We recently learned that Wells Fargo (NYSE:WFC) is shutting down its personal lines of credit in order to focus their attention on other parts of their lending operations. In this Fool Live video clip, recorded on July 12, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why Wells Fargo may have decided to make this move and how some consumers might be adversely affected through no fault of their own.
Jason Moser: They're saying, "Hey, your credit score might be dinged because of this action, and well, there's just not much we're going to be able to do about it." To me, that's just obviously not very customer-centric. It's not customer-centric at all the way they message that, and maybe they're going to backtrack and try to figure out a way to rectify that situation, because, to me, honestly, this is something where the consumer should not be held accountable here. This is through no fault of their own, particularly if they're ultimately going into some other type of lending product. Because like you said, I did a little bit of digging here just to get a better idea as to how important this was to the business. If you look through their 10K, the personal lending division, this little chunk of the business, the personal lending portion of the business represented $594 million in revenue in 2020 for the bank. That was like you said loan is declining, that was down from $652 million in 2019. Now this is in the context of a bank that brought in just a little over $58 billion in revenue in 2020. It is insignificant really. To your point, maybe it's just, hey, getting rid of excess risk or products that they don't need to manage, because they can put people into better products. I get that, absolutely. But when you message it the way they've messaged it, it really just leaves a bad taste in your mouth.
Matt Frankel: Well, it's not the consumers fault, and it's not necessarily Wells Fargo's fault. I think Elizabeth Warren is actually mad at the wrong people. It's the credit bureaus fault or the credit scoring. It's FICO's fault specifically. That shouldn't affect it. There should be some provision let's say if your bank closes, if they shut down a product like you see right now. If something happens through no fault of the consumer, there should be some provision in the credit scoring formula that insures that that customer is not affected. Because it's not their fault. It's not necessarily the banks fault. You can't fault the bank for making a good business decision.
Moser: Yeah. I agree.
Frankel: It's not necessarily their fault, but because of the way the credit scoring formula is setup, this can affect consumers in two ways. One. A bit. The second biggest category of your credit score is the amounts you owe. That generally means the amount you owe relative to the amount of available credit. Now, you tell, some of these consumers were getting rid of $10,000, $20,000, $30,000 of your available credits, all of a sudden the utilization rate shoots up without adding effect of their own and their score gets dinged. On the other hand, if they've had these accounts for a while, there's another credit score category that makes up 15 percent year score called length of credit history. If you get rid of that, especially if it's one of the consumers' older accounts, it can really hurt. You've probably heard before you're not supposed to close your oldest credit cards.
Moser: I have, yeah.
Frankel: Same idea there, because it reduces the age of your average account, which can also adversely affect your score. So it can, but it's not necessarily for anything Wells Fargo is doing. It's really because of how the credit scoring systems setup. I feel like Wells Fargo should try to work with the FICO people to make sure it doesn't. I just feel like you're not going about it the wrong way, but I don't necessarily think it's their fault.
Moser: Yeah. Well, I think that what you've just said here, frankly, Matt, maybe you need to be working with our investor relations department or something because all they had to do was basically message it the way you just said it and say, listen, this is something that based on this set of rules, could impact your credit score. However, we're going to work with the appropriate agencies to make sure that it doesn't. It's basically saying, here's a set of rules that everybody has been playing by here, we need to go back and change the rules. There needs to be some amendment there that helps protect the consumer in a situation like this. Maybe that's ultimately what will happen here. Again, it just goes back to their messaging from the very get-go here has just been not so great.
Frankel: Yeah. I call out Elizabeth Warren because she's ahead of the Senate Banking Committee so that's why she gets-
Moser: Right. Great idea, yeah.
Frankel: I would rather see her put more pressure on FICO, the Fair Isaac Corporation (NYSE:FICO), to make the credit scoring model more fair. Because when you think about it, there are a lot of businesses springing up based on the premise that the credit scoring system is not there. That's the whole point of Upstart's (NASDAQ:UPST) business, and they're doing really well with it, and it's because the credit scoring methodology is somewhat flawed. I think they are pressuring the wrong people. It's wrong to pressure Wells Fargo to keep a failing products on their books.
Frankel: It's also wrong to fault the consumers, when a bank shuts down or when a bank discontinues a product. If one of my credit card issuers decides to cancel one of my credit cards for no reason which they have the right to do, during the financial crisis they were canceling consumers credit cards left and right for no-fault of their own to reduce risk. There should be some provision in the rules that doesn't affect your credit score, that it's considered for scoring purposes, like you've maintained that credit line in good standing because you did. I would like to see that.