Wells Fargo: Rated 'Needs to Improve'; pays 'much less than expected' for phony accounts

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Wells Fargo said Tuesday, March 28, 2017, it will pay $110 million to settle a class-action lawsuit over up to 2 million accounts its employees opened for customers without getting their permission.

Wells Fargo, the dominant commercial bank in Philadelphia and many other U.S. metro areas, has agreed to pay $110 million to resolve claims in 12 lawsuits over what the bank says is its former practice of paying branch employees for opening new accounts — which resulted in thousands of workers opening unauthorized accounts for unsuspecting consumers and invading their privacy. 

"This agreement is another step in our journey to make things right with customers and rebuild trust,” said Wells Fargo CEO Tim Sloan, who got the job when predecessor John Stumpf was forced out after admitting the company let its illegal branch-banking practices continue for years. 

This class-action settlement, following last year's $190 million settlement with Los Angeles and federal regulators who verified customer and employee complaints about Wells Fargo's phony accounts, was for "much less than we would have expected," wrote analyst Brian Kleinhanzl in a report to clients of Keefe Bruyette & Woods, a New York investment bank that focuses on U.S. banks.

He noted average refunds from the initial stage of the bank's review of its own phony accounts worked out to around $25 per customer. 

"Wells Fargo is not yet out of the woods," but the payments are "an important milestone" to resolving the account scandals, added analyst R. Scott Siefers of Sandler O'Neill + Partners. 

Bank-watchers are more worried about Wells Fargo's sharp decline in new accounts since it stopped paying branch workers bonuses to find them by whatever means they found necessary.

Wells Fargo added accounts equal to just 1.9% of its previous business in February, down from 5% a year ago, before the scandal, noted analyst Kleinhanzl.

The bank plans new marketing campaigns, and new worker incentives, in an attempt to revive the nation's largest branch banking network. More than one-tenth of total U.S. bank branches have closed since the mid-2000s, as more Americans now bank by phone and computer.

A failure by Wells Fargo to restart growth could result in thousands more branch closing and tens of thousands of layoffs.

Wells Fargo boss Sloan also said he was "disappointed" the bank's rating under the Community Reinvestment Act, which requires banks to make services available in poor neighborhoods as well as rich ones.

Wells Fargo was downgraded to "Needs to Improve" from its previous "Outstanding" rating by examiners at the federal Office of the Comptroller of the Currency.

In the Philadelphia area, federal examiners found, for example, that Wells Fargo's home purchase loans "in low-income geographies is significantly lower than the percent of owner-occupied housing units" in those same neighborhoods. Its refinance loans in the same neighborhoods were "poor," its loans to small farms across the metro region were "very poor." But overall its loan record in metro Philadelphia "is excellent," and for all of Pennsylvania was "satisfactory." 

Read the report - you can search for its sections on Wells Fargo's lending record in Philadelphia and Pennsylvania -- here.

The overall poor rating, due in part to the large number of consent decrees in which Wells Fargo has admitted wrongdoing and promised to do better, "puts some restrictions" on Wells Fargo's ability to buy other banks, shut or relocate branches, and could make it tougher to win and keep government accounts, wrote analyst R. Scott Siefers in a report to clients of Sandler O'Neill + Partners, New York.

But "we did not expect Wells Fargo & Co. to engage in much M&A at this point , anyway," and the impact on Wells Fargo shareholders "will likely be negligible," Siefers concluded.