In January, Wells Fargo announced a one-time benefit from the Tax Cuts and Jobs Act of $3.89 billion. With the 40 percent cut in the corporate-income tax, Wells could write down the cost of its deferred tax liabilities—money it owed down the road to the government. So with the stroke of a pen, Donald Trump made Wells Fargo $3.89 billion richer.
The benefits didn’t end there. In the first quarter of this year, Wells Fargo enjoyed a drastically reduced effective income-tax rate of 18.8 percent, down from 27.5 percent a year earlier. That produced a $636 million savings, on top of the $3.89 billion. Wells Fargo’s Q1 income would have declined year-over-year were it not for the tax law.
When you put Wells Fargo’s ongoing tax bounty against Friday’s $1 billion fine from the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency for scamming customers on mortgage and auto loans, the penalty looks more like a kickback, worth 22 percent of what Wells Fargo has been gifted in tax savings so far. Over time that $1 billion will constitute a smaller and smaller percentage of the tax perk, more like a tip to the Trump administration—a thank-you for its generous support.
The Trump administration gets something out of it too. The Consumer Financial Protection Bureau, under the misdirection of anti-regulatory zealot Mick Mulvaney, had been criticized for not recording a single enforcement action in the 135 days since Mulvaney took over. The Wells Fargo fine, an outgrowth of a defensive tweet from the president in response to media reports that the case would be tossed out altogether, is intended to be the exception that disproves the rule. “We have said all along that we will enforce the law,” Mulvaney got to say in a statement. “That is what we did here.”
Except that doesn’t seem to be what Mulvaney did, because “enforcing the law” would have meant sending a criminal referral to the Justice Department for sanction against individual Wells Fargo executives. Instead, the bureau, along with the bank regulators at the OCC, settled for another fine, paid by shareholders instead of executives, ensuring that nobody in charge at Wells Fargo will see the inside of a jail cell for crimes that include what amounts to grand theft auto. Critics of the Obama administration’s approach to corporate crime fumed at a series of weak fines that created no accountability in the banking sector. The Trump administration’s alternative of one marginally bigger fine does not represent an advance.
It’s important to understand just what Wells Fargo did in this case, as described in the consent order. Regulators identified two violations: Wells Fargo charged “rate lock” extension fees to borrowers who wanted to keep their initial interest-rate quote for a mortgage, when the delays were of Wells Fargo’s own making; and the bank “force-placed” auto insurance on borrowers’ loans without telling them, in many cases causing loan defaults and repossessing the vehicles.
We’ve known about the auto-insurance abuses since at least last July, and the rate-lock extension fees since Wells Fargo self-reported last October. The CFPB had already been investigating this before Mulvaney entered the office. “Investigations that take many months or even years, and that are just now being finalized, are due to the aggressive work my team did to bring predatory behavior to light,” said his predecessor, Richard Cordray, who’s now running for governor of Ohio. “To suggest this is the work of Mulvaney, who has done nothing but throw sticks in the spokes of a talented, hardworking CFPB team of devoted public servants, is preposterous.”
The consent order unveils a significant amount of information about how Wells Fargo went about overcharging customers. On the mortgage issue, Wells Fargo brokers sold a policy that would lock in interest rates when delays were caused by borrowers. But the CFPB found internal communications showing that they were not training loan officers correctly on what to tell borrowers about the rate-lock policy. And indeed, the policy was inconsistently applied, with borrowers paying in cases where Wells Fargo was to blame for delays in mortgage processing. An extra quarter-percent in an interest rate can translate into paying thousands of dollars more over the life of a loan, giving borrowers incentives to lock in rates. Charging borrowers these rate-lock fees when Wells Fargo was responsible for the delay amounts to theft.
The auto-insurance scam was even worse. All car owners must have insurance attached to the vehicle. Wells Fargo worked out a plan with auto-loan customers whereby, if the borrower did not obtain insurance, the bank could automatically place it and charge the premiums through the loan payment. It turned out that Wells Fargo executed this force-placed auto insurance 2 million times since 2005, including hundreds of thousands of instances where the borrower already had auto insurance. Numerous other times, the borrower obtained the required insurance but Wells Fargo never canceled the force-placed policy. Even if Wells Fargo eventually canceled the policies, it failed to refund borrowers for unnecessary or duplicative insurance.
The CFPB has documentation that Wells Fargo knew about high cancellations of auto insurance placed on borrowers in error. It knew that the system for force-placing insurance was inadequate and led to hundreds of thousands of unnecessary insurance policies. Furthermore, borrowers who were unaware of the extra insurance premium got behind on payments as a result. Between 2011 and 2016, at least 27,000 car owners went into default and lost their vehicles because of a scam operation Wells Fargo ran. It’s really just stealing cars.
So the CFPB knows who received the briefings that Wells Fargo was stealing cars and ripping off mortgage borrowers. It has names on internal documents of executives who were discussing these issues. It is aware of who turned a blind eye to this scheme that impoverished people and took their cars away. Isn’t that enough to refer to the Justice Department to investigate violations of criminal laws involving theft and fraud? The CFPB cannot make its own criminal cases, but it has every authority to make a criminal referral. The bureau declined to comment on whether it did refer the case to the Justice Department.
Critics of the culture of no accountability on Wall Street have clamored for this level of justice since the financial crisis. Nobody was demanding a relatively higher fine, even one that could be termed as the largest fine in the CFPB’s history. The belief is that the only way to truly hold top bankers accountable would be to make them feel the consequences of their actions. That’s what happened to a small degree earlier this year, when the Federal Reserve relieved Wells Fargo board members of their jobs. And the OCC’s consent order with Wells Fargo gives that agency the power to fire executives or board members in the future, a direct consequences of the Fed’s bold action.
But the real sanction for criminal activity should be a criminal sentence. Wells Fargo merely had to pay back some of its tax benefits. It even booked this charge in the first quarter, retaining a net profit of $4.7 billion. And the CFPB may not be able to bring a case like this in the future, as a bipartisan bill in Congress would strip it of oversight of certain insurance products, like car insurance sold by a financial company.
If this is what’s considered “enforcing the law,” then the law only technically still exists.