WELLS FARGO makes good money off poor! ANYONE THEY DON'T?

Wells Fargo's Kovacevich Says Bank Doesn't Overcharge the Poor
Aug. 2 (Bloomberg) -- As Cecilia Campillo stood up at Wells Fargo & Co.'s annual meeting in San Francisco on April 26, she was choking back tears. Campillo, 66, a former office manager who lives in Tucson, Arizona, said that Wells Fargo had fleeced her family by charging $8,400 in fees and an 11.7 percent interest rate to refinance a $75,300 mortgage. Addressing Chief Executive Officer Richard Kovacevich, Campillo said the loan's terms were so burdensome that she feared losing her house.
Kovacevich, 61, replied that Wells Fargo doesn't take advantage of its customers and then moved on to the next speaker.
In a 30-year maverick career, Kovacevich has pursued his own agenda in defiance of consumer complaints, industry trends and Wall Street's expectations, says Scott Kisting, an executive vice president who worked for Kovacevich at Norwest Corp. from 1990 to 1997. ``He's not afraid to tell the analysts to go to hell,'' says Kisting, 58, who's now retired.
Kovacevich usually receives praise at annual meetings, not stinging criticism. At Minneapolis-based Norwest and then at Wells Fargo, Kovacevich pioneered so-called cross selling by plying checking-account customers with an array of offerings, including home mortgages, home equity loans and his latest push, mutual funds. Wells Fargo sells an average of almost five such offerings per customer, about double the industry average.
``Dick has done a fantastic job for Wells Fargo shareholders, and I'm delighted that Berkshire is one of them,'' Warren Buffett, CEO of Omaha, Nebraska-based investment company Berkshire Hathaway Inc., wrote in an e-mail. ``He has grown revenue at a rate unmatched by any of the giant banks, and all of his operating policies make enormous sense.''
Wall Street Titans
Wells Fargo has produced a 13 percent compound annual growth rate in revenue during the past 10 years. Second-quarter net income rose to $1.91 billion, or $1.12 a share, from $1.71 billion, or $1, a year earlier.
As of March 31, Berkshire Hathaway held 56.4 million Wells shares, or 3.3 percent of the company's shares outstanding, making it the bank's third-largest stockholder, after London- based Barclays Bank Plc, with a 4.6 percent stake, and Boston- based Fidelity Investments, with a 3.7 stake, according to data compiled by Bloomberg.
Kovacevich has shunned the empire-building ways of peers like Sanford Weill, chairman of Citigroup Inc.; William Harrison, CEO of JPMorgan Chase & Co.; and Hugh McColl, former CEO of NationsBank Corp. and its successor, Bank of America Corp.
Those men have challenged Wall Street titans like Goldman Sachs Group Inc. and Morgan Stanley by assembling so-called universal banks that offer clients securities underwriting and merger advice in addition to loans and credit lines.
Unwavering Champion
Not Kovacevich. He remains an unwavering champion of retail banking, managing more than 3,097 branches in 23 states -- a network three times larger than Citigroup's.
Even though Kovacevich (pronounced koh-VA-seh-vich) runs the fifth-largest U.S. bank, with $435 billion in assets, he's chosen to be the odd man out on Wall Street.
``Wells doesn't want to be a universal bank,'' says Ray Soifer, chairman of Soifer Consulting LLC, a Ridgewood, New Jersey-based management consulting firm. ``It sticks to businesses it's good at.''
Kovacevich's single-mindedness has paid off: Since becoming CEO in March 1993, he's delivered to stockholders an average annual return of almost 17 percent, including reinvested dividends. By comparison, the Standard & Poor's 500 Financials Index, which consists of 82 companies, including Bank of America, Citigroup and Wells Fargo, has delivered an average annual return of 14 percent.
In the past five years, Wells's earnings per share have jumped 76 percent, to $4.15 in 2004 from $2.36 in 2000, compared with a 17 percent drop in EPS at Bank of America.
Mortgage Refinancings
This year, Wells stock has slipped 0.6 percent, to $61.56 on Aug. 1 from $61.91 on Jan. 3. In 2004, Wells paid Kovacevich $29.7 million in salary, bonuses and stock options.
