Wells Fargo & Co. (WFC) , working to repair its brand after a fake accounts scandal, is returning $80 million to about half a million car-loan customers who were charged for vehicle insurance they didn't need.
A review prepared for CEO Tim Sloan's management team showed some 490,000 customers were charged for insurance to safeguard the San Francisco-based lender from damage to the vehicle used as loan collateral -- even though the borrowers already had the coverage the bank required, according to a statement on Thursday, July 27. The insurance issues, first reported by the New York Times, occurred from 2012 through 2017.
An additional 60,000 customers in states with specific disclosure requirements may not have been informed about the insurance by the third-party vendor that issued it, Wells Fargo said, and some 20,000 may have defaulted on loans and had their cars repossessed because of the charges.
The lender dropped 2.6% to $53.30 in New York trading on Friday. Following the fake-accounts scandal in September, the shares plunged, but they had recovered and were up 10% through Thursday, still trailing a 13% gain in the S&P 500 over that period.
"We take full responsibility for our failure to appropriately manage the collateral-protection insurance program and are extremely sorry for any harm this caused our customers, who expect and deserve better from us," Franklin Codel, head of the bank's consumer lending unit, said in a statement.
Wells Fargo has already started issuing insurance refunds and in August will send letters and checks to customers who are due additional payments.
While the bank is moving quickly to make customers whole, the discovery compounds damage to Wells Fargo's image from the creation of as many as 2 million unauthorized accounts over a five-year period by employees struggling to sell as many as eight products to each customer.
The disclosure of the accounts in a $185 million settlement with federal and local regulators last September sparked a public backlash that curbed growth in the consumer division, hammered the company's stock price and led to the abrupt retirement of then-chairman and CEO John Stumpf.
Sloan, his successor, has tried to rehabilitate the Wells brand by moving quickly to settle a class-action customer lawsuit for $142 million; overhauling leadership of the community banking division, the company's largest; and introducing a new marketing campaign, "Building Better Every Day."
Restoring customer trust is the bank's top priority, he said on earnings call this month, and Wells Fargo has more work ahead, including the completion of a third-party review of its sales practices.
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"For the overarching brand, and consumer appetite to use Wells Fargo for deposits and bank loans and things like that," issues with the auto loans are "a concern," Ken Leon, an analyst with CFRA Research, said in a telephone interview. "This is a significant bank that's trying to revamp its culture internally and also the face that it shows to the market, especially customers."
The bank's reputation has also been a concern to investors, who rebuked the board sharply at the company's annual meeting in April -- 12 of the 15 members were elected with votes of 80% or less, well below the 90% norm. Board Chairman Stephen Sanger, who led the nearly-two-hour session, garnered just 56% of support.
Earlier this month, Sen. Elizabeth Warren, a Massachusetts Democrat who's advocated for stricter regulation of banks, questioned Federal Reserve Chair Janet Yellen about why the central bank hadn't used its authority to remove directors who failed to put a halt to the fake accounts or the pay incentives that encouraged them.
"The behavior we saw was egregious and unacceptable," Yellen answered, without offering details on the Fed's oversight of the bank. "A number of actions have already been taken. We need to conduct a thorough investigation to look at the full record to understand the root causes of the problems. We are certainly prepared to take enforcement actions if they prove appropriate."
Discovering that the bank charged customers for a product for they didn't need prompted Warren to urge the central bank again on Friday to take action.
"There are surely deep risk-management problems at a bank when it opens millions of fake customer accounts" and charges thousands of customers "for a financial product they don't need," the senator wrote in a letter to Yellen.
"The Wells Fargo board is ultimately responsible for that failure, and the Federal Reserve should remove board members who served during that time period," she added. "Fines alone will never do the job."
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Updated from 11:57 p.m. on Thursday, July 27, 2017.
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