Among the ammunition fired at the Consumer Financial Protection Bureau by Republican critics is that it was slow to discover and act upon the discovery of illegal account openings at Wells Fargo.

Now there is a new bombshell: Congressional accusations that the Bureau assessed, literally, a penny on the dollar for what it could have fined the baking giant.

In September 2016, the CFPB fined Wells Fargo Bank, a subsidiary of Wells Fargo & Company, $100 million for what it called “the widespread illegal practice of secretly opening unauthorized deposit and credit card accounts.” The infractions date back to 2011. Spurred by sales targets and compensation incentives, employees boosted sales figures by covertly opening accounts and funding them by transferring funds from consumers’ authorized accounts without their knowledge or consent, often racking up fees or other charges.

A third-party review commissioned by the banking giant recently discovered that the number of falsified accounts is nearly 1.5 million higher than the 2.1 million initially uncovered and disclosed.

On Sept. 19, the House Financial Services Committee released a second interim staff report on its investigation into the Wells Fargo fraudulent account scandal and, more specifically, the CFPB’s enforcement action on the matter. The title of the report: “Did the CFPB let Wells Fargo Beat the Rap?”

Among the accusations developed by the Committee in its report: “An internal CFPB ‘Recommendation Memorandum’ for Director Richard Cordray, improperly withheld from the Committee for over a year, reveals that the Bureau failed to fully and adequately investigate Wells Fargo. Instead, the Bureau rushed to settle with Wells Fargo for less than 1 percent of the Bureau’s own estimate of the bank’s statutory civil monetary penalty.” 

Not only does the Recommendation Memorandum “fail to justify the CFPB’s settlement,” the report says, it calls into question the accuracy of Cordray’s testimony before Congress and claims that his Bureau conducted an “independent and comprehensive investigation,” a statement by Chairman Jeb Hensarling (R-Texas) says.

“The CFPB’s handling of this matter and its refusal to fully comply with the Congressional subpoena are a slap in the face to millions of Americans who were harmed by Wells Fargo and further evidence of the CFPB’s unaccountable structure and leadership,” he adds.

According to the Committee’s investigative documentation, the freshly uncovered Recommendation Memorandum was presented to and approved by Cordray. It assessed the CFPB’s case against Wells Fargo and sought authorization to either enter into settlement negotiations with, or to sue, the bank.

The memo shows that the CFPB estimated that the bank was potentially liable for a statutory monetary penalty exceeding $10 billion,” according to Hensarling and his team. This penalty could potentially be increased further, enforcement attorneys noted, if the Bureau determined that the fraudulent behavior was reckless or knowing, as opposed to negligent, or if it discovered additional fraudulent behavior not yet reported and violations of other statutes.

Cordray ultimately approved a settlement with Wells Fargo for a mere $100 million.

“Furthermore, in records discovered by the Committee and made public in the report, Director Cordray, senior CFPB officials, and oversight attorneys appear to have deliberately withheld the Recommendation Memorandum and other key records in response to the Committee’s records requests and subpoenas,” Hensarling claims, adding that “some CFPB officials even appear to have taken affirmative steps to attempt to conceal the [memo’s] existence from the Committee.”

Number crunching

Most CFPB Recommendation Memoranda contain a calculation of possible penalties that could be obtained at trial, and a calculation of the possible “settlement” value of the case—that is the amount of money that the CFPB could reasonably expect to get in a settlement (a value typically discounted from the possible penalties at trial). 

The memorandum’s penalty analysis begins with the CFPB calculating that there were two million known violations of the Consumer Financial Protection Act and a statutory penalty at the time of up to $5,437 per “ordinary” violation.  The Recommendation Memorandum then recounts that the statutory penalty could have been much larger, as the CFPA provides that the penalty for each “reckless” violation was up to $27,186 and the penalty for each “knowing” violation was up to $1.087 million.

Despite the Enforcement Division’s observation in the Recommendation Memorandum that “the bank’s violations could be characterized as reckless, at least, and possibly knowing,” the CFPB did not calculate an enhanced penalty.

“The CFPB’s premature suspension of its investigation” also meant that it lost the opportunity to factor in additional instances of consumer harm.

“A quick settlement pausing or ending the investigation meant that the CFPB risked failing to identify similar sales-integrity issues involving other products or developing theories for why the practices identified may violate other laws within the Bureau’s authority,” the congressional report says. “In fact, the Recommendation Memorandum states that the CFPB believed there were likely more violations that had yet to be revealed, and consequently the Bureau could potentially have sought a larger statutory penalty because a thorough investigation would likely have revealed addition violations.”

“Why then would the CFPB rush to settle a strong case against one of the largest banks in the country for one percent of its possible statutory liability?  One possibility is reputational risk,” the report speculates. “Had the CFPB not settled in time to announce a joint enforcement action with both the Los Angeles City Attorney’s Office and the Office of the Comptroller of Currency, that failure might raise difficult questions about whether the Bureau had failed to discover the widespread fraudulent sales account practices at the bank despite its ongoing supervision and examination activities.”

No reason is articulated for the $100 million figure besides a summary conclusion that a “penalty in that amount would sufficiently deter similar violations and would impress upon the bank the need to review its incentive-compensation program and to better monitor its effect on bank employees in the future,” the investigative report says.

Documentation underlying the House Financial Services Committee’s report, can be accessed online.