Even as stockholders applaud, some Wells Fargo customers say the bank profits from abusive lending practices. Wells Fargo Financial, a Des Moines, Iowa-based division that offers mortgages and other loans to so-called subprime borrowers with poor credit records, has come under fire from customers who say it saddles them with unfair loan terms.
On mortgage refinancings, Wells's loan officers have imposed ``prepaid finance charges,'' fees for processing the loan, that raised the principal more than 10 percent.
For example, Innocente and Aurora Cortazar, Mexican immigrants who own a home near Los Angeles, paid $19,635 in fees to refinance a $168,468 mortgage at an 8.9 percent annual interest rate in 2002. They're suing Wells Fargo in state court in San Francisco, alleging they weren't properly informed that the fees, amounting to 11.7 percent of the loan, were going to be so high.
`True Cost'
``Wells is not telling people the true cost of the loan,'' says Niall McCarthy, the Cortazars' lawyer. Wells counters that the bank always discloses loan terms to borrowers and that the couple's suit is without merit.
In 2003, Wells joined most other subprime lenders in lowering finance charges to a maximum of 4 percent of the total loan after consumer advocates and federal and state regulators pressed the industry to lower fees.
The Association of Community Organizations for Reform Now, a nonprofit group based in New Orleans that lobbies against predatory lending, has waged a two-year campaign to force the bank to change its lending practices.
The group has staged demonstrations in front of Wells Fargo's headquarters and lobbied state officials to probe the bank.
Minority Neighborhoods
Acorn worked with another advocacy group, Boston-based Responsible Wealth, to arrange for a Wells stockholder to make Campillo her representative at the annual meeting in April. In May, David Kvamme, president of Wells Fargo Financial's U.S. consumer unit, sent Campillo and her husband, Abelardo, a letter that said he had reviewed their loan. Wells refunded about $8,000 in fees, Campillo says.
In a 33-page report released in March 2005, Acorn said Wells Fargo targets minority neighborhoods for subprime loans and charges borrowers higher interest rates than warranted by their credit records.
After analyzing publicly disclosed lending data for 592,000 refinance loans made in 42 metropolitan areas in 24 states, Acorn said one of every five refinancings made by Wells Fargo Financial are in predominantly minority neighborhoods. Acorn said Wells Fargo Home Mortgage, the bank's unit that offers prime loans to consumers with good credit ratings, made one of 20 loans in minority neighborhoods.
`Fundamentally Disagree'
``Most people go to Wells Fargo thinking this is a great bank and believing they are going to get a great deal, and they don't have any idea they will become victims to lending abuse,'' says Maude Hurd, Acorn's national president.
Kovacevich says Wells Fargo offers subprime and prime loans to customers based solely on their credit ratings, which largely track consumers' histories of paying back debts.
``We are responsible lenders, and we price for risk; we don't price for race,'' he says. ``We don't do predatory lending. And the American consumer is better off that we take that risk. We just have to get paid for it.''
Mark Oman, senior executive vice president of the home- and consumer-finance units, including Wells Fargo Financial, adds, ``We fundamentally disagree with what Acorn has alleged.''
$30 Billion Revenue
Wells Fargo Financial is the smallest of the bank's three divisions, generating $507 million of the company's total $7 billion in net income in 2004, or about 7 percent. The subprime unit, which runs outlets in 48 states, Guam, Puerto Rico, Saipan and Central America, is also the bank's fastest-growing division, with profit having soared 178 percent since 2002.
The wholesale banking division, which caters to mid-size companies with annual revenue of $10 million to $1 billion, produced a 40 percent rise in net income. And the community banking unit, which oversees the retail network, posted a 21 percent increase.
Last year, the retail unit accounted for 71 cents of every dollar of Wells Fargo's total net income, and the corporate arm chipped in 23 cents.
The bank's revenue rose to $30 billion last year from $28.4 billion in 2003. Wells Fargo Financial's profit should contribute a larger share of the bank's bottom line in the years to come, Oman says.
Regulators across the U.S. have been probing Wells Fargo's lending practices. On May 2, 2003, the California Department of Corporations, which oversees stockbrokers and consumer finance firms, revoked the license of Wells's home mortgage unit indefinitely after finding that it had overcharged customers.
Customer Refunds
The next week, the U.S. District Court in Sacramento ruled that the Office of the Comptroller of the Currency (OCC), which oversees national banks, has proper authority over Wells's home mortgage unit, not the state of California. Wells continues to offer mortgages in its home state.
On June 7, 2004, Louisiana Attorney General Charles Foti issued a civil investigative demand directing Wells Fargo to produce loan documents in connection with 19 customers who alleged predatory lending.
On June 11, 2004, Wells sent state officials a letter stating that, though its loans ``complied with all applicable state and federal law,'' it was refunding some finance charges to customers.
In April, New York Attorney General Eliot Spitzer's office sent letters to HSBC Holdings Plc, Citigroup, Wells and five other banks asking for lending data as part of an inquiry into whether they had violated the civil rights of minorities by charging excessive interest rates and fees.
Regulatory Scandals
On June 16, the OCC and the Clearing House, a 152-year-old trade association in New York that represents commercial banks such as Wells, filed separate lawsuits asking the U.S. District Court in Manhattan to block Spitzer's inquiry.
Both complaints argue that his office lacks the authority to regulate national banks, a contention Spitzer rejected in a statement issued on June 17.
Investors are wary of the ``headline risk'' -- the damage that a predatory lending fiasco could do to Wells Fargo's stock, says Thane Bublitz, a money manager at Thrivent Financial for Lutherans in Appleton, Wisconsin.
Citigroup, which struggled last year with regulatory scandals in Japan and Europe and paid the U.S. Federal Reserve a $70 million penalty for misleading subprime borrowers, has seen its stock slide 11 percent between Jan. 2, 2004, and Aug. 2, compared with a 6.2 percent gain in the S&P 500 Financials.
No. 1 Underwriter
``It's definitely a serious issue for Wells, but I think they do take it seriously,'' says Bublitz, whose firm held 841,000 Wells shares as of March 31.
Meanwhile, Kovacevich faces another challenge: the potential collapse of the soaring residential real-estate market. Outstanding mortgages have jumped 56 percent in the past five years, to $7.5 trillion in 2004 from $4.8 trillion in 2000, according to the Federal Reserve.
Having underwritten $298 billion in home loans last year, Wells Fargo was the No. 2 mortgage lender after Calabasas, California-based Countrywide Financial Corp., according to Inside Mortgage Finance Publications.
Wells is the No. 1 underwriter of home equity loans, with $54 billion in loans outstanding at the end of the first quarter. About 20 percent of Wells's earnings stem from home mortgage and equity lending.
In May, the Fed's Board of Governors joined the OCC and three other federal agencies in issuing a warning that the home equity loan market may be overheating and that lenders should take steps to protect themselves if defaults rise.
`Might Haunt Them'
Harvey Rosenblum, executive vice president and director of research at the Federal Reserve Bank of Dallas, cautions that a real-estate bust would hurt even the strongest banks by slowing down lending and hindering the ability of borrowers to service their debts.
``It's happened in the past, and it can happen again,'' Rosenblum says.
Investors say Wells Fargo's exposure to a meltdown in the home real-estate market is worrisome.
``That's a business that might haunt them,'' says Thomas Russo, a partner at Gardner Russo & Gardner, an investing firm in Lancaster, Pennsylvania, that holds 2.2 million Wells shares.
Joe Morford, an analyst at RBC Capital Markets in San Francisco who's covered Wells Fargo for more than a decade, says Kovacevich has steered the bank through tough cycles before. By deriving income from 84 different business lines organized under its three divisions, the bank can absorb a hit to the mortgage market, Morford says.
Cross-Selling Strategy
A 19 percent jump in retail banking net income in the first quarter, for example, helped Wells overcome declines in its other two divisions and post a 5 percent increase over the first quarter of 2004.
``They have so many different levers to pull to meet the numbers,'' says Morford, who rates Wells shares ``outperform.'' ``Mortgages are a bigger business for it now, but they are by no means driving the ship.''
