The prospect of a president who made a career out of scamming consumers has led to understandable fears that the next four years will present a bonanza of tricks, con games and deceptions unrestrained by federal regulators. But before we hyperventilate too much, we should recognize how this already describes our current reality to an uncomfortable degree.
Perhaps the best example of this recently has been the appalling Wells Fargo scandal, which you’ll be thrilled to know has not ended. Over the weekend The New York Times reported on a similar fraud involving allegedly unauthorized life insurance accounts arising from a partnership between Wells Fargo and Prudential.
The situation resembles a popular scam during the mortgage crisis known as force-placed insurance. Loan servicing companies would automatically issue homeowner’s insurance policies to any of their customers who allowed their insurance to lapse. However, in many cases the homeowner had a current policy; the servicer just overlaid their force-placed insurance on top of it. This insurance was typically so substandard as to be unusable, and the only real beneficiary was the servicer, which got a kickback from the insurance company for every plan it issued.
These types of insurance scams proliferate because there’s no real oversight of that industry at the federal level. Dodd-Frank put in place a small Federal Insurance Office inside the Treasury Department, but it serves no regulatory function, leaving that to the fragmented rules of the states.
The partnership between Wells Fargo and Prudential involved selling life insurance policies inside bank branches. An internal Prudential investigation revealed that Wells Fargo sales representatives signed up customers for the Prudential policies without their permission, even setting up automatic debits from their accounts, according to former Prudential employees.
These abuses would be separate from the 2 million fake Wells Fargo accounts we know about, since they are ultimately Prudential policies. Unfortunately we don’t have the whole story, because the three corporate investigators at Prudential who uncovered the scandal were all fired. They’ve since filed a lawsuit over wrongful termination; Prudential claims the firings were unrelated.
It’s worth questioning whether this partnership should have ever been allowed.
Bank employees cannot legally sell insurance. Instead, in mid-2014, Prudential set up self-service kiosks inside Wells Fargo branches, and a link on the Wells Fargo website, for a low-cost life insurance policy called MyTerm. Applicants could get approved for MyTerm simply by filling out a 15-minute questionnaire, with no medical exam required.
Wells Fargo employees couldn’t give customers specific details about MyTerm, but they could (and were told to) steer them to the kiosks. Every sign-up would count as credit toward Wells Fargo employees’ sales goals. So it was inevitable that sales reps would cut out the middleman and start signing people up for MyTerm themselves. Obvious falsehoods on the application, like addresses listed as “Wells Fargo Drive,” gave away the scheme.
The goal was less to scam people out of money than to meet sales goals. The Prudential whistleblowers found that reps would routinely open and close MyTerm accounts, taking credit for each re-opening. This bolstered Wells Fargo’s overall sales figures, eventually presented to investors to boost the stock price. Nevertheless, some of the 15,000 MyTerm account premiums were paid through automatic debits to checking and savings accounts.
On Monday, Prudential decided to suspend the MyTerm program with Wells Fargo, pending a review. “Prudential remains squarely focused on doing what is right for our customers,” Chief Operating Officer Steve Pelletier said in a statement.
I have many questions here. Why is Prudential still allowed to sell a life insurance policy based off a quickly rendered application and scanning a couple medical databases? Why do former Prudential employees compare these policies to predatory reverse mortgages granted to unsophisticated consumers? What benefits does this policy, which costs around $300 a year, provide? Why were the Wells Fargo policies “sold predominantly to individuals with Hispanic-sounding last names,” as the whistleblower lawsuit claims? How did Prudential not pick up on anything amiss at Wells Fargo after 70 percent of the policies sold in the first year lapsed?
If we could ask one federal regulator those questions, it would be nice. But we would have to survey 50 different insurance commissioners in the states, and ask about policies issued online in many cases. California and New Jersey are reportedly investigating the matter, but that only begs the question of who protects residents in the other 48 states. No single regulator coordinated or monitored the Wells Fargo partnership because such an office doesn’t exist. And Wells Fargo’s national bank regulator, the Office of the Comptroller of the Currency, isn’t exactly focused on ancillary insurance policies sold out of the storefronts.
The entire regulatory structure, then, frustrates consumer protection on these products. Prudential has been labeled a systemically important financial institution, subject to enhanced supervision by federal authorities. But that effort is about threats to the financial system, not penny-ante life insurance schemes that may or may not be legitimate.
By the way, Prudential sells MyTerm through other retail banks, including BB&T and South Carolina Federal Credit Union. High-pressure sales goals have been eliminated at Wells Fargo; what about these other banks? [UPDATE: In response to this piece, the South Carolina Federal Credit Union says it has not offered the MyTerm insurance since 2013 and no MyTerm policies were ever issued, though a link to sign up for the Prudential policies remained on the credit union site until it was removed this week.]
Before the liberal hysteria over the imminent doom of Trump’s America crests, we need to understand that this scandal, and so many others, happened under the watch of eight years of a Democratic president. The Consumer Financial Protection Bureau, the one significant structural change to our regulatory framework since the financial crisis, was an important advance, but even it has been unable to uncover the mass of scams out there — and in some cases it’s been prevented by law from doing so.
Something about the structure of our economy tends to reward bad behavior, even in supposedly tighter regulatory environments. Whenever those dedicated to rooting out corporate scam culture ever re-enter the halls of power, they’ll need to have a long memory to understand that overhaul is needed, not tinkering around the edges.