Wells Fargo froze his bank account. Now he might lose a house, lawsuit claims

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In the age of AI and automation, all it may take is an algorithm error to
lock you out of your bank account. It’s a frustrating – albeit common –
consequence as banks make efforts to combat fraud.

But in some cases, the consequences of a bank’s policing mistake can be
long-lasting and financially devastating.

Such is the alleged case of Ethan Parker, who filed a lawsuit in the
Middle District of North Carolina after being unable to get his house out
of foreclosure due to a frozen bank account.

Parker’s adoptive mother died in 2020, leaving him as the designated
beneficiary for a retirement account with AIG. After complying with the
requirements for receiving death benefits, Parker received two checks –
one for just over $9,700 and another for just under $207,800, according to
his lawsuit. Parker, who didn’t have a bank account, cashed the first
check. He then opened a Wells Fargo (NYSE: WFC) account through the bank’s
website, depositing the second check at a Wells Fargo branch in
Burlington, along with an additional $5,000 in cash.

While he used the account without incident for weeks, in October of 2022,
Wells Fargo, “without any explanation,” seized the funds and closed the
account, the lawsuit says.

According to the lawsuit, the bank accused Parker of forging the check.
After an attorney got involved, the firm that had issued the check in the
first place submitted a letter confirming it was valid and had been issued
to Parker.

But, according to the lawsuit, Wells Fargo still refused to provide the
funds, “implying that either Mr. Parker or his counsel had forged this
letter as well.”

“Wells Fargo did not conduct any meaningful fraud investigation,” the
lawsuit says. “Rather, Wells Fargo impermissibly shifted the burden to
their customer, insisting that he prove to the bank’s satisfaction that
the check was not fraudulent.”

In a statement, a Wells Fargo spokesperson said, "We strongly disagree
with the allegations made in the suit filed by Mr. Parker, and will defend
our position as we believe Wells Fargo took the appropriate actions."

Larger issue
Jim White, Parker’s attorney, said the case has larger implications than
just Parker’s money, as it shows Wells Fargo continues to keep customer
accounts frozen – in apparent violation of an agreement signed by CEO
Charles Scharf in December 2022.

The Consumer Financial Protection Bureau had claimed Wells Fargo regularly
froze accounts completely when its automized fraud detection system
identified suspect deposit accounts for employee review, a practice the
CFPB called unfair and likely to cause consumers substantial injury.

Wells Fargo was ordered to pay more than $2 billion in redress to
consumers and a $1.7 billion civil penalty over the issue last year. The
payments included more than $160 million in remediation to more than 1
million account holders.

To further resolve the issue, Wells Fargo agreed via consent order to use
item holds or other lesser account restraints – not full freezes – in the
future.

The CFPB did not respond to a request to comment for this story.

Wells Fargo isn’t the only bank the CFPB has called out for the practice.

Last year the CFPB fined Bank of America (NYSE: BAC) $100 million for
botching the disbursement of state unemployment benefits by freezing
people’s accounts with a faulty fraud detection program.

The CFPB oversight is coming at a time when fraud is increasing.

A recent report out of NICE Actimize shows overall deposit volume
increased by 2.6 percent year over year in 2022, while at the same time
fraud volume swelled by 62 percent.

As a result, banks across the board – including Wells Fargo – are turning
to technological fixes, such as complex AI algorithms, which White says
may have been overly aggressive in his client's case.

Peter Gwaltney, the CEO of the North Carolina Bankers Association, called
fraud a "significant issue" for banks in 2023.

"It comes in many forms and requires banks to employ a variety mitigation
efforts ... to protect their customers and to guard against losses to the
bank," he said. "Specific fraud mitigation efforts vary from bank to bank,
just depending on the nature of the risks they routinely encounter."

Gwaltney declined to talk about the specific case with Wells Fargo.

Elyse Hicks, consumer policy counsel for Americans for Financial Reform,
said that while fraud is a big problem, so are overly aggressive AI
algorithms.

Hicks was not familiar with the lawsuit, but said banks shouldn’t be
replacing a “reasonable investigation” with technology until it advances
to the point where it’s on equal footing with human oversight.

Hicks said she expects the CFPB to get more aggressive in implementing
actions against these kinds of practices in the coming years.

“They already seem to be getting more and more enforcement actions by the
CFPB than ever before,” she said.

In the meantime, Parker's attorney believes the only resolution for his
client is a declaratory judgment in court. Property he inherited is in
foreclosure proceedings as he is unable to pay a mortgage due to the
account freeze, according to the lawsuit.

“If Wells Fargo does not surrender Mr. Parker’s funds, he will lose this
house,” the lawsuit says.

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