Howard Atkins, Wells Fargo's chief financial officer, says the bank's cross-selling strategy further insulates it from the vagaries of economic cycles. At an investor conference in Seattle on May 3, he said that selling services to existing customers generated 80 percent of the bank's 2004 revenue growth.
``Frankly, it doesn't matter what the economy is doing when you take business away from your competitors,'' Atkins said.
Richard Bove, an analyst at Punk Ziegel & Co., a New York- based investment bank and research firm, says the economy does matter.
82 Percent Drop-off
The Fed's increase of its target rate for overnight bank loans to 3.25 percent in June from 1 percent in June 2004 is already having an impact: In 2004, Wells Fargo recorded a $539 million gain in fees from new mortgages compared with a $3 billion gain in 2003, according to its 2004 10-K filing with the U.S. Securities and Exchange Commission.
The company blamed the 82 percent drop-off on rising interest rates and lower consumer demand.
``It will have to prove that its cross-selling will offset what should be a significant decline in income from mortgages,'' says Bove, who's based in Pinellas Park, Florida, and has an ``market perform'' rating on Wells shares. ``That's going to be the big test in the next 12 months.''
Kovacevich rules Wells Fargo from a 12th-story office in its headquarters in San Francisco's financial district, just off California Street and its famous cable car line.
Executive Suite
The building stands on the same site where Henry Wells and William Fargo, partners who ran a stagecoach line, founded the bank in 1852 to deposit the gold that prospectors mined in the Sierra Nevada mountains during the California gold rush. A museum occupies the ground floor, displaying gold pans, ore carts, brass scales and a wooden stagecoach that's long served as the bank's corporate logo.
Upstairs, in the executive suite on the 12th floor, the walls are adorned with paintings of Yosemite National Park and other wilderness scenes celebrating the American West. To promote open communication, none of the offices, including Kovacevich's, has doors.
Inside the CEO's office, a panoramic painting of the Grand Canyon in Arizona hangs on one wall. Next to Kovacevich's desk, a credenza holds photos of his wife, Mary Jo, and their three children and three grandchildren. A shelf is crammed with memorabilia and photos from his career, including a picture of Kovacevich posing with one of his heroes, Margaret Thatcher, the U.K.'s prime minister from 1979 to 1990.
Retired Athlete
Kovacevich says he admires how Thatcher addressed the U.K.'s woeful economic condition in the 1980s by selling state-run industries and curtailing the power of trade unions. ``She had principles and vision and never strayed from it,'' he says.
Kovacevich often dresses in a banker's classic uniform: starched white dress shirt, crimson necktie and a navy blue, pin- striped suit.
Yet the 6-foot, 3-inch (191-centimeter) CEO, with his square jaw and high forehead crowned with a wave of dark brown hair, looks more like a retired professional athlete than a banker.
And he almost was a pro ball player; he was a star pitcher on his high school baseball team in Enumclaw, Washington, and was approached by Major League Baseball's New York Yankees. He turned down their offer and enrolled at Stanford University in Stanford, California, on an athletic scholarship.
Consumer Food Giant
After tearing the rotator cuff, a group of tendons, in his throwing arm, he decided to forgo baseball. He earned bachelor and master's degrees in industrial engineering and in 1967 graduated with an MBA, tied for first in his class.
Richard Marco Kovacevich was born on Oct. 30, 1943, in Tacoma, Washington. He was raised in Enumclaw, a lumber town about 45 miles (72 kilometers) southeast of Seattle, where his father worked in the sawmill.
After graduating from Stanford, Kovacevich took a job on the mergers and acquisitions team of General Mills Inc., the Minneapolis-based consumer food giant that makes Cheerios cereal.
He advanced rapidly, and in 1971, he was appointed general manager of the company's Kenner toy subsidiary. Under Kovacevich, who was then only 28, the unit unveiled Baby Alive, a doll that simulated an infant feeding, and SSP racing cars that shot across the floor when a rip cord was pulled. Both became top sellers.
``That's where I developed my sales knowledge,'' he says.
