San Francisco-based bank has struggled to recover from a scandal in which it opened millions of accounts that customers may not have approved
The Federal Reserve late Friday restricted Wells Fargo’s growth, citing the embattled bank’s “widespread consumer abuses and compliance breakdowns.”
As a result, the San Francisco-based bank struggling to move past a scandal over having created millions of fake accounts will replace three members of its board of directors by April and a fourth by the end of 2018.
In a cease-and-desist order issued after financial markets closed, the Fed said Wells Fargo must improve its government and risk management, as well as oversight by its board of directors.
Until the bank makes sufficient improvements, it will be restricted from growing any larger than its total asset size at the end of 2017, the Fed said.
The announcement sent shares of Wells Fargo ( WFC) down 6.2% to $60.10 in extended trading.
“We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again,” Fed Chair Janet Yellen said in a statement issued as she prepares to make way for successor Jerome Powell on Saturday.
“The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers.”
Wells Fargo’s CEO Tim Sloan said the bank takes the order seriously and is focused on meeting the Fed’s concerns.
“It is important to note that the consent order is not related to any new matters, but to prior issues where we have already made significant progress,” Sloan said in a formal statement .
The order is unrelated to the bank’s financial position, which remains strong, added Sloan.
Wells Fargo for years outpaced its banking industry rivals by posting consistent earnings growth. Part of that growth came from the bank’s reported success in having customers open multiple accounts and other financial products.
But the success turned to scandal in September 2016 when the bank was hit with $185 million in penalties in a settlement with the U. S. Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and Los Angeles legal officials.
Investigators in the state and local agencies said Wells Fargo secretly opened millions of deposit and credit card accounts that may not have been authorized by customers and that ultimately harmed those who had entrusted their financial affairs with the bank.
The investigation showed that Wells Fargo had boosted its sales figures by secretly opening the accounts — then funding them by transferring money from customers’ authorized accounts without their knowledge or permission.
Additionally, the bank’s salary incentive practices at the time, along with pressure by some bank managers, prodded Wells Fargo employees to open the accounts.
Wells Fargo initially reviewed 93.5 million current and former customer accounts opened from May 2011 through mid-2015 and identified roughly 2.1 million potentially unauthorized accounts.
Last August, however, the bank said a newly completed independent review had found approximately 3.5 million potentially unauthorized accounts in all.
Trying to win back consumer confidence, the bank revamped its salary practices, ousted some managers, and clawed back tens of millions of dollars in compensation from two former executives — including former CEO John Stumpf, who retired after the scandal exploded.
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Yet other financial problems continued to crop up.
In July, Wells Fargo said the bank would make $80 million in refunds — $64 million in cash and $16 million in account adjustments — to more than 570,000 auto loan customers who were charged for auto insurance without their knowledge.
And in October, Wells Fargo outlined plans for refunds to customers who were charged extra fees to extend rate locks on mortgages because of delays that were caused by the bank.
The cumulative impact of the banking problems has weighed on Wells Fargo’s financial results.
In January, the bank disclosed a larger-than-expected $3.25 billion pre-tax expense, or 59 cents per share, for litigation reserves related to the customer accounts scandal, as well as mortgage-related regulatory investigations.
The charge came after Wells Fargo took a $1 billion write-down for an anticipated federal settlement over the marketing and sales of mortgage-backed securities before the national financial crisis.
Asked during a January conference call with Wall Street analysts whether all of the negative issues are now past, Sloan offered no assurances.
“I just can’t provide you with that absolute guarantee at this moment in time,” Sloan said. “Maybe someday I will, but I think it’s going to be something we look at in the rear-view mirror over a longer period of time, as opposed to having some inflection point today or tomorrow or the week after that.”
Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc
