Paper Outline

1. Introduction

DRAFT INTRODUCTION

This research provides insight into Wells Fargo and Company’s (Co.) magnificent mid 1800’s beginning to what can only be described is a self-induced internal financial crisis which cost the company $2 billion in fines.

From the moment Henry Wells and William Fargo founded Wells, Fargo and Co. in 1852, “the banking company established a reputation of trust due to its attention and loyalty to customers and subsequently the financial institution forged successfully through the Gold Rush to the early 20th Century” (Wells Fargo, 2020). Wells Fargo (2020) affirmed that Wells Fargo “offered banking (buying gold and selling paper bank drafts as good as gold) and express (rapid delivery of the gold and anything else valuable)” (p.1). Wells Fargo became known for being “reliable in dealing with rapidly and responsibility with people’s money for over 160 years” (Wells Fargo, 2020).

With such a rich and reputable origin, it is hard to imagine that in 2016 Wells Fargo was “accused of opening millions of unauthorized accounts, firing employees for violating policy without addressing the root causes of those violations, and failing to detect and prevent these sorts of issues before they became widespread” (Roy, 2018, p. 1). This research explained Wells Fargo’s business practices and shed light on a history of bad acts; and the research then moved intently to find facts on what the Wells Fargo case was about and finally; this research determined what Wells Fargo should have done to avoid this devastating financial crisis. After a thorough Wells Fargo data review this research will conclude by providing an understanding of how the financial institution which was known for being a credible and was known as having a well-received banking reputation got impugned by a history of bad acts, and then received a $2 billion fine for fraud and misconduct which leads this research to surmise what should Wells Fargo have done so stave off this self-induced financial crisis.

1. Body

First Topic – review the issues of the case study as background for the events relating to the role of the leadership and teams

History of Misconduct

The $2B fine for misrepresenting loan quality is not the first scandal Wells Fargo has been a part of. The bank company has a history of bad behavior making it hard for clients, investors, and their own employees to trust and believe in the company. For the past four years Wells Fargo has paid over $4 Billion in penalties and fines (Everett, 2020). Although the company has an extended history of questionable business practices, we will focus on their two biggest scandals that have negatively impacted their profit.

In September 2016, Wells Fargo admitted that it created millions of accounts and opened credit cards under the names of their clients without their knowledge or permission. This scandal brought up a lot of questions about the company, but a year later, the scandal became worse. According to CNN business, Wells Fargo uncovered up to 1.4 million more fake accounts after digging deeper into the bank’s sale culture making it a total of 3.5 million accounts (Egan, 2017). Wells Fargo’s habit of opening fake accounts is not something recent, in fact, it was originally thought that the accounts were opened between 2011 to 2015, but after an announced analysis it was found that some of the accounts date back to 2009. This scandal has cost the company $3 Billion to settle a civil lawsuit, resolve a criminal prosecution, and finally admit that employees were pressured to meet sales quotas (Williams, 2020).

Another setback for Wells Fargo came a year later after the fake account scandal. This time the company had to pay a settlement of $1 Billion for auto loan issues and mortgage practices. Wells Fargo acknowledged it had charged their clients with car loans for insurance without their knowledge and extending mortgage-rate locks (Wolff-Mann, 2018). On both instances, the company charged the customers for products they already had, such as car insurance, or charged them fines even though the bank was responsible for the delay in locking the mortgage rate. In October of 2018, Wells Fargo issued refunds to the customers that got charged for the mortgage rate locks between September 16, 2013 and February 28, 2017 and refunded more than 570,000 auto loan customers (McCoy, 2018).

Second Topic – analyze the leadership practices of the organization in the case study, and define the practices that leaders used to create collaborative and successful teams, or failed to effect successful working relations resulting in negative conditions

Point A

Wells Fargo used its power and influence to create conditions that would work together to create a financial bomb. First, Wells Fargo made an inspirational appeal about risk-taking to their underwriters. Then Wells Fargo used reward power on their credit risk professionals to encourage more loan approvals. Lastly, Wells Fargo used its legitimate power to loosen lenders’ requirements on “stated income loan programs” in order to increase the number of loans the lenders processed.