By 1975, Kovacevich had grown restless. Citibank's CEO, the late Walter Wriston, was a General Mills director and had followed Kovacevich's career.
250 Retail Branches
Wriston, who was to become Kovacevich's mentor, planned to make Citibank as dominant in consumer banking as it was in corporate banking. Intrigued, Kovacevich met with John Reed, another wunderkind who, at 36, was the youngest senior vice president in Citibank's history.
Kovacevich accepted a job as head of the domestic division's consumer unit, which encompassed 250 retail branches outside New York City, a finance company and a mortgage lender.
In 1977, Kovacevich was running the 273-branch network in New York City as Citibank began rolling out its first generation of automatic teller machines.
Even though the New York unit was losing $100 million annually, Reed insisted that Citibank develop its own ATM software and cash machines, Kovacevich says. Considering that move too expensive, he says he urged Reed to buy existing hardware and technology instead, to no avail. Reed declined to be interviewed for this story.
`Everyone in New York'
Facing a steep rise in fixed costs with no offsetting revenue growth, Kovacevich realized that to make the unit profitable he would have to increase revenue, which was stagnant, at least 20 percent a year. That wouldn't be easy because most of Citibank's revenue stemmed from checking account fees, and the firm already commanded a third of the New York market.
``I said, 'So everyone in New York has to be a Citibank customer before we make any money?''' Kovacevich says.
He decided that Citibank had to boost marketing efforts for other products such as loans, credit cards and mortgages to its checking customers. And it had to train its loan officers and sales representatives to promote more than checking. ``That's where this cross-selling idea came in,'' Kovacevich says.
By 1980, the New York unit was producing $120 million in annual profit.
Kovacevich was poised to succeed Reed, who became Citicorp CEO in 1984, as head of the entire U.S. retail bank. Kovacevich says he and Reed clashed over long-term strategy. While Kovacevich believed branch banking was the best way to reach new customers and grow sales, his boss said ATMs and debit and credit cards were the future.
Marketing Manager
``John Reed told me when I first came to Citibank that in 10 years, none of these branches would exist,'' Kovacevich recalls. ``I said, `Maybe you're wrong. I don't see any sign of that, John, thank you very much.'''
In 1985, Reed picked Richard Braddock, a former marketing manager at General Foods Corp. who had joined Citibank in 1973, over Kovacevich as head of the retail bank.
Disappointed, Kovacevich quit. ``I don't blame him for deciding to have one person running the consumer businesses,'' he says. ``I disagreed with who that person was.''
Norwest CEO Lloyd Johnson, now 75, persuaded Kovacevich to return to Minneapolis in March 1986 as the bank's chief operating officer and vice chairman.
A commercial bank and consumer-finance company in five Midwestern states, Norwest was in bad shape. It had almost $1.5 billion in nonperforming corporate loans and mortgages on its books -- 9 percent of its total assets.
Confidence and Decisiveness
``They weren't bright days,'' says Kenneth Murray, 67, an executive vice president at Norwest and then Wells Fargo from 1983 to 1999. The bank later sold off or charged off its bad loans.
From the outset, Kovacevich exuded confidence and decisiveness as he repaired Norwest, says John Stumpf, former group executive vice president in charge of Wells Fargo's community banking division.
``Dick has very bright lines between what's right and what's wrong,'' says Stumpf, who has worked with his boss since 1986. ``There is no gray when it comes to Dick.''
With Johnson's blessing, Kovacevich applied his cross- selling approach at Norwest.
He urged his deputies to push offerings that produced fees. One of the surest producers of fee-driven income was Norwest Financial, the bank's subprime consumer-loan unit in Des Moines, Iowa, which contributed 25 percent to 30 percent of the bank's earnings in the early 1990s.
`Putting Money Up'
``Norwest Financial was about the only division putting money up,'' Murray says.
At a meeting with deputies in 1987, Kovacevich took out a piece of paper and drew a horizontal axis, where the bank's offerings should be listed, and a vertical axis, where the bank's corporate customers should be listed, recalls James Campbell, 63, head of corporate lending at that time.
