FORMAL ADMINISTRATIVE ACTIONS

Question 1

15.1 FORMAL ADMINISTRATIVE ACTIONS

What is the primary evidentiary exhibit under the FDIC?

Answer 1

Report of Examination (ROE)

Question 2

15.1 FORMAL ADMINISTRATIVE ACTIONS

What are the primary corrective tools that the FDIC uses?

Answer 2

The use of reason and moral suasion.

Question 3

15.1 FORMAL ADMINISTRATIVE ACTIONS
What are the guidelines that should be observed in the preparation of a report where the examiner believes Section 8 action is or may be warranted?

Answer 3

• Only the FDIC’s Board of Directors is authorized to make a finding of “unsafe or unsound”. Examiners must only use the synonyms and other descriptive terms such as “undesirable, unacceptable and objectionable practices.”
• In a separate memo to the RD, aside from the ROE, examiners should detail each specific “Undesirable and Objectionable Practice” regarded as unsafe or unsound, the facts which conclusion is based, listed and discussed in order of importance under subheadings and captions. Violations of law or regulations should be discussed under a separate subheading. Relevant facts should be addressed, with reference to specific schedules within the report where full details are presented. The memo should include statements made by the bank’s directors/officers either supporting any charge made by the examiner or showing any corrective action. Quote the facts and circumstances from previous examination reports, Supervisory Authority letters to the bank, and letters of inquiry regarding correction of criticisms from the RD, so that examiners can call attention to incomplete corrective promises of management. Examiners should also comment when the “Undesirable and Objectionable Practices” violate the provisions of the bank’s board established formal policies.
• Examiners should detail in the RD memo their suggested measures to correct the “Undesirable and Objectionable Practices”. Such measures should be tailored to the situation with the possibility of performing them within the given time frame. Ensure that recommended corrective actions are detailed for each “Undesirable or Objectionable Practice” reflected in the memo. Corrective measures not relating to the specific “Undesirable or Objectionable Practice” should not be recommended for inclusion in a corrective order.
• The RD memo should contain specific comments and recommendations relative to the existing management situation. Existing management may be considered adequate to solve the problems facing the institution, although a redirection or a clarification of authority may be necessary. If present management is not considered satisfactory, the examiner should comment upon such matters as:
&raquo_space; The addition of independent outside directors and a chief executive officer, senior lending officer, or other appropriate senior officer with defined authority;
&raquo_space; The establishment of appropriate lines of authority, suitable board committees with outside director representation, and additional board policies for guidance of bank management;
&raquo_space; The implementation of board follow-up procedures to assure compliance with directives and established policies;
&raquo_space; The restriction of particular authorities of specific officers;
&raquo_space; The potential need for the directorate or an outside consultant to assess active management and/or the board; or
&raquo_space; Any other managerial situations particular to the institution’s circumstances.
• The RD memo should include the names and home addresses of any individuals the examiner believes should be named in a formal action to facilitate service on such individuals. The facts supporting the examiner’s opinion should be provided in the RD memo as well as the ROE.
• If information required to fully support the examiner’s recommendations cannot be obtained through customary examination techniques, the Regional Office should be apprised of the situation as soon as possible; if the matter remains unresolved, the examiner should so indicate in the RD memo, and the RD may consider possible use of the more formal investigative procedures under Section 10(c) of the FDI Act.
• Examiners recommending Section 8 actions should realize that these proceedings are within the purview of the Equal Access to Justice Act. The Act provides that certain parties who prevail in contested administrative or judicial proceedings against an agency of the Federal government may be able to recover their litigation expenses from the agency if the position of the agency in the proceeding was not substantially justified. Comments and observations in the memorandum must be well supported by substantial evidence and be able to stand up under cross examination in a hearing.
• The ROE generally serves as the FDIC’s primary evidentiary exhibit in Section 8 proceedings. It should be both factually and statistically correct, free of inconsistencies, and should not contain inflammatory remarks nor personal comments or observations not pertinent to evaluation of the bank or its management. Gratuitous remarks are to be avoided. Criticisms and comments set forth in Examination Conclusions and Comments should be realistic and must be well supported. Classifications should be reasonable, not arbitrary, and likewise well supported. Classifications of related lines or lines dependent upon the same source of repayment or strength should be consistent. The same is true where action is recommended against related banks with participations in the same loans. ROE’s containing the basis for Section 8 recommendations should receive special priority in terms of field examination work and Regional and Washington Office processing.
• When Section 8(b) cease and desist actions against a bank is to be recommended, the examiner should consult with the Regional Office prior to discussing the possibility with the bank’s board. Documentation of notification to the bank’s board of directors should be included in the RD memo.
• When a Section 8(e) removal action may be taken, the examiner should consult with the Regional Office, including Regional Counsel, as directed. It is especially important that the report or other documentary evidence support the charges issuing the Notice, particularly as they pertain to actions of the respondents.

