Did CFPB Hit Wells Fargo Its Reputation Harder Than Its Wallet?

Wells Fargo certainly has had a lot of bad publicity — and fines — over the past six years.

The series of scandals it is trying to overcome kicked off in 2016, when it paid $185 million in fines for opening unauthorized deposit and credit card accounts in customers’ names. Then came a $1 billion settlement with regulators in 2018 over improper auto-loan insurance and mortgage practices. Just months later there was a $2.1 billion settlement with the U.S. Department of Justice for incorrectly denying mortgage modifications, including for 400 homeowners who subsequently suffered foreclosure. And it agreed to pay a whopping $3 billion in 2020 to resolve criminal and civil investigations into its past sales practices.

But the latest headlines have heralded the biggest financial hit so far: “Wells Fargo to pay $3.7 billion for mistreating customers,” reads one.

The initial news does look bad, in part because the numbers are so large. Wells Fargo’s $1.7 billion fine is the largest one levied in the Consumer Financial Protection Bureau’s history, and the bank must pay out an additional $2 billion in redress to consumers who have been harmed. Analysts expect the bank also will have to sock away billions more for future claims, fines and legal expenses.

Is this the end for Wells Fargo? Hardly. But surely it will pay a huge price? Not necessarily. Won’t its reputation suffer? It depends. What lessons will it learn? Too early to tell.

But there are lessons to learn.

There are also steps Wells Fargo — and any financial institution facing negative publicity — can take, with an eye to repairing relationships with key audiences and reviving a tarnished brand.

Taking a Closer Look at Wells Fargo’s Regulatory Turmoil

The CFPB settlement was announced in late December 2022. It resolves charges that the bank improperly denied mortgage modifications, caused unwarranted foreclosures, illegally repossessed cars, froze bank accounts, assessed unexpected fees that may or may not have actually been due, and hung onto unused insurance product payments rather than refunding them. More than 16 million consumer accounts were affected.

Wells Fargo agreed to the settlement without admitting guilt. However, President and Chief Executive Officer Charlie Scharf issued a statement — in his name rather than in the generic name of the bank — saying that Wells Fargo and its regulators had identified “a series of unacceptable practices” that it has been working to change. “This far-reaching agreement is an important milestone in our work to transform the operating practices at Wells Fargo and put these issues behind us,” he said.

That certainly sounds a lot like, “Yeah, we did it.”

But it’s worth noting that, at the same time, the CFPB terminated a 2016 consent order and provided a path toward terminating a 2018 consent order. So Scharf has some basis for his hopeful comment about Wells Fargo getting past its issues.

Will the bank’s reputation and business suffer? Multiple fronts have to be considered.

Banking is one of the most highly regulated industries — proof that piling on rules does not guarantee obedience. So, regulators are a key audience here.

Investors are as well. After all, they put the money in to create, expand and run the business. Customers should be in the top tier of key constituencies, as should employees, who are responsible for doing the remedial work.

There is another important component of that top tier too. Virtually all the community banks my firm works with would have their local communities at the very top of the list of key audiences. Money-center banks tend to partner with large, brand-name charities and various civic organizations, which also are part of the community constituency.

Now, let’s get more specific. Far and away, regulators and other government agencies have to be the most important audience for Wells Fargo right now. There are hordes of them, and they have served notice that they are looking at the bank as the poster child of bad business behavior.

How do we know? They’ve told us.

“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,” CFPB Director Rohit Chopra said when announcing the $3 billion settlement in December.

A stated goal for Chopra is to come down hardest on repeat offenders. His intention is to work with other federal banking regulators in the coming year to further punish Wells Fargo for being, as he put it, a “corporate recidivist.”

Other federal officials are conducting their own probes as well. In September, the bank was ordered to pay $22 million for allegedly firing an executive who tried to report that employees had committed or been instructed to commit wire fraud, price fixing and falsification of customer information. This enforcement action was from the Labor Department, which is also investigating complaints of employees being harassed and forced to open unauthorized accounts to meet sales goals.

