Wells Fargo Senate Hearing Summary 9/20/16

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1 Wells Fargo Senate Hearing Summary 9/20/16 Committee on Banking, Housing and Urban Affairs Hearing: An examination of Wells Fargo s Unauthorized Accounts and Regulatory Response SENATORS ATTENDING: Republicans Chairman Richard Shelby (AL) Sen. Mike Crapo (ID) Sen. Bob Corker (TN) Sen. David Vitter (LA) Sen. Patrick Toomey (PA) Sen. Dean Heller (NV) Sen. Tim Scott (SC) Sen. Jerry Moran (KS) Democrats Ranking Member Sherrod Brown (OH) Sen. Jack Reed (D) Sen. Chuck Schumer (NY) Sen. Robert Menendez (NJ) Sen. Jon Tester (MT) Sen. Jeff Merkley (OR) Sen. Elizabeth Warren (MA) Sen. Heidi Heitkamp (ND) Sen. Joe Donnelly (IN) PANEL I WITNESS LIST: John Stumpf, Chairman and CEO, Wells Fargo & Company MEMBER OPENING STATEMENTS Chairman Richard Shelby (R-AL) began by highlighting that 5,300 employees were terminated as a result of the possible fraudulent opening of 2 million deposit and credit card accounts. He noted that Wells Fargo has agreed to set up a $5 million remediation fund for consumers and pay nearly $185 million in fines to the CFPB. Further, he noted there were reports of employees under intense pressure to meet ambitious sales goals for financial products which led to questionable cross selling practices. Ranking Member Sherrod Brown (D-OH) commended the OCC and CFPB for bringing light to the questionable activity and was very critical of Wells Fargo, claiming that it did not treat the situation seriously until the issue was written about in newspapers. He stated that low-paid employees opened fraudulent accounts to keep their jobs and pay the salaries of executives, expressing disappointment that senior executives were not held accountable. Brown also broadened his criticism to the banking industry writ large, stating that the biggest banks have not learned the lessons of the crisis and that bank culture must change to hold executives accountable and to better protect customers. WITNESS OPENING STATEMENTS 1

2 John Stumpf, Chairman and CEO, Wells Fargo In his testimony, Stumpf apologized, stating that Wells Fargo had failed in its responsibility to customers, team members, and the American public, commenting that wrongful sales practices go against the firm s core principles, ethics, and culture. Stumpf said he accepted full responsibility for the misconduct and that the Board of Directors has the tools necessary to hold senior management accountable. Stumpf outlined three initiatives to address the current issue: (1) expanding the scope of account review and remediation to 2009 and 2010, (2) contacting every customer across the country to see if they would like to continue using their existing products, and (3) notifying customers via about the opening of new accounts within an hour after they re opened. Stumpf stated Wells reduced sales goals in 2012, implemented corporate-wide oversight of sales practices in 2013, and revised incentive-based compensation plans in 2014 with the complete elimination of sales goals in He highlighted the results of a PwC audit that found approximately 2% of accounts, 1.5 million deposit accounts and 565,000 consumer credit cards were identified as possibly fraudulent accounts. PwC found that 115,000 of those accounts incurred $2.6 million in fees that have been refunded to consumers. QUESTION AND ANSWER Timeframe Chairman Richard Shelby (R-AL) and Ranking Member Sherrod Brown (D-OH) began their question and answer sessions by inquiring about a specific timeline as to when senior management was notified about the unethical activity. Stumpf stated that he was notified in 2013 and that early on, the issue was contained and dealt with at the regional level and stressed the issue only impacted 1 percent of all people and accounts. Sen. Brown asked whether Wells Fargo s investigation will extend back further than 2009 as the company s emphasis on cross-selling dates back to their acquisition of Norwest Bank in 1998, but Stumpf could not guarantee investigations into previous years. In response to questioning from Sen. Jack Reed (D-RI), Stumpf stated they informed their primary regulator, the OCC in 2013 whereas the CFPB became involved in Accountability & Clawbacks Chairman Shelby, Ranking Member Brown, Sen. Reed, and Sen. Corker were all interested in how Wells Fargo plans to hold former executive Carrie Tolstedt accountable for her actions, with Sen. Corker stating it is almost malpractice from a public relations standpoint not to invoke some degree of clawbacks. Stumpf stressed that any decision regarding the compensation of Tolstedt would be subject to approval of the company s board. Stumpf clarified that he is not able to make any decisions regarding clawbacks of any sort of compensation, and that the Human Resources Committee of the Wells Fargo board determines compensation of executives. Stumpf concluded there is no question Wells Fargo violated consumers trust. Sen. Brown stressed concern that most of the terminated workers were low-wage workers, while Stumpf stressed that most of the terminated team members had good paying jobs. 2

