Wells Fargo disclosed in its latest corporate quarterly report (PDF) to the U.S. Security and Exchange Commission that it erroneously denied mortgage loan modifications or did not offer loan modifications to approximately 625 customers who were indeed eligible for them under various government-backed loan programs. Furthermore, some 400 of those affected customers eventually lost their homes to foreclosure.
Wells Fargo blamed the loan denials, which occurred between 13 April 2010 and 20 October 2015, on a “calculation error” in its mortgage loan modification software tool. A programming mistake in the tool overstated the amount of the “attorneys’ fees that were included for the purposes of determining whether a customer qualified for a mortgage loan modification,” the bank stated. Apparently the fees pushed the customers outside the loan qualification limits.
Although Wells Fargo said that its customers never were charged the attorneys’ fees, the damage was already done. The bank said in its quarterly statement it has set aside $8 million to “remediate customers whose modification decisions may have been affected by the calculation error.” The amount works out to US $12,800 per customer, which seems like a pretty paltry figure given the life-altering consequences of the error. Nevertheless, the bank says it believes that the amount is appropriate given the circumstances.
Wells Fargo has tried to downplay the error, both in why it took so long to find, as well as in its effects on customers. So far, the bank has not commented on when it first realized that there was a problem, why it took so long to find the error in the first place, or why it tried to bury the information in its quarterly report to the SEC rather than publishing a press release.
Second, ever since the error became widely publicized last week, Wells Fargo has been trying to downplay its impact on the customers affected by it. While it has apologized for the error, the bank also has claimed that there is “not a clear, direct cause and effect relationship” between the improper loan modification denials and the eventual foreclosures, strongly implying that most of those customers who had home foreclosures would have experienced them even if they weren’t denied a loan modification.
That reasoning seems at best disingenuous, given that one-third of those not approved for a mortgage loan modification still seemed to be able to find a way to avoid foreclosure. Who knows what would have happened to the other 400 families if they had less financial pressure to contend with.
Wells Fargo’s tone-deaf defense of its error is remarkable for a financial institution that has been fined hundreds of millions by the U.S. government for rampant manipulations of customer accounts as well as billions for its subprime mortgage shenanigans. Wells Fargo has been claiming that it is changing what the government says is a reckless, unsafe, and unsound (PDF) banking culture to one that’s more understanding of its customers’ needs and circumstance. However, the latest incident makes it look like the company still has a long way to go.
Wells Fargo joins the Commonwealth Bank of Australia and Australia’s Westpac Bank in recently discovering long-dormant software errors. Commonwealth Bank, like Wells Fargo, tried to minimize its computing error which ended up allowing drug-related money laundering to go undetected by way of its smart ATMs.
Commonwealth’s “it wasn’t that bad a computing error” attitude irritated both the Australian populace as well as government regulators, who ended up imposing a fine of AU $700 million plus legal fees on the bank. Commonwealth Bank’s management originally expected only to be fined AU $375 million. It is one of the largest fines imposed for a computing-related error, rivaling the €561 million fine imposed by the European Commission on Microsoft in 2013.
It will be interesting to see whether Wells Fargo will change its mind about how much to “remediate” its customers for the error, given the bad publicity it is generating. Perhaps Warren Buffet, who holds 9 percent of the bank’s stock, can help the bank’s management revisit its callous decision, especially in the light of the enormous sums it has been paying out to the government for its past bad behavior.
Robert N. Charette is a Contributing Editor to IEEE Spectrum and an acknowledged international authority on information technology and systems risk management. A self-described “risk ecologist,” he is interested in the intersections of business, political, technological, and societal risks. Charette is an award-winning author of multiple books and numerous articles on the subjects of risk management, project and program management, innovation, and entrepreneurship. A Life Senior Member of the IEEE, Charette was a recipient of the IEEE Computer Society’s Golden Core Award in 2008.