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Looking for Wells Fargo-like risks in CFPB's complaint database

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Looking for Wells Fargo-like risks in CFPB's complaint database

It is easy to find plenty of consumer complaints aboutunauthorized accounts at numerous financial institutions. Whether thosecomplaints will translate to regulatory action is another matter.

As Wells Fargo& Co. continues to deal with fallout from after employeesopened more than 2 million deposit and credit card accounts that may not havebeen authorized by consumers, cross-selling practices have become a for regulators. Since Jan.1, 2015, consumers have filed 638 complaints with the Consumer FinancialProtection Bureau regarding unsolicited issuance of credit cards.

Financial institutions have criticized the CFPB's complaintdatabase as faulty. The regulator will make some effort to confirm the customerhas a relationship with the named institution, but the CFPB does not verifyother details. Nonetheless, it seems clear that the CFPB uses the database as ajumping-off point for investigations.

"Consumer complaints are the CFPB's compass and play acentral role in everything we do. They help us identify and prioritize problemsfor potential action," said CFPB Director Richard Cordray in July2015.

Among the 638 complaints for unsolicited credit cardissuance, Wells Fargo accounted for 28 complaints, the seventh-highest total.Although nominally small, the figure appears worse when accounting for the sizeof Wells Fargo's credit card business. Bank of America Corp.'s credit card business is morethan twice as large, but the bank only had three more complaints.

One company stands out when looking at unsolicited issuancecomplaints: PayPal Holdings Inc.The company was the subject of 122 complaints, nearly 50% more than the nextcompany, CitigroupInc., which has the largest credit card portfolio among U.S. banks.PayPal does not disclose the size of its credit card business.

PayPal offers a line of credit option previously known asBill Me Later, rebranded as PayPal Credit and backed by . PayPal also hasa PayPal Extras Mastercard product, which is issued by .

PayPal did not respond to requests for comment.

PayPal has already been hit over its Bill Me Later product.In May 2015, the CFPB fined the company $10 million and ordered $15 million inconsumer redress. While consumer complaints are always concerning, there isreason to believe the CFPB is comfortable with PayPal's approach, said SanjaySakhrani, an analyst with Keefe Bruyette & Woods who covers the company.

"I feel like this is something that the CFPB hasdefinitely vetted, and I think PayPal has been working with them to improvetheir disclosures," Sakhrani said in an interview.

The CFPB's consent order against PayPal required that thecompany stop using PayPal Credit as the default option for payment, among otherthings. The rate of unsolicited issuance complaints against PayPal has notchanged significantly since the CFPB action. From January 2015 through May2015, the company was the subject of 29 such complaints, or roughly 5.8 permonth. From June 2015 through September 2016, the rate was almost exactly thesame, 5.8 per month.

In a Sept. 21 note, Piper Jaffray analysts examined the CFPBcomplaint database for risks among banks. They believe facessignificant risk considering an elevated number of complaints and a focus oncross-selling practices. Still, the analysts like the company based onvaluation and expected earnings growth.

Wells Fargo was the subject of a significant number ofcomplaints regarding bank account opening, closing or management and regardingmanaging a loan or lease. But those complaint figures appear to be in line withother money-center banks like Bank of America, JPMorgan Chase & Co. and Citigroup. To an extent,significant complaint volume is unavoidable for banks that large, said RickFischer, a senior partner with Morrison Foerster.

"It's the nature of servicing literally tens ofmillions of consumers," he said.

Fischer said the complaint database can provide valuableinsight into areas of focus for the CFPB. For example, Fischer said his firmstarted work on debt collection practices before the CFPB released its study asthe volume of complaints made it clear the industry would become a focus.

Tristram Wolf, an associate with law firm Ballard Spahr anda former investigator for the CFPB, said companies should pay close attentionto the database to monitor reputation risk and prepare for exams. But Wolf saidthe CFPB will rarely start an enforcement action based on a complaint, which ishandled by the regulator's consumer response division. Rather, the agency'ssupervisory division will use the database to determine the scope of an examand the questions to ask. And he said the enforcement division will consultcomplaints for additional support.

"Enforcement pretty regularly reaches out to consumerresponse for consumer complaints that can support ideas that they have orenforcement actions they might be interested in," Wolf said in aninterview. "As a general matter,the flow between the consumer complaint unit and enforcement is generallydriven by enforcement."