wsj.com | November 4, 2016
By Emily Glazer
Bank also says range of possible litigation losses related to separate probe rose to as much as $1.7 billion in third quarter
Wells Fargo & Co. is in talks with a group of federal and state prosecutors examining potential abuses related to mortgages as it continues to grapple with investigations and public outrage from its sales-practices scandal.
The bank disclosed in its most recent quarterly securities filing posted Thursday that it is in discussions with the Residential Mortgage-Backed Securities Working Group of the Financial Fraud Enforcement Task Force. That group, which includes the Justice Department, has levied billions of dollars in fines on other big U.S. banks, including a $16.65 billion payout from Bank of America Corp. and $13 billion from J.P. Morgan Chase & Co.
A number of big, European banks are also in negotiations with the Justice Department related to how mortgages were bundled and sold. Germany’s Deutsche Bank AG initially was told it would have to pay $14 billion, The Wall Street Journal has reported, but it now appears any settlement could be far lower.
A Justice Department spokesman declined to comment on the discussions.
The RMBS task force has raised “potential theories of liability” with Wells Fargo related to certain mortgage practices, according to the bank’s filing. The bank had said in previous filings that it was responding to requests for information from government agencies related to the origination, underwriting and securitization of certain mortgages. The bank has produced documents for the Justice Department, but people familiar with the matter have previously said the process wasn’t progressing.
“Other financial institutions have entered into settlements with these agencies, the nature of which related to the specific activities of those financial institutions, including the imposition of significant financial penalties and remedial actions,” Wells Fargo said in its most recent filing.
Wells Fargo didn’t disclose by how much it had increased litigation reserves during the quarter. It did say, though, that its range of possible litigation losses in excess of its “probable and estimable losses” rose to as much as $1.7 billion in the third quarter, up $700 million from the prior period. The bank said this increase was due to “a number of matters.”
Wells Fargo also confirmed in its latest filing that the Securities and Exchange Commission is one of the federal and state agencies probing matters related to its sales practices. The San Francisco-based bank didn’t specify what the SEC is examining, but the disclosure follows a Wall Street Journal article Wednesday that the agency is in the early stages of inquiries related to whether Wells Fargo violated rules around investor disclosures and other matters relating to its recent sales tactics scandal.
That resulted in a $185 million fine in September and a raft of other federal and state investigations, including the Justice Department.
The SEC sent requests for information to the bank asking for documents in recent weeks, following three Democratic senators’ calls in late September for the SEC to investigate whether Wells Fargo misled investors and violated whistleblower protections while allegedly engaged in illegal sales practices, The Wall Street Journal reported.
Wells Fargo has said it is working to restore trust with customers, employees and shareholders and is in the process of refunding impacted customers.
Separately on Thursday, Wells Fargo Chief Executive Timothy Sloan appeared for the first time at an investor conference since assuming the top position after former chief John Stumpf abruptly retired last month. In his remarks, Mr. Sloan said the bank would continue to emphasize cross-selling across the bank, or the practice of trying to sell customers multiple products.
“We’re not abandoning our cross-sell focus,” he said. “There’s nothing wrong with cross-sell done right.”
But Mr. Sloan did say the bank’s management team, especially new retail banking head Mary Mack, is concerned about “the risk of overcorrecting.” He acknowledged that Wells Fargo needs to make changes to correct mistakes made.
Wells Fargo in its securities filing also added the “negative effects” from its retail banking sales practices to its list of risks and uncertainties. In particular, the bank highlighted its “ability to engage in certain business activities or offer certain products or services, our ability to keep and attract customers, our ability to attract and retail qualified team members, and our reputation.”
In the filing, the bank gave updates on matters relating to its cross-selling ratio, or how many households are using different Wells Fargo products or services. Wells Fargo also said that although it found as many as 2.1 million accounts could have been opened improperly in the sales-practices scandal, the bank’s monitoring and removal of inactive accounts was ongoing and didn’t impact the cross-sell metric at any one time. The maximum impact those accounts had to the metric in any one quarter was 0.02 products per household, or 0.3%.
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