Monday Morning Cup of Coffee: Federal Reserve Board to vote on lifting Wells Fargo’s growth restrictions

Monday Morning Cup of Coffee takes a look at news coming across HousingWire’s weekend desk, with more coverage to come on larger issues.

Several months ago, Capital One announced an abrupt departure from the mortgage business. Now, analysts at Trefis, posting on Forbes, claim this move is going to be a good one for investors, especially as it finalized deals to sell off its home-loan portfolio.

“We believe that the portfolio sale will have a negligible impact on our forecast for Capital One’s revenues and EPS for this year. However, the biggest gain for investors from the deal is that the funds generated from the deal will allow Capital One to reinstate its share repurchase program – resulting in a sizable increase in its payout ratio over subsequent quarters,” they write in the piece.

Blame stricter regulations and a slower mortgage market for the decision: “The mortgage division was never a strategic growth area for the bank. With the Fed’s ongoing rate hike over recent years driving mortgage rates higher, Capital One concluded late last year that it would no longer be able to keep up with the competition in a profitable manner – prompting an abrupt exit from mortgage originations,” they conclude. 

Back in February, the Federal Reserve announced it would restrict the growth of Wells Fargo until it “sufficiently improves its governance and controls,” citing what it called compliance breakdowns and widespread consumer abuses as the primary motivations for the order. Now, following pressure from Democratic Senator Elizabeth Warren, D-Mass., Fed Chair Jerome Powell has indicated that the Federal Reserve Board of Governors will hold a vote to decide whether or not to lift those growth restrictions placed on the megabank, according to an article from Reuters.

From the article:

The Fed’s policy shift could make it tougher for Wells Fargo to shake off the unprecedented sanctions that the bank said on Thursday are expected to crimp earnings by around $100 million.


In February, the Fed ordered Wells Fargo to keep its assets below $1.95 trillion until it had improved its governance and risk controls following a wave of sales practices scandals. The regulator previously said Fed staff would assess the adequacy of the bank’s remediation plan, which would also be reviewed by an independent third party.


During a congressional hearing in March and in a follow-up letter, however, Senator Warren pressed Fed Chair Jerome Powell to submit the bank’s remediation plan to a board vote and to consider publishing the third-party review.

The terms of the consent cease and desist order require Wells Fargo to submit a plan to improve its risk management policies and to improve the effectiveness of its board of directors.

During a Senate Banking Committee hearing in March, Warren pressed Powell to “consider requiring a vote of the Fed before” approving a plan, Powell agreed. Later in April, she urged him to commit to a public vote on the bank’s remediation plans and to consider releasing the third-party review required by the consent order.  

In a letter published by Warren’s office on Friday, Powell wrote to the senator and said that he’s accepted a request for a board vote.

“After further consideration, the decision about terminating the asset growth restriction will be made by a vote of the Board of Governors,” Powell said in the letter, adding, “we will review that report to determine whether and to what extent the report can be publicly disclosed.”

According to Reuters reporter Michelle Price, the Fed declined to comment on Friday beyond Powell’s letter, and a spokeswoman for Wells Fargo declined to comment on the Fed’s decision, too.

Speaking of the Fed, two more things… First, according to a CNBC report, St. Louis Federal Reserve President James Bullard said the Fed has already reached a “neutral” level on rates and that more rate hikes aren’t necessary for right now.

From the article:

Going further at this point, he said, risks nipping off business investment that might follow the recent corporate tax cut, upset healthy conditions in the labor market, and leave inflation expectations short of the central bank’s goal.


There are “reasons for caution in raising the policy rate further given current macroeconomic conditions,” Bullard said in remarks to the Springfield Area Chamber of Commerce in Springfield, Mo.


Bullard has made a series of arguments in recent years for halting further rate increases until it is clear that inflation, growth and market interest rates have shifted to a higher, more dynamic “regime.”

Following its May meeting earlier this month, the Federal Open Markets Committee announced that while economic activity has continued to strengthen along with the labor market, it would not be raising rates.

Second, according to the latest forecast from a team of economists at the Federal Reserve Bank of Philadelphia, there is less chance of an economic downturn through early 2019. The report, released Friday, said the economy looks “slightly stronger now than it did three months ago,” according to 36 forecasters surveyed by the Philadelphia Fed.

The forecasters also predict that real GDP will increase at an annual rate of 3% for both this quarter and next quarter, growing slightly from previous estimates from three months ago, the report said.

From the report:

The forecasters predict real GDP will grow at an annual rate of 3.0 percent this quarter and next quarter, up slightly from the estimates of three months ago. On an annual-average over annual-average basis, the forecasters predict real GDP growing 2.8 percent in 2018, 2.7 percent in 2019, 1.9 percent in 2020, and 2.0 percent in 2021.


The forecasters see a marginally brighter outlook for the unemployment rate. The forecasters predict the unemployment rate will average 3.9 percent in 2018, 3.7 percent in 2019, 3.9 percent in 2020, and 4.0 percent in 2021. The projections for 2018 and 2019 are slightly below those of the last survey, indicating a better outlook for unemployment.

Finally, according to a brief report from Reuters, mortgage servicer Ditech Financial and Fannie Mae “have been hit with a proposed class action accusing them of charging borrowers for excessive home inspections and disguising the fees to look legitimate on billing statements.”

From the brief:

Filed on Thursday in Orlando federal court, the lawsuit said thousands of Florida homeowners who missed payments on their mortgages may have been charged for inspections that were not permitted by mortgage servicing guidelines or clearly disclosed.

More on that and other topics to come this week. Have a good week everyone!

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