. I hope that as regulators pursue solutions, tax-deductible settlements are not repeated. What are your opinions?