Question 4

15.1 FORMAL ADMINISTRATIVE ACTIONS

What are considered Unsafe & Unsound practices. What are the actionable items - “operating with”? (ISHELP)

Answer 4

Operating with:
• Inadequate Capital (< 2% Tier 1 Leverage Capital)
• Speculative or hazardous investment activities
• Hazardous lending
• Excessive dividend payments
• Low Liquidity
• Poor Internal Routines & Controls

Question 5

15.1 FORMAL ADMINISTRATIVE ACTIONS

What can be considered Unsafe and Unsound conditions?

Answer 5

• Maintenance of unduly low NIM
• Excessive overhead expenses
• Excessive adverse classifications
• Excessive net loan losses
• Excessive volume of overdue loans
• Excessive volume of nonearning assets
• Excessive large liability dependence

Question 6

15.1 FORMAL ADMINISTRATIVE ACTIONS

Possible responses to an Unsafe and Unsound practices, conditions caused by lack of actions or actions. (2)

Answer 6

• Memorandum of Understanding is prepared by an examiner and submitted to the Regional Director to address the Unsafe and Unsound actions or conditions • Generally used to prepare for a Cease-and-Desist.

Question 7

15.1 FORMAL ADMINISTRATIVE ACTIONS

What are considered Unsafe & Unsound practices. What are the non-actionable items - “operating without”? (ATAASAP)

Answer 7

Operating without:
•   Adequate Board Supervision
•   Timely general ledger entries
•   Adequate ALLL
•   Accurate books and records
•   Sufficient collection practices
•   Accurate accounting applications
•   Perfecting liens

Question 8

15.1 FORMAL ADMINISTRATIVE ACTIONS
According the Manual of Examination, the lack of actions by the bank are identified by the FDIC Board of Directors as Unsafe & Unsound Practices. What are some actions that the bank may lack? (ATAASAP)

Answer 8

Operating without:
•   Adequate Board Supervision
•   Timely general ledger entries
•   Adequate ALLL
•   Accurate books and records
•   Sufficient collection practices
•   Accurate accounting applications
•   Perfecting liens

Question 9

15.1 FORMAL ADMINISTRATIVE ACTIONS

What is the principal objective of Section 8(a)?

Answer 9

To secure necessary corrections and not to terminate a bank’s deposit insurance.

Question 10

15.1 FORMAL ADMINISTRATIVE ACTIONS

If based on specific facts, the decision is made to terminate FDIC insurance, what must the FDIC give the institution?

Answer 10

Not less than 30 days written notice of its intention to terminate the institution’s insured status and fixes a time and place for a hearing.

Question 11

15.1 FORMAL ADMINISTRATIVE ACTIONS

What is the basis for Section 8(a) Action - Termination of Insurance?

Answer 11

• The institution or its directors or trustees have committed unsafe or unsound practices;
• The institution or its directors or trustees have violated a law or regulation to which the bank was subject, a written condition imposed by the FDIC in connection with the granting of an application or other request of bank, or any written agreement entered into with the FDIC;
• The institution is in an unsafe or unsound condition to continue operations.

Question 12

15.1 FORMAL ADMINISTRATIVE ACTIONS

What does the severity of the ultimate penalty implicit in any Section 8(a) action limit?

Answer 12

The severity of the ultimate penalty implicit in any 8(a) action limits its use as a remedial supervisory instrument.

Question 13

15.1 FORMAL ADMINISTRATIVE ACTIONS

What are the reasons why a Section 8(b) can be served?

Answer 13

• The bank is engaging, or has engaged, in unsafe or unsound practices;
• The bank is violating, or has violated, a law, rule, or regulation, or any condition imposed in writing by the FDIC with regard to the approval of a request or application, or a written agreement entered into with the FDIC; or
• There is reasonable cause to believe the bank is about to do either of the above.

Question 14

15.1 FORMAL ADMINISTRATIVE ACTIONS
Since the time frame can be lengthy in obtaining a Consent Cease and Desist Order that may allow additional damage to be suffered by the bank, what provides the FDIC power to act swiftly if necessary?

Answer 14

Section 8(c) of the FDI Act, provides the FDIC with the power to act with the utmost speed when the facts so dictate by issuing a Temporary Cease and Desist Order whenever the FDIC determines the violations or threatened violations or unsafe or unsound practices specified in the Notice of Charges are likely to cause insolvency or substantial dissipation of assets or earnings of the bank, or otherwise seriously prejudice the interests of the depositors prior to the completion of action under Section 8(b).

Question 15

15.1 FORMAL ADMINISTRATIVE ACTIONS

What is Section 8(e) and what power does it give to the FDIC?