Holding it up, he instructed the executives to mark boxes showing how many services a customer was buying from Norwest. If a customer didn't have a mark next to a particular offering, the bank's staff should sell it to the customer, Kovacevich told them. ``This isn't rocket science,'' he said.
Kovacevich also imbued Norwest with the sales culture of a retailer rather than a bank. He dubbed employees ``team members'' and called branches ``stores.''
He visited Norwest's branches across the Midwest, explaining his cross-selling program to managers and loan officers. While visiting a branch in Sioux Falls, South Dakota, he made a company video showing him standing next to a cow to demonstrate that he was in farm country.
Call of Nature
As Kovacevich looked at the camera and exhorted employees to sell, the cow heeded the call of nature. Kovacevich shook his head and laughed and distributed the video to branches anyway.
In 1993, Kovacevich became CEO of Norwest, and two years later, chairman. By 1997, his efforts were producing solid results: Norwest's noninterest income almost doubled to $3 billion from $1.6 billion in 1993 compared with a 70 percent rise in interest income. The bank's market capitalization almost quadrupled to $29.4 billion from $7.5 billion.
RBC Capital's Morford says Kovacevich's hardball sales culture drove the performance. ``Sometimes it can get kind of hokey, but it does get everyone rowing together,'' Morford says.
Throughout his tenure, Kovacevich had avoided what analysts call the ``transformative acquisition,'' a blockbuster, multibillion-dollar deal that can change a company's corporate culture and direction.
Terms Weren't Disclosed
Kovacevich favored buying privately held banks that pushed Norwest into new territories, like Colorado and Texas, and consumer finance companies that increased Norwest Financial's customer base.
The deals were usually so small that terms weren't disclosed.
Unlike serial acquirers such as Sandy Weill, who in 1998 was assembling what would become Citigroup, Kovacevich didn't buy companies and strip out costs by firing employees. Rather, he tended to add expenses as he hired loan officers and opened new branches, Murray says.
``What difference does it make if you eliminate 1,000 jobs?'' Murray says. ``The idea is to keep the people and give them more tools to sell more stuff to more people.''
In 1998, Kovacevich did start thinking big, at least for one deal. Wells Fargo, California's oldest bank, was having difficulty digesting First Interstate Bancorp, a Los Angeles- based company Wells had bought in a $13.2 billion hostile deal in 1996.
Lost Deposits, Payments
Wells botched the integration of its computerized account system with First Interstate's lost deposits and loan payments for thousands of customers, according to its 1997 10-K filing. Customers fled, and deposits dropped 10 percent to $68 billion in 1997 from $76 billion in 1996.
Wells Fargo CEO Paul Hazen sought a suitor, and Kovacevich, eager to add Wells's 956 branches in California, Arizona and eight other Western states to his 930-branch network in 16 Midwestern states, jumped on a deal.
On Nov. 3, 1998, Norwest, the ninth-largest U.S. bank, with $104 billion in assets, closed its purchase of Wells Fargo, the No. 10 bank, with $93 billion in assets, for $32.6 billion in stock. Norwest adopted Wells's name and moved its headquarters to San Francisco.
Meanwhile, Kovacevich's competitors were racing to exploit the U.S. government's reversal in 1998 of the Glass-Steagall Act of 1933, which had barred commercial banks from investment banking. First Citigroup and then J.P. Morgan & Co., Bank of America and Wachovia Corp. started expanding their stock brokerages and acquiring investment banks.
Wary of Wall Street
Kovacevich remained wary of Wall Street. He feared that investment banks, with their zealous pursuit of trading profits and reputation for cutthroat competitive tactics, wouldn't mesh with Wells Fargo's Main Street-oriented ways.
``I felt strongly that the culture of investment banks was so different from this culture that they were incompatible,'' he says. ``Investment banks are transaction oriented; we're relationship oriented. They're a star system; we're a team. Everything about it is a totally different way of doing business than how we do business.''
There's the annual sales conference, for example. The tradition began in 1988, when the bank flew more than 300 employees to a luxury resort in Scottsdale, Arizona; as they stepped off the bus from the airport, Kovacevich and his deputies greeted and thanked each employee with a handshake, a ritual still observed today.
