Comerica: Potential Legal and Regulatory Issues Not Ideal but Manageable

A May 29 American Banker report details compliance issues related to Comerica’s CMA handling of a Treasury Department program known as Direct Express. Comerica has been involved in this program, which is a way for people without a bank account to receive federal benefits, for years. Complaints about the program have bubbled up in the past, and there are several lawsuits outstanding. However, there were some new details in this report.

From our perspective, the most relevant new details were that certain data and processes may have gone through a non-U.S. vendor location (which is not allowed), certain data and reporting capabilities may have been inadequate for addressing fraud claims, and executives may have been aware of these inadequacies for years.

The absolute scale of the program and the alleged fraud do not appear to us to be massive with respect to Comerica as a whole. For example, a letter from Sen. Elizabeth Warren cites $460,000 in confirmed fraud in the year after August 2017. It is difficult to estimate the size of the liability from a pending class action lawsuit, as it is still in the beginning stages of gathering the class of plaintiffs. Comerica’s latest estimate of the range of potential possible losses from legal and regulatory matters is from $0 to $72 million.

While these exposures appear manageable, and this doesn’t appear to us to be a Wells Fargo-like situation (where issues were noted across large portions of the entire consumer banking unit), it also is not ideal that a more vulnerable consumer population was affected. Regulators tend to crack down harder on situations like that. We do not plan to make a material change to our $76 fair value estimate, but this does increase the chances of surprise legal and regulatory issues in the future.