If investors learn anything about Wells fargo (NYSE: WFC)is to listen carefully to the words of CEO Charlie Scharf. As sentiment on the bank turned bullish and many, including myself, began to believe that the asset cap the bank had been operating under for more than three and a half years could be lifted in the near term, Wells Fargo was fined a further $ 250 million. and a new consent order from the US Office of the Comptroller of the Currency (OCC), which regulates domestic banks.
Additionally, Federal Reserve Chairman Jerome Powell has publicly stated that the Fed will not hesitate to act if Wells Fargo does not fix its regulatory issues that ultimately led to the bank’s infamous fake accounts scandal. in which bank employees fraudulently opened a deposit and a credit card. has millions of customers without their permission.
Scharf did not mislead investors. In Wells Fargo’s second quarter earnings call, he called the remaining work on regulatory issues “important.” He also said there could be “setbacks and progress will not be linear,” a statement that came true in the third quarter and which Scharf echoed in previous earnings calls.
Scharf has also said on several occasions that the work planned in the remaining consent orders is “clear,” so a good thing investors can do is familiarize themselves with the bank’s remaining consent orders, which might be helpful. prove to be the best way to follow the progress of its regulatory work.
10 remaining consent prescriptions
As Scharf has said on several occasions, there is still a lot of work to be done to get the bank to where it needs to be, and that work could take several years. As consent orders dwindle, the bank’s shares are expected to rise, with investors expecting the bank to be on the verge of finally updating its regulatory infrastructure at the discretion of regulators. Here are the 10 remaining active orders on Wells Fargo.
April 13, 2011 – The oldest of the group, the Federal Reserve issued this consent order to nine other banks in addition to Wells Fargo over issues in each of their mortgage management divisions and the way they foreclosed their mortgages. clients. Likely born out of the troubles of the Great Recession, the Fed wanted to improve the way the largest banks communicated with borrowers and ensure that banks did not always try to foreclose on a loan once the terms of that loan had been cleared. modified.
July 20, 2011 – Another issue with the bank’s mortgage program, the Federal Reserve fined Wells Fargo $ 85 million. This was due to claims that the bank had driven higher quality borrowers, who could have been considered to be of prime credit quality, to loans with more expensive interest rates normally reserved for lower quality borrowers. . The order, which ordered Wells Fargo to compensate victims, was the biggest fine imposed on a bank by the Fed in connection with a consumer complaint at the time.
June 3, 2015 – The OCC fined Wells Fargo $ 4 million for selling identity theft protection products it appears to have inherited in part from its acquisition of Wachovia during the Great Recession. The OCC, in the consent order, said Wells Fargo, through a vendor, billed some customers for identity theft services they never received.
September 2, 2015 – I couldn’t find a ton of information about this consent order, but it is still active according to the OCC enforcement action records. It appears from the documents that one of Wells Fargo’s subsidiaries engaged in activities that it was not supposed to do. The order stipulated that Wells Fargo was not to acquire any new financial subsidiaries unless it obtained special authorization from the OCC.
22 Aug 2016 – The Consumer Financial Protection Bureau, born out of the Great Recession and intended to act as a watchdog for consumers, fined Wells Fargo $ 3.6 million and ordered the bank to reimburse more than $ 400,000 to borrowers in its student loans division. The CFPB says Wells Fargo charged borrowers unwarranted fees, failed to provide certain information, and did not have accurate credit information for borrowers. These actions have resulted in “increased costs and unfairly penalized some student loan borrowers.” Interestingly, Wells Fargo announced the sale of its student loan portfolio not too long ago.
September 8, 2016 – Directly linked to the fake accounts scandal, the OCC fined Wells Fargo $ 35 million for opening bank accounts and credit card accounts without the approval of the customers they were opening them for. Numerous fines and penalties would follow for this practice. The OCC also criticized Wells Fargo in this order for not having put in place good risk management practices to prevent such a scandal.
February 2, 2018 – The most punitive of all consent orders, the Fed has made the unprecedented move to prevent Wells Fargo from increasing its balance sheet until it corrects its internal controls and risk management practices. The order would limit the size of the bank to around $ 1.95 trillion in total assets.
The move cost Wells Fargo hugely – Bloomberg estimated in August 2020 that the cap cost the bank at least $ 4 billion in profits. Wells Fargo has made progress on the asset cap, but no one currently knows when it will be removed. Earlier this year, market sentiment suggested Wells Fargo may be on the verge of fading, but that sentiment has turned more negative in light of Powell’s recent statements, although it’s really hard to know. By far, this consent order is the most prohibitive on the course of action.
April 20, 2018 (2 orders) – The OCC and CFPB collaborated in issuing two consent orders which both dealt with the same bank offenses. The consent orders involved an auto loan insurance program in which the bank inappropriately charged consumers for collateral protection insurance, or left policies in place too long. The orders also concerned improperly forcing clients to extend the interest rate on their mortgages. The agencies tasked Wells Fargo with establishing and implementing a business risk management program that prevents such problems from reoccurring. In total, the two agencies also fined Wells Fargo $ 1 billion.
September 9, 2021 – Most recently, the OCC slapped Wells Fargo with a $ 250 million fine, which was for the bank’s inability to correct shortcomings in orders placed in a timely manner. The order said Wells Fargo had not yet addressed the issues raised in its 2018 OCC consent order and that there were still issues with the bank’s mortgage management practices.
Progress has been made
While the company still has 10 active consent orders in place, Wells Fargo has also made decent progress since early 2020.
May 4, 2020 – Wells Fargo received an outstanding rating for its performance under the Community Reinvestment Act, which measures how well the bank serves low to moderate income communities within its geographic footprint.
January 5, 2021 – The OCC removed a previous consent order issued to the bank in 2015 which concerned the regulatory infrastructure of the bank associated with the program of compliance with the law on banking secrecy (BSA) and the fight against money laundering. ‘money (AML). BSA and AML aim to help the US 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.
February 17, 2021 – The media reported that Fed officials have accepted a proposal submitted by Wells Fargo to restructure its governance and risk management framework. The approval marked the second of four steps Wells Fargo must go through in order to get the asset cap removed. The news skyrocketed the stock that day and shows how the asset cap is the most prohibitive of all stock consent orders.
September 9, 2021 – Wells Fargo has announced that a CFPB consent order regarding the bank’s retail practices following the fake accounts scandal is no longer in place. “The expiration of the CFPB consent order in 2016 is representative of the progress we are making,” Scharf said in a statement.
How close is Wells Fargo to getting its remaining consent orders removed?
Wells Fargo still has a lot of work to do on the remaining 10 consent orders. The good news is that several of the consent orders appear to be very closely related, such as those issued by the OCC and CFPB in 2018. The most recent in 2021 essentially berates the bank for not working quickly enough with previous consent orders. , so I’m guessing that once some of the major issues are resolved, several of them could be lifted simultaneously or in a very near time frame.
The asset cap is the biggest shadow on the bank and its stock market performance, so watch for which one comes closest. Finally, I would like to point out that the two consent orders withdrawn from Wells Fargo took at least five years from their issuance.
Bank consent orders often take years to revoke, and Wells Fargo processes many, so patience will likely still be required. But on a positive note, management knows what to do, appears to be working diligently, and continues to make progress, despite a few setbacks.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.