Wells Fargo Settles Class Action for Fraudulent Accounts

Wells Fargo agreed to settle a class action lawsuit concerning its fraudulent behavior in opening millions of checking, savings, and credit card accounts in the names of customers who did not authorize them. The class action lawsuit (Jabbari v. Wells Fargo & Co.) is pending in federal court in San Francisco.

Class action settlements are subject to the judge’s approval. Judge Vince Chhabria conditioned his acceptance of the proposed $142 million settlement on a guarantee that all defrauded customers would be fully compensated.

Unauthorized Accounts

Wells Fargo pressured its employees to meet quotas for new business, including selling new services to existing customers. The bank also paid bonuses to employees based on the number of new accounts they opened. More than 5,000 employees responded by creating new credit card, savings, and checking accounts for customers who did not authorize them.

The number of bogus accounts that Wells Fargo created is unclear. At one point, the bank estimated that its employees created 2.1 million unauthorized accounts between 2011 and 2015. More recent evidence, however, suggested that Wells Fargo created as many as 3.5 million fraudulent accounts since 2002. The settlement is based on the estimate that 2.73 million account holders were defrauded.

Wells Fargo earlier resolved civil prosecutions by paying a total of $185 million to federal and California authorities. As part of that settlement, Wells Fargo paid $2.6 million in fee refunds to customers who were the victims of unauthorized accounts opened between 2011 and 2015. That settlement, however, did not include the costs associated with credit damage that some customers experienced.

Wells Fargo agreed to settle the class action before significant discovery was underway. The attorneys representing the class of bank customers are concerned that they haven’t been able to verify the data that Wells Fargo provided concerning the number of unauthorized accounts its employees created.

Consumer Harm

Bank and credit card accounts harmed customers who did not authorize them in a couple of ways. Fees are associated with nearly any financial account, and customers were typically charged fees that they did not incur. In some cases, they were charged overdraft fees because the account did not maintain a minimum balance, or because bank employees depleted the customer’s actual account to fund the new account. The financial harm associated with those fees is relatively easy to measure.

More difficult to value is the damage done to credit ratings. Lenders rely on credit scores that take into account the number of credit accounts a customer has opened. Opening a credit card account that the customer doesn’t know about may increase the interest rate and other borrowing costs that the customer will need to pay when the customer obtains credit.

Settlement Terms

The proposed settlement initially called for Wells Fargo to pay $110 million to resolve pending lawsuits. The settlement amount was revised to $142 million after lawyers for the defrauded customers learned that the class was larger than they had initially estimated.

When the parties submitted the settlement for the judge’s approval, they learned that the judge was not happy with the resolution. Most legal disputes settle with victims receiving only a percentage of their actual loss. That’s true in part because settlements reflect the reality that wrongdoing is not always clear. In this case, while Wells Fargo is not admitting corporate fault, it is not denying that its employees created fraudulent accounts.

Judge Chhabria expressed concern that the settlement did not guarantee that every defrauded consumer would be repaid the expenses and higher credit costs they incurred as a result of the bank’s wrongdoing. The judge conditioned approval of the settlement on a number of revisions, including a guarantee that defrauded bank customers would receive full compensation and would have more than the proposed amount of time in which to file claims.

Given the uncertainty of computing the higher credit costs that customers may have experienced, the judge decided he should have authority to appoint a settlement monitor to assure that customers receive full compensation. The judge also wanted to make it easier for consumers to opt out of the settlement if they preferred to pursue their own lawsuits.

Settlement Approved

Judge Chhabria approved the settlement after Wells Fargo agreed to make the requested changes. The settlement agreement requires Wells Fargo to reimburse customers for wrongly charged fees, to provide “credit-damage relief,” and to pay cash compensation of $40 to $70 per fake account.

Since the agreement is open-ended, the amount of compensation that Wells Fargo will ultimately pay is unknown. Wells Fargo has maintained that consumers paid an average of $25 in fees related to unauthorized accounts, but that figure does not take into account the increased cost of borrowing that some consumers face.

Wells Fargo told the press that it does not expect its payout to exceed the $142 million cap that was proposed before the judge insisted on an open-ended settlement. Since Wells Fargo has not made complete information available to the court, however, the total amount that Wells Fargo will eventually pay cannot easily be predicted.

Actions Consumers Can Take

Wells Fargo must notify its past and present customers of the settlement and give them the option to make a claim. That process is expected to take months. Evaluating and paying the claims might take years.

Wells Fargo customers should check their mail for a settlement notice and should file a claim if they believe they are entitled to compensation. Customers should read the settlement notice carefully. A customer who already received a refund for fees may be entitled to additional compensation. A settlement website will also be established that should explain a customer’s rights in simple language.

It is always a good idea for consumers to order the free copy of the credit report that each credit reporting bureau must provide annually upon request. Instructions for making the request are available at annualcreditreport.com. Consumers should take prompt action, including notifying the institution that issued the account and the credit reporting bureaus, if they see an account in their name that they did not authorize.