Read More:

Investors See Beyond CFPB’s Headline Grab to Brighter Future

What about investors? Are they spooked by the huge settlement? Apparently not.

Although Wells Fargo’s stock fell somewhat — it is down 14% for the year, including the 1.5% drop in reaction to the CFPB settlement — investors have read beyond the headlines. In fact, Jason Goldberg, senior equity analyst at Barclays, told CNBC that with the latest regulatory developments and performance improvements, it seems like “the bulk of the issues are in the rearview mirror.”

The fines and restitution of $3.7 billion turn out to be manageable. After taxes, Wells Fargo is still expected to be profitable in the fourth quarter. In addition, analysts at Jefferies and elsewhere noted that they expect the amount Wells Fargo sets aside for future penalties will decline compared with past amounts.

“The bulk of the issues are in the rearview mirror.”

— Jason Goldberg, Barclays

My late father, an ophthalmologist, had a number of pithy mottos. One that fits the Wells Fargo situation: “It’s better to be lucky than smart, but the trick lies in knowing the difference.”

Beyond the analysts’ post-settlement outlook, Wells Fargo got lucky, in the bigger picture. Unlike other banks, it doesn’t face the need to raise additional capital because of what’s called the “global systemic risk score.” Without diving into the minutia, this is an unintended gift from the Federal Reserve, which has been requiring the bank to operate under what’s called a “penalty asset cap.” (Some think the impact this measure had on Wells Fargo’s deposit strategy may actually produce a performance tailwind in 2023.)

And, if you thought higher interest rates were bad, you may be surprised to learn that’s not the case for everyone. The bank will pick up significant gains in earnings for every percentage point rise in interest rates.

These facts have made Wells Fargo a top performer among bank stocks. In fact, a CNN Business canvas of bank analysts in late December 2022 projected a median stock price increase over 2023 of 33.1%.

So, Wells Fargo got lucky. But did the bank get smart yet?

See all of our latest coverage on bank culture.

Wells Fargo Should Get Smarter About Customer Communication

The first thing to look at is how Wells Fargo has explained itself to customers getting restitution. In 2019, the bank announced a major rebranding campaign as a way to mark what was supposed to be closure around the allegations of opening unauthorized accounts. I thought they had missed an opportunity.

At the time, I was just paying off a Wells Fargo home equity loan and, as I noted in The Financial Brand‘s article about the rebranding, the bank representative was professional and friendly but never took the opportunity to say something like: “Thank you for giving us a chance” or “We want to live up to our promise to our customers.”

Restitution Sets Up Fresh Opportunity:

Wells Fargo's current round of restitution could be a chance to communicate about the future with customers not only in writing but also with video, website messages and possibly social media.

This is a moment to channel my alma mater, Columbia Business School, to ask some basic questions: What is Wells Fargo’s business model? Does the bank provide products and services to customers in a manner and at a price that allows them to attract investors and fund the operation of the business and to recruit and retain the trained employees necessary?

The answers to the above questions are affirmative. Analyses from BusinessInsider and NerdWallet identify Wells Fargo as having 16,000 ATMs; more branches than competitor JPMorgan Chase (4,800 versus 4,000); lower monthly fees and minimum balance requirements; and “easily manageable checking accounts.”

The internet provides a prospective customer with dependable comparative information. One has to do a lot of searching through this type of info before encountering the question, “What is Wells Fargo in trouble for?” And even then, it only yields four or five laconic lines about the CFPB settlements.

Is the bank providing these products and services at a price that generates enough revenue to attract investors? Clearly yes, particularly if the Jefferies analysts are correct.

Now we get to the seemingly throwaway phrases in my questions about providing service, things like “in a manner” and by “trained employees.” As far as we can tell, no one in the C-suite sent out an email saying, “Here’s our chance to make some extra funds. Go ahead. Stick these fees on.”

