Banking and Finance Law Daily Wrap Up, OVERSIGHT AND INVESTIGATION—House Committee reprimands CFPB for failures in Wells Fargo fraud investigation, (Sep 20, 2017)

By Annie J. Matonis, J.D.

The House Financial Services Committee just released its second Interim Majority Staff Report regarding the CFPB’s handling of the Wells Fargo scandal, and it is a doozy. The Report slams the CFPB and its Director Richard Cordray for failing to comply with the Committee’s repeated requests for documents related to the Wells Fargo investigation, especially a crucial Recommendation Memorandum which the CFPB withheld from the Committee for over a year. The Committee’s report also chastises the CFPB for settling for pennies on the dollar without a valid explanation, not conducting its own investigations of the fraud, failing to act until the Los Angeles Times publicly censured the bank, and then covering it all up.

A Recommendation Memorandum is a document presented to the Director containing analysis of the legal and factual components of an enforcement matter, along with a recommendation to either sue or settle and appropriate valuations for each option. The Committee now has the CFPB’s Recommendation Memorandum for the Wells Fargo investigation, and it is a smoking gun.

Considering there were two million known violations of the Consumer Financial Protection Act (CFPA), and the lowest-tier statutory penalty at the time was up to $5,347 per violation, the most conservative penalty the CFPB should have imposed upon Wells Fargo would have been in excess of $10 billion. Mitigating factors would not justify any significant reduction of the penalty, and the CFPB’s Enforcement Division stated that it saw "no significant risks" in litigation, as the facts underlying the violations were undisputed and the CFPB’s claims are straightforward applications of the Bureau’s authority.

However, despite the CFPB’s apparent slam-dunk case, Director Cordray approved a settlement with Wells Fargo for a mere $100 million—one cent on the dollar of the CFPB’s own conservative settlement estimate and less than half a percent of the bank’s 2015 earnings. Why? The CFPB doesn’t appear to have a good explanation.

The Committee suggests one possibility: the CFPB might have acted to preserve its reputation. "Had the CFPB not settled in time to announce a joint enforcement action with both the Los Angeles City Attorney’s Office and the Office of the Comptroller of the Currency (OCC), that failure might raise difficult questions about whether the CFPB had failed to discover the widespread fraudulent sales account practices at the bank in spite of its ongoing supervision and examination activities."

The Recommendation Memorandum actually states that the CFPB’s Enforcement Division opened its enforcement investigation in response to the L.A. Times articles and the complaint filed by the Los Angeles City Attorney’s Office, and not the CFPB’s own investigative work or supervisory activity. This was echoed in comments made by CFPB Deputy General for Oversight and Litigation John Coleman on a letter drafted by Director Cordray—Coleman warns that Cordray’s statements could prompt a request for the CFPB’s decision memo, a memo which apparently begins by stating: "We opened this matter in March following media reports and a lawsuit by the Los Angeles City Attorney…"

Neither that statement nor a series of timelines circulated in advance of Director Cordray’s Congressional testimony give much credence to Cordray’s earlier statements that the CFPB was actively tracking the Wells Fargo fraudulent branch sales practices since receiving whistleblower tips in mid-2013. The Report offers a lengthy discussion of these matters, but, in short, while it appears there was perhaps a 2013 whistleblower tip, it wasn’t pursued by CFPB Supervision or Enforcement at the time.

The whistleblower tip wasn’t the only thing the CFPB may have failed to investigate. The Recommendation Memorandum also indicates that, despite the possibility of other statutory violations (TILA, TIFA, EFTA, GLBA), the Bureau saw "little upside" in continuing to investigate them, as they appeared to be "less pervasive and less egregious" than the CFPA violations. The Committee questions why the CFPB failed to investigate these potential violations.

The Committee similarly criticized the CFPB for relying on third party numbers regarding the number of unauthorized credit cards, debit cards, online banking profiles, and deposit accounts. The numbers came from Wells Fargo, the Los Angeles City Attorney, and PricewaterhouseCoopers (in a report paid for by the bank). In its Report, the Committee repeatedly notes that it is unclear whether the CFPB ever "independently and comprehensively" investigated the number of fraudulent activities at all. If the CFPB had, in fact, investigated these matters, why not provide the information?

The Report also includes an exhaustive timeline of the Committee’s repeated requests for internal CFPB documents related to the Wells Fargo investigation and the CFPB’s refusal to cooperate, even after the Committee subpoenaed the records. It took over a year for the Committee to get the Recommendation Memorandum from the CFPB.

The Committee understandably finds itself wondering what else the CFPB might be hiding, stating that the investigation raises "grave questions as to whether Director Cordray, other senior CFPB officials, and CFPB oversight attorneys engaged in actions that had the effect of obstructing the Committee’s lawful oversight related to the Wells Fargo fraudulent account scandal." It remains to be seen which of these questions will be answered.

Companies: Wells Fargo

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