Bank regulators have given
In a regulatory filing and news release, the San Francisco bank said that the Office of the Comptroller of the Currency had given it a rating of "needs to improve" on its lending and other activities under the Community Reinvestment Act.
The rating sets up a handful of new regulatory hurdles for the bank, though analysts said the downgrade — driven in part by the bank's recent accounts scandal — is above all else a reminder that Wells Fargo will continue to deal with fallout from its bad practices for some time.
"Wells Fargo, as a result of the sales scandal, is in regulatory crosshairs," said R. Scott Siefers, an analyst with investment bank Sandler O'Neill. "There's going to be a drumbeat of events that will happen before this is finished."
The Community Reinvestment Act, or CRA, is a 1977 law that encourages banks to operate and lend in low-income and minority communities and threatens them with sanctions if they fall short.
Wells Fargo noted that this is the first time since 1994, when ratings were made public, that it has received less than an "outstanding" score for its CRA activities.
CRA ratings are usually based on whether and how much banks lend, serve and invest in their communities, including low-income neighborhoods. But Wells Fargo's downgrade had less to do with those measures and more with a recent history of bad practices.
In their report, regulators gave the bank high marks for various community development lending — such as providing financing for affordable housing. But they knocked its score down over 10 regulatory orders or settlements related to discriminatory or illegal practices — an outcome Siefers said he has never seen.
Prominent among the practices cited were the bank's recent scandal over unauthorized accounts, which led last year to a $185-million settlement with regulators and the resignation of former Wells Fargo Chairman and Chief Executive John Stumpf.
Other actions and settlements stemming from activity years earlier that was cited by the OCC include:
- A 2012 settlement in which the bank agreed to pay $125 million to black and Latino homebuyers who, regulators say, were overcharged and steered into pricey subprime mortgages.
- A 2015 deal in which the bank agreed to pay $28 million to members of the armed forces to settle allegations that the bank improperly foreclosed on them in violation of a law aimed at protecting service members.
- A 2016 settlement, announced just weeks after the bank’s settlement over unauthorized accounts, in which the bank agreed to pay $24 million over allegations that it illegally repossessed cars owned by service members.
The bank said in its regulatory filing that the downgrade could have wide-ranging implications, including limiting potential mergers and acquisitions.
Siefers said that's likely not an immediate concern for the bank, as it is not likely to pursue acquisitions for the foreseeable future.
"This would generally be a larger concern for a bank, but Wells Fargo is totally focused right now on repair — with shareholders, with customers, you name it," he said. "I don't think most people would be expecting them to be doing much in the way of M&A right now."
The downgrade also could prompt some government entities to cease or limit their business with the bank. Wells Fargo said that some public agencies have policies that restrict them from doing business with banks that have less than a "satisfactory" CRA rating.
Several city and state government entities across the country — including the state treasurers of California and Illinois — already have sought to cut off at least some of their business with Wells Fargo over the past six months following revelations that employees opened as many as 2 million accounts without customers' authorization.
The city of Seattle cut Wells Fargo out of a $100-million bond refinancing deal last year over the accounts scandal. Leaders there also voted last month to cut remaining business ties with the bank because it is one of more than a dozen banks that have loaned money to the developers of the Dakota Access Pipeline, a project opposed by environmental groups and Native American tribes.
On Tuesday, Los Angeles City Council members Mitch O'Farrell and Paul Koretz introduced a motion that would call for the city to pull public funds out of Wells Fargo securities, also in protest of the pipeline project.
Wells Fargo executives noted that the new CRA report looked at the bank's activities between 2009 and 2012 and that the bank is seeking an expedited review — and a potential upgrade in rating — based on activity after that.
"With more than four years having passed since the end of our last CRA evaluation period, Wells Fargo intends to ask the OCC to accelerate the timing of its next exam so that we may continue to serve most effectively the low- and moderate-income communities in which we operate," Wells Fargo CEO Tim Sloan said in a statement Tuesday.
Bryan Hubbard, a spokesman for the OCC, said he could not comment on why Wells Fargo's report was so long in coming. In a speech in December at a conference of housing lenders, Comptroller of the Currency Thomas Curry noted that his agency has a backlog of CRA reviews and is seeking to complete reviews more quickly.
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2:55 p.m.: This article was updated with more details on the ratings decision by the Office of the Comptroller of the Currency, comments from analyst Scott Siefers and an account of actions by Los Angeles and Seattle to cut business ties with the bank.