The Office of the Comptroller of the Currency is trying to hold several former executives accountable, but it’s hard to believe they jumped out of bed and said, “I’m going to break the rules today!” This seems to be a question of past leadership and probably of how financial incentives were handed out to — and by — top executives. (Indeed, there was a widespread industry reckoning with sales practices and incentive structures after the initial scandal at the bank hit.)

This is the real challenge for Wells Fargo: Can management develop and instill throughout the company a real mission of servant leadership recognizing that this doesn’t come just from a pep-talk email from the CEO?

Read more about Wells Fargo:

Critical Steps Wells Fargo Needs to be Taking

Such direction has to come from discussions and observations over months and years of how the top people behave versus what they say. CEO Scharf characterizes this task as a commitment “to transform the operating practices” at the bank. Wells Fargo is already well underway in doing that. But, ultimately, the problem is not solely about operating practices. The bank’s real challenges lie in culture and leadership.

A common practice when big organizations get into regulatory trouble is to hire an outside law firm or consultant, pay them seven or eight figures, and have them produce a report. This checks all the boxes. Such efforts produce a weighty document from a third party to show to regulators. However, it’s unlikely to bring about the desired results.

So what can Wells Fargo do? I’d suggest taking a lesson from Marc Shapiro when he was CEO of what was then Texas Commerce Bank.

Texas Commerce embarked on a drive for companywide transformation. The goal was to identify millions of dollars of cost savings but also to examine how the bank provided products and services and recruited, trained and deployed staff.

Shapiro decreed that the bank would put a spotlight on itself. It set up internal teams with minimal outside expertise, aside from firms that were already working with the bank (mine was one).

The Texas Commerce effort involved a cultural shift and that’s part of what Wells Fargo must demonstrate. If the bank’s not already doing the following, here are the types of efforts Scharf could be implementing:

• Empower, train and encourage Wells Fargo executives to be brand ambassadors and to talk to as many groups as possible about how banking benefits the community.

These brand ambassadors would have to do a lot of listening — and they would have to learn how to respond to criticism and complaints.

That’s the price in order to get the opportunity to re-introduce the Wells Fargo brand.

• Set up a way to collect stories of employees who have gone above and beyond their job descriptions to reach out to customers and help them.

Vet, share and tell the stories. Do the same to collect such examples from customers.

• Find strong examples to emulate. Learn how companies like FedEx and Mary Kay made storytelling a part of their culture, and just as importantly, how they lived up to the values embedded in these stories versus just paying them lip service.

Cultural Change Takes Engaged Leadership:

The CEO and other top executives have to be everywhere, cheering people on and telling stories about successes. They have to become adept at using humor and props and embrace every other way of engaging employees.

This kind of long-term, hands on, internal effort is necessary because what Wells Fargo faces isn’t a short term challenge and can’t be addressed with an off-the-shelf initiative. An effort with such an extended duration is possible because the bank’s underlying business model appears to be sound.

Just as important, this cultural work will create a virtuous circle, where customer-facing employees can provide credible proof of how they are serving people, and actual customers can provide stories of how the bank is truly helping them.

And that’s the piece that can’t be skipped or just validated with aggregate statistics. Wells Fargo needs real people talking about real experiences.

Again, it takes time, but it can work, and if the bank invests in and commits to this, it will be not only lucky, but smart.

About the author
Before founding Spaeth Communications in 1987, Merrie Spaeth was a producer for ABC’s 20/20, a speechwriter for William S. Paley, the founder and chairman of CBS, and was assigned to FBI Director Judge William Webster while serving as a White House fellow. All of this culminated in her roles as director of public affairs for the Federal Trade Commission, and ultimately her appointment as director of media relations at the White House in the Reagan Administration. Her firm works extensively with banks and credit unions of all sizes as well as with state bankers associations.