3 Sen. Elizabeth Warren (D-MA) called Stumpf s leadership gutless and called for his resignation. Further, Sen. Warren asked whether any money was returned or if any senior executives were fired as a result of these unethical practices, to which Stumpf replied no. Sen. Warren alleged that Stumpf s definition of accountability is blaming low-wage workers and again called for criminal investigations by the Department of Justice and the Securities & Exchange Commission. Consumer Credit Scores Many Senators, including Sens. Brown, Crapo, Scott, and Tester, expressed concern over the additional adverse impact opening of accounts and credit cards, as well as unpaid fees, would have on consumers. Stumpf replied that the company would make it right but did not provide details on how consumers whose credit had been negatively affected and therefore led to higher interest rates would be made whole. Stumpf reiterated the efforts Wells Fargo is taking to call each consumer to ask inquire whether or not they d like to keep their credit card account. Cross-Selling Sen. Patrick Toomey (R-PA) and Sen. Elizabeth Warren (D-MA) slammed Wells Fargo for their aggressive cross-selling of financial products. Toomey stated that Wells Fargo s practices are fraud, not cross-selling. He asked whether or not Stumpf believed his employees committed fraud, to which Stumpf stated his employees were responsible for committing ethics violations and those employees have no place in their company culture. Sen. Warren blasted Wells Fargo for setting unattainable product goals and asked if cross-selling is about pumping up their company s stock price as he has mentioned in multiple earnings calls and alleged that Stumpf himself garnered approximately $200 million as a result. Stumpf replied that his company s stock price is not the primary goal of cross-selling. Moreover, in response to questioning from Sen. Reed, Stumpf replied that he would rather have a customer with two products they need and value rather than four products they do not need. Arbitration Sen. Brown criticized Wells Fargo for the use of mandatory arbitration in settling disputes with consumers about possible fraudulent accounts. Ranking Member Brown asked Stumpf if Wells Fargo will require consumers to use mandatory arbitration. Stumpf was not sure and noted he would discuss the issue with his legal team. Complaint Database Sen. Warren asked Mr. Clark if the CFPB s complaint database was helpful during the city of Los Angeles investigation. Mr. Clark responded that the CFPB s complaint database was very helpful. SBA Loans Sen. David Vitter (R-LA) questioned Stumpf about the potential for unethical business practices in other parts of Wells Fargo particularly as the company is the largest provider of 7A SBA loans. Stumpf noted that there are no product goals in any of Wells Fargo s other businesses. Too Big to Manage 3

4 Sen. Vitter asked whether the scandal is proof that a business like Wells Fargo is too big to manage. Stumpf responded that this was a problem of focus, not size. Sen. Joe Donnelly (D-IN) noted that the fraudulent account practices went on for five years before they were addressed, and also expressed concern that the bank too big to manage, while Sen. Jon Tester argued that every time Stumpf states that 5,300 people were fired, he is giving ammunition to people who favor breaking up the big banks. CFPB Sen. Chuck Schumer (D-NY) praised the CFPB for their investigatory work. He noted that this case exemplified why the CFPB should exist. When asked about the value of the CFPB and OCC, Stumpf replied we share the mission of all our regulators. Panel II Witness List The Honorable Tom Curry, Comptroller of the Currency, Office of the Comptroller of the Currency The Honorable Richard Cordray, Director, Consumer Financial Protection Bureau Mr. James Clark, Chief Deputy, Office of the Los Angeles City Attorney OPENING STATEMENTS Comptroller Tom Curry s opening statement: Comptroller Curry began stating the practices of Wells Fargo are outrageous, arguing that the continued application of the OCC s heightened standards for large banks will help prevent this behavior in the future. He pushed for the need to finalize the interagency incentive compensation rule, which he said will provide direction to the application of incentive programs including clawbacks and forfeiture to hold executives accountable. Director Cordray Opening Statement Director Cordray stated that Wells Fargo engaged in abusive conduct towards its consumers, and that as one of the largest banks, it is in a position to lead by example. He proffered that much of bank growth has occurred through cross selling, stating there is a right and wrong way to do that. Incentive compensation structures can motivate positive behavior, but it needs to be monitored so that it does not harm consumers. Timeline Director Cordray was very direct in stating that the CFPB learned about the opening of fraudulent accounts through its sources, however, warned banks about trying to divide regulators by selfreporting to one before the other. This was in reference to the fact that Wells reported the fraudulent behavior to the OCC in 2013, long before the CFPB was involved in Arbitration Sen. Brown asked whether banks are required to self-report when they uncover fraud in their business, to which Director Cordray responded it is not legally required, but it is a best practice. In response to questioning regarding arbitration, Director Cordray stated that he believed that these financial products were subject to arbitration clauses, however, in cases like this he believes that 4

5 the best relief is through a class action. Sen. Warren stated that arbitration clauses make it easier for Wells Fargo to get away with scamming customers and applauded the CFPB s proposed rule to forbid forced arbitration clauses at financial institutions. CFPB Appropriations In response to questioning from Sen. Menendez regarding efforts to subject the CFPB to the appropriations process, Director Cordray stated, the appropriations process would undermine our independence and make it harder to protect consumers. Cross Selling Comptroller Curry stated that the OCC will be undergoing horizontal examinations at mid and large sized banks supervised by the OCC to examine those institutions incentive compensation structure. To which, Director Cordray stated the CFPB will also be undertaking exams to determine appropriate incentive plans and cross-selling. 5