Buffets and Luaus
Over the next 17 years, the sales conference has swelled to 1,300 deserving employees. They spend four days attending strategy meetings and partying at buffets, luaus and a rally that resembles a political convention.
At the most recent meeting, in Honolulu, in May, the employees wore aloha shirts. Knocking together thunder sticks and shaking maracas, they hooted and cheered as Kovacevich, dressed in black and sporting wraparound sunglasses to impersonate Bono, lead singer of the rock group U2, lip-synched the song ``Beautiful Day.''
At a banquet two nights later, Kovacevich implored employees to stay true to Wells's strategy: ``How do we measure success at Wells Fargo? It all comes down to one word. I'm sure you all know what that one word is. It's revenue.''
Instead of plunging into investment banking, Kovacevich concentrated on what he knew best: retail banking and lending to consumers. In California, Norwest Financial, now dubbed Wells Fargo Financial, expanded into the nation's largest mortgage market.
Litigious War
It wasn't long before it was embroiled in a two-year litigious war over its lending practices with California's Department of Corporations.
Like many subprime lenders, Wells Fargo Financial sends $500 to $3,000 ``live checks'' to prospective customers through the mail. Also called ``draft loans,'' they look like checks and are activated as loans after they're cashed or deposited, most with annual interest rates of 20 percent and higher.
In 2001, the Department of Corporations alleged that live checks sent to 15,000 customers failed to disclose about $533,000 in total finance charges. Wells assured regulators it would make refunds and fix the problem, yet the next year, examiners found that the company was overcharging the same customers again a total of $338,000.
In January 2003, the department asked a state court in Sacramento to fine Wells Fargo Financial $39 million.
`Financially Strapped'
``Many of the people who cash `instant loan checks' that they received unsolicited in the mail are already financially strapped enough without being overcharged,'' Demetrios Boutris, the department's commissioner, said in a statement.
The suit is pending. Wells spokeswoman Janis Smith says the bank is in settlement discussions.
The department also alleged that Wells Fargo's home mortgage unit was overcharging customers $104 to $477 each by starting interest on their loans one to five days before they were filed with a county recorder's office, a violation of state law. It ordered the firm to conduct audits of all of the residential mortgage loans it made in California in 2001 and 2002.
Wells resisted, and in January 2003, it argued in a lawsuit that under federal law, it was entitled to collect interest the day the borrower received the loan, not when it was recorded. The bank further contended that its practices were subject to regulation by the OCC, not state officials.
The Department of Corporations fired back by revoking Wells's home-mortgage lending license.
Pre-Empted State Law
In May 2003, U.S. District Judge Garland Burrell ruled in favor of Wells Fargo, finding that federal law pre-empted the state law. Kovacevich railed at then Governor Gray Davis in a letter sent that month.
``The damage done to a responsible California-headquartered company by the department's conduct cannot be easily undone,'' he wrote. ``California's reputation as an anti-business state is richly deserved.''
The state appealed Burrell's decision to the Ninth Circuit Court of Appeals. Both sides are now negotiating a possible settlement to the case, a person familiar with the litigation says.
The OCC, which filed a brief supporting Wells's case, declined to comment on whether it investigated the state's allegations.
Wells Fargo Financial uses other means besides live checks to attract new subprime customers. In the 1990s, it offered high- interest, unsecured loans.
Borrowers' Homes
As more subprime borrowers obtained credit cards in the past five years, Wells Fargo Financial switched to offering asset- based loans, usually secured by borrowers' homes. It now draws new subprime customers by offering to consolidate all of their debt, from credit card balances to mortgages, into one monthly payment.
The company uses telemarketers and direct-mail advertising to reach borrowers. When shoppers use zero-interest, 12-month term financing to buy furniture or home entertainment systems from retailers, Wells often buys those loans wholesale. It then offers those new customers debt-consolidation plans.
Some customers object to Wells Fargo's efforts to push new debt on them even as they're struggling to service existing loans. Maria Bonilla, 47, a social worker and single mother in north Philadelphia, paid off more than $21,000 in credit card balances by consolidating her debt with a $31,532 loan from Wells Fargo Financial, secured by her home.