Supporting Evidence

Wells Fargo used its influence over their underwriters by making an inspirational appeal. They submitted a philosophy change to their underwriters’ risk-taking. They called the philosophy, “Courageous Underwriting”, and encouraged, “Wells Fargo’s underwriters to take more chances…” “…in approving loans that were outside of Wells Fargo’s underwriting guidelines.” (Department of Justice, 2018). This was a dangerous use of their influence because an underwriter is supposed to appropriately assess risk and approve or deny a loan. By allowing the underwriters to assume risk outside of their guidelines, Wells Fargo was breaking down the teamwork needed to ensure the customer was receiving a product that was affordable to him, while protecting the money invested and/or deposited into their trusted institution.

Wells Fargo used reward power on the credit risk professionals to create more mortgages. Wells Fargo created, “new categories of compensation for, ‘Market Share Growth’ and ‘Competitive Positioning to Drive Volume.’” (Department of Justice, 2018) for the credit risk professionals. The pay programs are benefits for credit risk professionals that increase as the risk increases. This was a dangerous use of reward power because credit risk professionals are responsible for ensuring that banks manage the credit risk they are taking (Credit Risk Professional, 2020).

Wells Fargo used its legitimate power to expand its stated income loan programs. “A stated income loan, as the name suggests, is a loan on which a borrower states his or her income.” (Department of Justice, 2018). The lender will determine if the stated income is reasonable compared with the applicant’s provided information, such as the applicant’s profession or other stated incomes. By expanding this program, lenders were assuming some risk if the applicant provided incorrect or falsely stated incomes.

When the new philosophy of underwriters taking more risk met with the credit risk professionals’ reward for running up the number of loans, and the lenders didn’t verify the applicants’ stated incomes, it was only a matter of time before all that bundled up risk would explode.

Point B

Wells Fargo used its information power and improper escalation of commitment in several ways to pass the financial bomb to investors in the form of Residential Mortgage-Based Securities (RMBS) and protect itself from the blast. First, Wells Fargo discovered that many of the stated income loans were not based on realistic income estimates. Then, they escalated their commitment by expanding the risky lending programs. Lastly, they misrepresented the problem to RMBS investors while they sold the loans away without a warranty for buying back the loans.

Supporting Evidence

Wells Fargo would be informed by two departments about a dangerous amount of risk that was discovered. Wells Fargo’s Risk Assessment Review Group found that many of the stated income loans looked bad and the “…risk of loan defaults was increasing substantially from its loosening of guideline requirements and its approval of more stated income loans.” (Department of Justice, 2018). Additionally, Wells Fargo Home Mortgage (WFHM) tested more than 1,200 stated income loans and found, “more than 70% of these loans had an “unacceptable” variance” between a client’s stated income and the tax-return verified income.” (Department of Justice, 2018). Although this is the risk involved with creating a stated income loan, WFHM stated that 70% of the loans were unacceptable.

Wells Fargo then engaged in the poor decision making of escalation of commitment. As the poor testing reports were received each month, a WFHM risk manager said, “instead of reacting in a way consistent with what is being reported WF is expanding stated programs in all business lines.” (Department of Justice, 2018). Another manager wondered if there was risk in knowing but not acting on the escalating risk. By ignoring the information and expanding the programs without a critical eye, Wells Fargo was holding tightly to what was already discovered to be very risky.

Finally, Wells Fargo misrepresented the strength of these loans all over the place and protected themselves from the bad loans. The Wells Fargo Settlement Agreement with the Department of Justice outlined that Wells Fargo misrepresented the number of loans with unacceptable variances, reported debt-to-income ratios based on the incomes they found to be falsely stated, and they didn’t share the results of the WFHM tests with RMBS investors. By not sharing the information proving the loans were built on falsely stated incomes and changing the warranty on the RMBS, Wells Fargo was silently sending away all of that risk to the RMBS investors while keeping the loans that had better risk assessments.

Moving Forward

In the future, to prevent similar issues from happening, Wells Fargo must firstly understand and recognize their failures. Although it can be difficult for a company as large as Wells Fargo to admit their failures and wrongdoings, it is important to publicly acknowledge their mistakes and apologize. This is especially true given the numerous crimes they’ve been accused of over the years i.e. overcharging homeowners for appraisals, illegally denying student loans to young immigrants protected from deportation, pushing minorities to riskier loans with higher rates, putting through unauthorized changes to bankrupt customers’ home loans, releasing confidential information on wealth-advisory clients, etc. in 2017 alone (Reiners, 2017). With such a large network of banks across the country and a vast number of Americans trusting to bank with Wells Fargo, it’s almost compulsory for Wells Fargo to recognize their past failures and view it as a helpful opportunity to improve their business model to ensure future failures are little to none. Without first admitting where and how they went wrong, it’s difficult to properly amend past problems.

