The CFPB’s recent action against Wells Fargo raises significant questions about the credibility of the institution, and by default, the industry. Bad business behavior and insufficient compliance practices are not limited to alternative finance or financial technology industries – incumbents too have challenges in addressing key regulatory requirements. And the prominence of the CFPB fine, as compared with the OCC’s enforcement action, is a clear signal that the regulatory focus remains on consumer protection.
While it’s difficult to police bad culture and inappropriate employee incentivization, Wells Fargo could have embedded controls throughout the loan process to avoid certain of the identified deceptive loan practices:
- Impairment of consumers’ ability to minimize costs and fees: Wells Fargo processed payments in a way that maximized fees for many consumers. The bank also failed to disclose to consumers how their payments were allocated across multiple loans. As a result, consumers were unable to effectively manage their student loan accounts and minimize costs and fees.
- Misrepresentation of the value of making partial payments: The bank incorrectly told borrowers that paying less than the full amount due in a billing cycle would not satisfy any obligation on an account. In reality, for accounts with multiple loans, partial payments may satisfy at least one loan payment in an account.
- Illegal late fee charges: Wells Fargo charged illegal late fees to certain consumers who made payments on the last day of their grace periods. It also charged illegal late fees to certain students who elected to pay their monthly amount due through multiple partial payments instead of one single payment.
- Failure to update and correct inaccurate information reported to credit reporting companies: Wells Fargo failed to update and correct inaccurate, negative information reported to credit reporting companies about certain borrowers who made partial payments or overpayments.
Part of the problem that financial institutions experience in embedding controls into the loan life cycle is that legacy processes are manual and partly reliant on systems that are inflexible and difficult to configure. An automated, digitized end-to-end loan process can assist business and compliance functions to configure fee calculations, payment structures and applications, and most importantly, manage credit reporting activities. In the era of Big Data, where scalable cloud-based environments are critical to managing information, data flow and their controls, I wonder how much longer will incumbents resist the obvious!