If investors are learning anything about Wells Fargo (WFC -0.23%), it's to listen to CEO Charlie Scharf's words carefully. As sentiment on the bank turned bullish and many, including myself, started to believe that the asset cap the bank has been operating under for more than three and a half years could be lifted in the near term, Wells Fargo received a fresh $250 million fine and a new consent order from the U.S. Office of the Comptroller of the Currency (OCC), which regulates national banks.
Additionally, Federal Reserve Chairman Jerome Powell said publicly that the Fed would not hesitate to act if Wells Fargo did not fix its regulatory problems that ultimately lead to the bank's infamous phony-accounts scandal, in which employees at the bank fraudulently opened depository and credit card accounts for millions of customers without their authorization.
Scharf has not misled investors. On Wells Fargo's second-quarter earnings call, he called the remaining work on regulatory issues "significant." He also said there could be "setbacks, and progress will not be a straight line," a statement that proved true in Q3 and that Scharf has echoed on past earnings calls.
Scharf has also said numerous times that the work laid out in the remaining consent orders is "clear," so a good thing investors can do is get familiar with the bank's remaining consent orders, which could prove to be the best way to track the bank's progress on its regulatory work.
10 remaining consent orders
As Scharf has said many times, there is still a lot of work required to get the bank where it needs to be, and this work could take multiple years. As consent orders run down, the bank's stock should rise as investors anticipate the bank being closer to finally having updated its regulatory infrastructure to regulators' liking. Here are the 10 active orders remaining on Wells Fargo.
April 13, 2011 -- The longest outstanding of the bunch, the Federal Reserve issued this consent order to nine other banks in addition to Wells Fargo for problems in each of their mortgage loan servicing divisions and how they foreclosed on mortgages of clients. Likely born from problems in the Great Recession, the Fed wanted to improve the way the largest banks communicated with borrowers and ensure banks weren't still trying to foreclose a loan once the terms of that loan had been modified.
July 20, 2011 -- Another issue related to the bank's mortgage program, the Federal Reserve fined Wells Fargo $85 million. This was due to claims that the bank led higher-quality borrowers, who could have been considered of prime credit quality, into loans with more costly interest rates normally reserved for less-than-prime borrowers. The order, which directed Wells Fargo to compensate victims, was the largest fine the Fed had hit a bank with in regards to a consumer complaint at the time.
June 3, 2015 -- The OCC fined Wells Fargo $4 million related to the sale of identity theft protection products that it looks like the bank, in part, inherited from its acquisition of Wachovia during the Great Recession. The OCC, in the consent order, said Wells Fargo, through a vendor, charged some customers for some identity theft services they never received.
Sept. 2, 2015 -- I did not find a ton of information on this consent order, but it's still active per the OCC's enforcement action records. It looks like, based on the documents, one of Wells Fargo's subsidiaries engaged in activities it wasn't supposed to. The order stipulated that Wells Fargo was not to acquire any new financial subsidiary unless it received special permission from the OCC.
Aug. 22, 2016 -- The Consumer Financial Protection Bureau, which was born from the Great Recession and is intended to act as a consumer watchdog, fined Wells Fargo $3.6 million and ordered the bank to reimburse borrowers in its student lending division more than $400,000. The CFPB asserts that Wells Fargo charged borrowers wrongful fees, didn't provide certain information, and didn't have accurate credit information for borrowers. These actions led to "increased costs and unfairly penalized certain student loan borrowers." Interestingly, Wells Fargo announced the sale of its student loan portfolio not too long ago.
Sept. 8, 2016 -- Directly related to the phony-accounts scandal, the OCC fined Wells Fargo $35 million for opening up bank accounts and credit card accounts without the approval of the customers they were opening them for. Many fines and punishments would follow for this practice. The OCC also faulted Wells Fargo in this order for not having the proper risk management practices in place to prevent such a scandal.
Feb. 2, 2018 -- The most punitive of all of the consent orders, the Fed took the unprecedented move of actually preventing Wells Fargo from growing its balance sheet until it corrected its internal controls and risk management practices. The order would limit the size of the bank to roughly $1.95 trillion in total assets.
The move has cost Wells Fargo immensely -- Bloomberg in August of 2020 estimated that the cap had cost the bank at least $4 billion in profits. Wells Fargo has made some progress on the asset cap, but it is currently anyone's guess as to when it gets removed. Earlier this year, market sentiment suggested Wells Fargo could be close to removal, but that sentiment has turned more negative in light of Powell's recent statements, although it really is hard to know. By far, this consent order is the most prohibitive to the stock price.
April 20, 2018 (2 orders) -- The OCC and CFPB worked together in issuing two consent orders that both had to do with the same infractions at the bank. The consent orders were in regards to an auto lending insurance program in which the bank inappropriately charged consumers for collateral protection insurance, or left the policies in place for too long. The orders also had to do with improperly charging customers to extend the interest rate on their mortgages. The agencies tasked Wells Fargo with establishing and putting in place an enterprise risk management program that prevents such problems from reoccurring. In total, the two agencies also fined Wells Fargo $1 billion.
Sept. 9, 2021 -- Most recently, the OCC slapped Wells Fargo with a $250 million fine, which was for the bank's inability to correct deficiencies from past orders in a timely manner. The order said Wells Fargo had yet to address the issues raised in its 2018 OCC consent order and that there were still existing problems with the bank's mortgage servicing practices.
Progress has been made
Although the company still has 10 active consent orders in place, Wells Fargo has also made some decent progress since the start of 2020.
May 4, 2020 -- Wells Fargo received an outstanding grade on its Community Reinvestment Act performance, which measures how well the bank serves low- to moderate-income communities within the bank's geographic footprint.
Jan. 5, 2021 -- The OCC eliminated a previous consent order placed on the bank in 2015 that had to do with the bank's regulatory infrastructure associated with the Bank Secrecy Act (BSA) and Anti Money Laundering (AML) compliance program. BSA and AML have to do with helping the U.S. government prevent bad actors, such as terrorists, from laundering money through the banking system. BSA/AML-related consent orders have not been uncommon for large banks in recent years.
Feb. 17, 2021 -- Media outlets reported that officials at the Fed accepted a proposal submitted by Wells Fargo for restructuring its governance and risk management framework. The approval marked the second of four steps Wells Fargo must successfully get through in order to get the asset cap removed. The news sent the stock soaring on this day and shows how the asset cap is the most prohibitive of all the consent orders to the stock.
Sept. 9, 2021 -- Wells Fargo announced that a consent order from the CFPB in relation to the bank's retail sales practices from the phony-accounts scandal was no longer in place. "The expiration of the CFPB's 2016 consent order is representative of progress we are making," Scharf said in a statement.
How close is Wells Fargo to getting its remaining consent orders removed?
There is still a considerable amount of work for Wells Fargo to do on the 10 remaining consent orders. The somewhat good news is that several of the consent orders seem very closely related, such as those made by the OCC and CFPB in 2018. The most recent one in 2021 is essentially reprimanding the bank for not working quickly enough through past consent orders, so my guess is that once some of the main issues are solved, several of these could be lifted simultaneously or within a very close time period.
The asset cap is the largest shadow over the bank and its stock performance, so watch that one the closest. Lastly, I'd point out that the two consent orders Wells Fargo has gotten removed took at least five years from issuance.
Bank consent orders often do take years to get removed and Wells Fargo is dealing with numerous, so patience will likely still be required. But on a positive note, management knows what it needs to do, seems to be working diligently, and continues to make progress, albeit with some setbacks.