It's not often that a $3.7 billion settlement results in good news, but when it comes to Wells Fargo (WFC -1.21%), I see this as a positive development on what has been a long and bumpy road toward getting its costly asset cap removed.

The fine came from the Consumer Financial Protection Bureau (CFPB), which is penalizing Wells Fargo for improperly and illegally charging fees and interest on mortgage and auto loans. The infractions also include wrongly repossessing customers' vehicles and incorrectly processing payments on auto and mortgage loans.

Roughly $2 billion of the settlement will go to harmed customers, and $1.7 billion is a civil fine from the CFPB, and the largest one the government agency has issued in its history.

The settlement is going to be costly in the near term, resulting in a $3.5 billion operating-loss expense in the fourth quarter. But it is also yet another crucial step Wells Fargo must take to eventually get its asset cap removed. 

How this relates to the asset cap

In 2016, Wells Fargo's phony-accounts scandal came to light. Employees were found to have opened millions of credit-card and bank accounts without the consent of customers. Since then, regulators have found numerous other issues at the bank.

Person on computer.

Image source: Getty Images.

Wells Fargo has now paid billions in fines. And at one point, by my calculations, it had 13 outstanding consent orders from various banking regulators. In 2018, the Federal Reserve placed Wells Fargo under an asset cap, telling the bank that it wouldn't be able to grow its balance sheet (a key way banks make money) until it got its regulatory affairs in order. This has easily cost the bank billions in profits. Nearly five years later, the asset cap is still in place and remains the largest impediment to the stock.

Many have wondered when the asset cap will be removed; there have been times in the past when investors thought the end was near only to be disappointed. Wells Fargo CEO Charles Scharf has indicated in the past that there is still a good deal of work to do when you consider all of the outstanding consent orders that resulted from the phony-accounts scandal.

So one idea investors following Wells Fargo have had is that as Wells Fargo starts to clear some of these consent orders, it would also be correcting regulatory issues, improving its regulatory controls, and getting the bank closer to when the asset cap can be lifted.

Work on the consent orders

Since 2020, Wells Fargo has rid itself of four of its outstanding consent orders that either expired or were terminated. But regulators issued the bank a consent order in late 2021 for not moving quickly enough to correct issues. Scharf has said previously that progress would not be linear and that there could be setbacks.

Heading into this year, Wells Fargo still had 10 outstanding consent orders. But as part of the settlement today, the CFPB terminated its 2016 consent order related to student lending violations (Wells Fargo has since sold its student loan portfolio), getting it down to nine consent orders.

Furthermore, the CFPB clarified the timeline for how a 2018 consent order on the bank could be terminated. This order had to do with violations in its auto insurance program, including leaving policies in place for too long. The CFPB has now modified the 2018 consent order to state that it will be terminated either 180 days after the bank confirms in writing that it has completed all actions required from the consent order or three years from now, whichever happens first.

I'm not sure whether the bank has done the confirmation in writing yet, but ideally, that means the order could officially be terminated sometime next year. The 2018 auto lending infractions also garnered attention from the U.S. Office of the Comptroller of the Currency (OCC), which regulates national banks and issued its own consent order on the same matter. I would think that if the CFPB is satisfied on this one, the OCC would be close as well. Termination of both of these orders would get the bank down to seven outstanding consent orders. 

In public remarks following the announcement of the settlement, CFPB Director Rohit Chopra acknowledged some progress by Wells Fargo in recent years. But he also took a harsh tone, saying that the settlement "should not be read as a sign that Wells Fargo has moved past its long-standing problems or that the CFPB's work here is done."

Chopra added that "we are concerned that the bank's product launches, growth initiatives, and other efforts to increase profits have delayed needed reform."

How close is the bank to asset cap removal?

I don't think anyone will really know until it happens, but Wells Fargo is making progress on lowering its outstanding consent orders. And given the size of the fine imposed, the 2018 consent order is clearly a big one to get past. 

Also, I do not believe that every consent order needs to be removed for Wells Fargo to get the asset cap lifted, and we know that the bank has made some progress in regard to the asset cap.

In early 2021, media outlets reported that the Federal Reserve had approved the bank's proposed overhaul for its new risk management and governance structure. That is apparently the second of four steps the bank would need to take to get the cap lifted. Considering it's now been almost two years since these reports, I would think the bank has made some decent progress since.

No one can really know when the asset cap will be lifted, but getting some of these consent orders removed shows real progress.