Wells Fargo engaged in unfair and deceptive practices, failed to properly manage risks and hasn't set aside enough money to pay back the customers it harmed, according to a confidential report by federal regulators.
The report, prepared by the Office of the Comptroller of the Currency and reviewed by The New York Times, criticizes Wells Fargo for forcing hundreds of thousands of borrowers to buy unneeded auto insurance when they took out a car loan, as well as its handling of the problems once they were detected.
The regulators' report, sent to the bank this week, is preliminary. Still, it represents the latest blow to the reputation of Wells Fargo, America's third-largest bank and one that was once regarded as being among the best run in the country. The bank is still trying to recover from a scandal in which its employees created millions of credit card and bank accounts that customers had not requested, eventually leading to the ouster of the bank's chief executive and millions of dollars in regulatory fines.
The comptroller's findings could have a significant impact on the bank. The report stated that Wells Fargo had most likely underestimated how much it would cost to reimburse harmed customers. And it could force the bank to curb, or at least more closely monitor, its practices across the entire company.
Wells Fargo's improper auto insurance practices came to light in July, after The Times obtained an internal report prepared for the bank's executives. That analysis showed that more than 800,000 people who took out car loans from Wells Fargo were charged for auto insurance they did not want or need, typically because they already had coverage.
That internal report said the costs of the unneeded insurance, which covered collision damage, had caused some 274,000 Wells Fargo customers to fall behind on their car loans, and almost 25,000 vehicles were wrongly repossessed. Customers on active military duty were among those hurt by the practice.
In the comptroller's report, regulators said management at the bank's auto loan unit, Wells Fargo Dealer Services, had ignored signs of problems in the business such as consumer complaints, focusing instead on sales volume and performance. The report described its management of compliance risk — essentially the ability to abide by regulations and best practices — as "weak." It noted that Wells Fargo in 2015 had characterized the risks associated with this business as "low."
Wells Fargo has set aside $80 million to compensate the 570,000 customers it said were harmed by receiving auto insurance they didn't want. The comptroller's office said that the amount was inadequate and that the bank might have to pay out substantially more as additional victims were identified — partly because Wells Fargo's analysis of how much money it needed to set aside excluded many years when the insurance was being imposed.
The report does give Wells Fargo's management credit for taking action after identifying the problems at the auto loan unit, such as hiring legal and consulting firms to assess customer harm, changing staff at the operation and notifying regulators.
The comptroller's findings are likely to affect how Wells Fargo does business, not just in the auto lending operation but across the bank. The comptroller's office said it would require Wells Fargo to ensure that all of its business units had effective systems in place to identify and prevent risky practices.
Catherine Pulley, a Wells Fargo spokeswoman, said in a statement that the bank had made significant changes in recent months to strengthen controls and oversight of insurers and outside vendors with which it does business.
"We are also working to enhance our customer care program and improve complaints resolution," she said. "We will continue to work with regulators on the remediation and make improvements to our auto lending business to build a better Wells Fargo."
Wells Fargo stopped the auto insurance program in September 2016.
Once the Office of the Comptroller of the Currency makes its findings formal, Wells Fargo will have time to correct the problems. A spokeswoman for the comptroller's office declined to comment on the report.
The report did not mention penalties or fines. The comptroller can impose penalties for violations of laws or unsound business practices in an attempt to deter violations and encourage corrective measures.
Last year, the comptroller's office came under scrutiny for its own failures to supervise Wells Fargo. A report in April by the office's ombudsman concluded that the agency "must continue our efforts to improve and refine the agency's supervisory program, to sharpen our early warning processes, and to enhance our supervisory capabilities."
The comptroller's review of Wells Fargo's auto lending and insurance practices has been underway for several months.
The report paints a damning picture of a bank that didn't monitor its contractors, that lacked the impetus to correct problems once they were uncovered and that proved unresponsive to complaints from its customers.
For example, the comptroller cited extensive lapses in Wells Fargo's oversight of National General, an insurer with which it had contracted to underwrite the auto insurance. National General was not obligated to — and did not — alert Wells Fargo to customer complaints about the unneeded insurance, the report said.
And when auditors at Wells Fargo detected and then flagged problems with National General in 2015, the comptroller's office said, the bank didn't act on those concerns promptly.
Christine Worley, a spokeswoman for National General, disputed elements of the report. "We believe that our customer service in this area was handled in a timely manner," she said in a statement. "We work closely with our financial institution clients and advise them of complaints on a regular basis."
The bank's lapses in handling consumer complaints and managing vendors are not new. Regulators in recent years had ordered Wells Fargo to improve its oversight in both areas.
Wells Fargo's ability to track consumer complaints efficiently, for example, had been part of a 2015 compliance-improvement plan at the bank, the report noted. And a so-called consent order in 2011 between Wells Fargo and the comptroller's office involving the bank's mortgage foreclosure operations required it to establish a more effective program to manage its relationships with outside companies and contractors.
The comptroller's office also concluded that the bank's plan to compensate customers who were harmed by the improprieties was insufficient. When calculating potential damages, the bank limited its payments to customers who were affected beginning in January 2012 and extending to July this year. But the auto insurance program has been in place for almost 12 years, and the bank didn't calculate potential damages caused for much of that period.
"The number of customers harmed in this time period could be substantial," the report said.
Wells Fargo also used "an overly complicated reimbursement methodology which lacked clear support for addressing all the customer costs incurred," according to the report.
Wells Fargo's auto insurance practices violated a section of the Federal Trade Commission Act that prohibits unfair or deceptive acts in commerce, the report said. For example, the bank did not break out the insurance costs embedded in car loans; rather, it included the amounts owed on the unneeded coverage in the monthly payments. Had borrowers known what the cost increases were for, the comptroller's office said, they could have taken action more quickly to avoid harm.
Even when Wells Fargo borrowers notified National General that they already had car insurance, they had trouble reversing the erroneous charges. The comptroller office's review of loan files and consumer complaints showed that Wells Fargo's customers often had to submit proof of coverage multiple times before the coverage was canceled.