New Credit Card
No sooner had she closed the loan than Wells sent her the last thing she wanted: a new credit card. ``I cut it up in pieces,'' says Bonilla, who cleans offices at night to make ends meet. ``Now they call me asking why I don't use it.''
Acorn has asked Wells to work with it to change its lending methods. In September 2004, Citigroup's subprime arm, CitiFinancial, entered into a partnership with Acorn to scale back its more-aggressive lending policies.
``Wells is very far behind in terms of acknowledging problems,'' says Jordan Ash, coordinator of Acorn's campaign against the bank. ``It hasn't adopted the best practices that others have.''
Kovacevich dismisses an alliance with Acorn. ``We know how to lend,'' he says. ``We don't know what a partnership brings, other than maybe getting someone off your back and being a great PR move.''
Consumer advocacy groups also lambaste Wells for providing revolving credit lines to so-called payday lenders, finance companies that advance borrowers $100 to $500 against their paychecks for fees that typically run at 390 percent annual interest rates.
20,000 Storefronts
Offering loans through more than 20,000 storefronts across the nation, payday lenders are a modern form of loan-sharking that preys on the working poor, says Jean Ann Fox, director of consumer protection at the Consumer Federation of America in Washington.
Payday lenders cluster around military bases such as Fort Bragg, North Carolina, where they post signs in their windows offering ``$500 quick cash, no credit required.''
Many customers, unable to settle their loans, wind up paying thousands of dollars in fees every two weeks to roll over a $500 payday loan.
``Payday lending creates a debt trap with high-cost, short- term loans, and it's fueled by banking services from large lenders like Wells Fargo,'' says Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, a Durham-based group that lobbies against predatory lending and owns 80 Wells shares.
Payday Lenders
Wells Fargo has extended credit to payday lenders like Armed Forces Loans Inc. in Las Vegas and Advance America Cash Advance Centers Inc. in Spartanburg, South Carolina, the No. 1 U.S. payday lender, according to SEC records and Uniform Commercial Code filings.
In April, Skillern introduced a shareholder resolution seeking an end to Wells's lending relationships with payday lenders. The California State Teachers' Retirement System, a $116.2 billion pension fund that owns 2.7 million Wells shares, voted for the measure; it garnered 4 percent of the total vote.
Sherry Reser, the retirement system's spokeswoman, says the fund is concerned Wells might face liability for supporting payday lenders. ``There have been some substantial settlements involving companies involved in predatory lending,'' she says.
Kovacevich argues that payday lending benefits consumers by providing them with cash for emergencies.
`The Unbanked'
``The responsible payday lenders that we lend to are complying with the law and providing a service that someone wants to pay for,'' he says. ``We're doing our utmost to get the unbanked into our banks.''
Kovacevich is adding still more offerings to cross sell. On Jan. 3, 2005, Wells Fargo paid an undisclosed sum for the $29 billion in assets of Strong Financial Corp., a Menomonee Falls, Wisconsin-based mutual fund manager.
Last year, Strong agreed to pay $80 million to federal and state regulators to settle allegations of improper mutual fund trading. With $100 billion under management, Wells is now a top- 20 mutual fund company in the U.S.
Kovacevich says he plans to retire in 2008, when he turns 65. His departure will leave a big void at Wells Fargo, former Norwest executive Kisting says. ``The challenge is that Dick is the culture,'' Kisting says.
That's why Wells's next CEO will probably be a loyal adherent steeped in Kovacevich's methods, Morford says.
Stumpf Promoted
On Aug. 1, Wells's board promoted community banking head Stumpf to president and chief operating officer, making him the top candidate to replace Kovacevich, Morford says. Mortgage and consumer lending head Oman, wholesale banking chief David Hoyt and regional banking head Carrie Tolstedt are also contenders.
Until the heir is named, consumer advocates are likely to keep lobbying Wells to change its subprime lending practices. And most investors will probably be happy to keep pocketing the returns Kovacevich has delivered for the past 12 years.