Wells Fargo: Federal Reserve’s growth cap shouldn’t hit credit card holders

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Asset cap limits the bank’s growth, but won’t affect new cards, higher limits

Senior Reporter
Expert on consumer credit laws and regulations

Wells Fargo

The regulatory cap slapped on Wells Fargo’s business last
week won’t affect its millions of credit card holders, the company said – but according to industry analysts, it might spur efforts by competitors to lure away Wells Fargo customers.

“From that point of view, it’s a headwind to Wells Fargo or
an opportunity to the other card players,” said Henry Coffey, finance industry
analyst at Wedbush Securities.

The Federal Reserve and the bank announced a
settlement Feb. 2 that will hold Wells Fargo’s assets at year-end 2017 levels until its
internal controls pass muster.

The bank needs to show that it has built
controls to prevent anti-consumer practices – such as the creation of more
than 2 million unauthorized accounts, and subsequent fees and credit problems
for the victims.

Bank misconduct won’t
be tolerated, says Fed

The Wells Fargo fake account scandal rocked the bank in September 2016 and brought fines of $185 million. Last week, the Federal Reserve said the bank’s response had not adequately revamped its operations to prevent further
failures of customer care.

“We cannot tolerate pervasive and persistent misconduct
at any bank,” Fed Chair Janet Yellen said in announcing the crackdown on her
last day on the job, “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.”

The cap means Wells Fargo can’t grow its total consolidated
assets above the $1.95 trillion level reached at the end of 2017. “Assets” include
loans to customers, including credit card balances.

“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.”

Wells Fargo is open
for business, says CEO

In a conference call last week, CEO Tim Sloan said Wells
Fargo is adjusting some of its commercial lending and deposit-taking activity
to allow room to continue making loans, including in its consumer business.

“We have levers to pull within the cap to grow loans and
deposits,” he told industry analysts on the conference call. “I can assure
customers and team members that Wells Fargo is open for business.”

Asset cap won’t
affect Wells Fargo cardholders, bank says

A company representative said the effect of the cap should not be noticeable for applicants for new cards, higher credit limits on cards or accounts that want to add an authorized user.

“We do not anticipate customers having a more difficult time
obtaining a Wells Fargo credit card,” communications manager Hilary O’Byrne
said in an email interview. “A customer will still be able to achieve a higher limit if
they meet our credit underwriting criteria, and will have the ability to add an
authorized user as they do today.”

But industry analysts said the cap makes it harder for the
bank to grow its business in general, and motivates competitors to try to win away market share.

Wells Fargo has about $35 billion of credit card loans
outstanding, according to its financial reports, making it the seventh
largest U.S. card issuer by balances.

“We do not anticipate customers having a more difficult time obtaining a Wells Fargo credit card. A customer will still be able to achieve a higher limit if they meet our credit underwriting criteria.”

What to expect from
Wells Fargo in 2018

Merchants who partner with Wells Fargo to issue their store
cards will be looking differently at the bank and may shy away from renewing
relationships with it, said Kevin Morrison, a senior analyst at consultant Aite
Group.

“The new business is probably stymied for a while,” he said.
Existing store-card relationships are governed by contracts between the bank
and merchant, he said, so current users of store cards would probably not
notice changes.

The Fed order
gives Wells Fargo until the end of the second quarter to meet the asset cap,
which will be based on the average of assets over two quarters. Total
consolidated assets of the bank holding company include business loans as well
as home mortgages, student loans and consumer loans including credit card
balances.

Wells Fargo will submit plans to comply with the order and
four of its directors will be replaced by year end, with three retiring by the
annual meeting in April. The cap will be lifted after a third-party review of
the bank’s risk management practices finds that sufficient controls are in
place.

Sloan said on the conference call that the bank has already
made strides toward meeting the Fed’s goals, having named six new independent
directors over the past year and spending $3.9 billion on risk management,
including hiring 200 team members to risk rolls.

The bank’s new
head of regulatory relations
, Sarah Dahlgren, is a 25-year veteran of the
Federal Reserve Bank of New York, “will work across Wells Fargo to make sure we
are meeting regulatory commitments,” he said.

But the fresh reminder of the bank’s fake account scandal,
paired with its slow cleanup, will not help repair its image in consumers’
eyes, Coffey said. The bank estimates the cap on growth will reduce its 2018
profits by $300 million to $400 million.

See related: Protect yourself from banks “cross selling” fake accounts




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