Subsequently, Wells Fargo must re-build their business model to support the company goals and values while making it mandatory to enforce ethical practices for the sake of their customers and their employees. It’s no secret that Wells Fargo has a huge corporate culture centered around sales. As mentioned earlier, tactics such as influencing underwriters to take bigger risks such as approving more loans which don’t fall under Wells Fargo’s underwriting guidelines, using reward power to create more mortgages, and not having lenders verify applicants’ incomes are all prime examples of Wells Fargo’s focus on increasing company revenue.

No community bank would establish a pressure-cooker sales culture designed to extort customer’s every nickel, and then fire employees for engaging in practices it generated. And community banks wouldn’t at the same time face fines and lawsuits over violating servicemember protections, overcharging for home appraisals, discriminating against their own employees, falsifying mortgage records and forcing unneeded auto insurance on customers (Rainey, 2020).

Even though Wells Fargo is a business, and businesses need to generate income after all, a system that begins with ensuring there is an understanding from all employees of all levels to adhere to the U.S. law first and remain ethically sound before trying to meet any sales quotas must be in place. Similarly, a system that is morally sound and fair for both all employees and customers must be developed and adhered to by all. Past behavior such as misrepresenting any type of information/agreement similar to what has been done in the past is an example of unethical decision making. A specific example of this would be when Wells Fargo chose not to share crucial loan details with RMBS investors and later changed the warranty on the RMBS, quietly giving all risk involved to investors and keeping less risky loans for themselves which was also mentioned above. Apart from this, to further protect both parties, higher-level management absolutely must avoid pressuring employees to make enough sales. This in turn will help lower any temptation to cut corners and commit crimes to generate enough sales. By doing so, Wells Fargo employees will avoid breaking the law, preventing the company from getting into any further trouble. An accountability system should also be created to ensure all levels of staff are adhering to said new rules. In this way, customers can be better protected. In the future, if and when new crises arise, responding in a timely manner is important. If leaders in the company handle issues during the time of discovery, this will help prevent issues from becoming bigger and more difficult to amend later. Rather than letting issues linger, should any employees find any problems, whether of small scale in the local banks or of large scale in the corporate office, Wells Fargo’s leaders must take the time to address the situation and listen to what their employees may be telling them for the greater good of the company. This is very important to prevent impacting America’s economy negatively and government intervention from taking place. In return, this will protect the brand recognition of Wells Fargo as well and further solidify customers’ trust and continue to help the company gain new ones as well.

Lastly, Wells Fargo must properly and truly incorporate how community banks run because they are choosing to market themselves as communal banks but behind the scenes operate as a megabank. They run in a way that they are “too big to fail” which is defined as “a business sector deemed to be so deeply ingrained in a financial system or economy that its failure would be disastrous to the economy” and “the government will often intervene in situations where failure poses a grave risk to the economy” as explained by Investopedia (Young, 2020). On the list of “Real-World Examples” of banks that pose as a threat to America’s economy, Wells Fargo was listed as a danger to the country’s financial stability (Young, 2020). By marketing themselves as a small communal bank but really operating as a large conglomerate, it gives actual small local community banks a bad reputation when megabanks like Wells Fargo commit crimes and are sent to court for fraud. This forces bank regulations and rules to be increased and smaller banks to be more scrutinized as a result to protect America’s financial institution. To make the big change from a megabank to a community bank, Wells Fargo must focus on their relationships with their customers. They must cherish these relationships to gain and maintain trust. “Unlike the megabank’s transaction-based, high-volume approach, community banks operate a relationship-based business model. This model holds locally based institutions accountable to their customers because-as friends and neighbors-their livelihoods depend on honest dealing” (Rainey, 2020). Wells Fargo knows that their customers are weary of their service so they “ even launched a heartfelt ad about earning back the trust of its customers in the spring of last year” (Sachs, 2019). An action like this is the direction Wells Fargo needs to move in to gain their customers’ trust back however they must ensure to follow through and show their customers how they will gain their trust back. Before any more sales pitches are done or new schemes/incentives are created, Wells Fargo must ensure that they are putting their customers first.

1. Conclusion

   1. Summarizing our main points and reinstating our thesis in fresh words
   2. Strong/memorable final statement