Answer 15

Section 8(e) gives the FDIC the power to order the removal of an institution-affiliated party (director, officer, employee, controlling stockholder, independent contractor, etc.) from office.

Question 16

15.1 FORMAL ADMINISTRATIVE ACTIONS

What are the specific circumstances for a Section 8(e) action to be taken?

Answer 16

Only when it is determined, after notice and hearing, that
• The institution-affiliated party has violated any law or regulation, any final cease and desist order, any condition imposed in writing in connection with the granting of an application or other request, or any written agreement; participated in any unsafe or unsound practice in connection with the institution; OR engaged in an act, omission or practice which constitutes a breach of fiduciary duty; AND
• By reason of the violation, practice, or breach, the insured depository institution has suffered or will probably suffer financial loss or other damage; the interests of the depositors have been or could be prejudiced; OR the party has received financial gain or other benefit; AND
• The violation, practice or breach involves personal dishonesty on the part of the institution-affiliated party OR demonstrates willful or continuing disregard for the safety and soundness of the institution.

Question 17

15.1 FORMAL ADMINISTRATIVE ACTIONS
Under Section 8(g), the FDIC may suspend an institution-affiliated party from office or prohibit that individual from participating in the conduct of the institution’s affairs if such party does what?

Answer 17

• Charged in any information, indictment or complaint authorized by a United States Attorney, with the commission of or participation in a crime involving dishonesty or breach of trust which is punishable by imprisonment for a term exceeding one year under State or Federal law; and
• If continued service by the individual may pose a threat to the interests of the bank’s depositors or may threaten to impair public confidence in the bank.

Question 18

15.1 FORMAL ADMINISTRATIVE ACTIONS

In regards to a Capital Directive, what is the purpose of a written agreement?

Answer 18

• A bank with less than a 2% capital ratio will not be subject to Section 8(a) action because of its Tier 1 leverage capital ratio if it has entered into and is in compliance with a written agreement to increase its Tier 1 leverage capital ratio to the level deemed appropriate by the FDIC and to take whatever other action is necessary for the bank to be operated in a safe and sound condition.
• The use of a written agreement should normally be reserved for a bank whose problems are limited essentially to a capital deficiency that has not been caused by the unsafe and unsound practices of its management.

Question 19

15.1 FORMAL ADMINISTRATIVE ACTIONS

What is a capital directive used for?

Answer 19

• A directive is to be used solely to correct a capital deficiency and it is not intended to address other weaknesses that may be present in a bank

Question 20

15.1 FORMAL ADMINISTRATIVE ACTIONS
Upon determining that a directive should be issued to a State nonmember bank, what should the written notification indicate? (CT)

Answer 20

The written notification to the bank should indicate:
• Capital ratios that the bank will be required to attain and thereafter maintain, and the dollar amount of capital the bank will be required to raise.
• Time period within which the bank should achieve the prescribed capital levels, a period which should generally not exceed 180 days following the issuance of the directive.

Question 21

15.1 FORMAL ADMINISTRATIVE ACTIONS

What is a Prompt Corrective Action Directive?

Answer 21

Prompt corrective action is a framework of supervisory actions for insured depository institutions which are not adequately capitalized. These actions become increasingly severe as an institution falls within lower capital categories.

Question 22

15.1 FORMAL ADMINISTRATIVE ACTIONS
Section 39 of the FDI Act establishes a corrective program for banks that do not meet the safety and soundness standards set forth in Appendix A to Part 364 of the FDIC Rules and Regulations, what does this entail?

Answer 22

• The FDIC may request a bank to submit a compliance plan describing the steps the bank will take to correct identified deficiencies.
• Banks that fail to submit a requested plan, or fail to adhere to the submitted plan, will be subject to an Order requiring correction of the deficiencies noted.
• The FDIC has the discretion to employ other corrective measures that include growth restrictions, capital calls, limits on the rate of interest paid on deposits, or any other measure deemed necessary by the FDIC to effect corrective action.

Question 23

15.1 FORMAL ADMINISTRATIVE ACTIONS
Institutions which are deemed undercapitalized, significantly undercapitalized, or critically undercapitalized, as defined in Subpart B of Part 325 of the FDIC Rules and Regulations - Prompt Corrective Action, must submit a capital restoration plan to the appropriate Regional Director. What must the capital restoration plan contain?

Answer 23

• The steps the insured depository institution will take to become adequately capitalized;
• The levels of capital to be attained during each year the plan will be in effect;
• How the institution will comply with the restrictions in effect under prompt corrective action;
• The types and levels of activities in which the institution will engage;
• Other information as required;
• Guaranteed that the institution will comply with the plan until the institution has been adequately capitalized on average during each of four consecutive calendar quarters; and
• Has provided appropriate assurances of performance.