Must Know - 13, 14, 15 Actions

Question 1

When is issuing a MOU is required

Answer 1

3 rated, virtually no exceptions, Belief that management has recognized the errors and will improve is NOT sufficient reason for not requiring an MOU for a 3 rated bank

Question 2

When CMPs may be issued

Answer 2

Civil money penalties may be assessed for the violation of any law or regulation, any final order or temporary order issued, any condition imposed in writing by the appropriate Federal banking agency in connection with the approval of any application, and any written agreement between a depository institution and Federal banking agency.

Question 3

The 13 factors that should be considered to determine whether CMPs should be imposed

Answer 3

In 1998, the FDIC adopted a revised interagency statement of policy regarding the assessment of civil money penalties. To facilitate evaluation of the gravity of such violation(s), the policy statement sets forth the following factors which must be considered in determining whether civil money penalties should be imposed:

1. Evidence that the violation or practice or breach of fiduciary duty was intentional or was committed with a disregard of the law or with a disregard of the consequences to the institution;
2. The duration and frequency of the violations, practices, or breaches of fiduciary duty;
3. The continuation of the violations, practices, or breach of fiduciary duty after the respondent was notified or, alternatively, its immediate cessation and correction;
4. The failure to cooperate with the agency in effecting early resolution of the problem;
5. Evidence of concealment of the violation, practice, or breach of fiduciary duty or, alternatively, voluntary disclosure of the violation, practice or breach of fiduciary duty;
6. Any threat of loss, actual loss, or other harm to the institution, including harm to the public confidence in the institution, and the degree of such harm;
7. Evidence that a participant or his or her associates received financial gain or other benefit as a result of the violation, practice, or breach of fiduciary duty;
8. Evidence of any restitution paid by a participant of losses resulting from the violation, practice, or breach of fiduciary duty;
9. History of prior violation, practice, or breach of fiduciary duty, particularly where they are similar to the actions under consideration;
10. Previous criticism of the institution or individual for similar actions;
11. Presence or absence of a compliance program and its effectiveness;
12. Tendency to engage in violations of law, unsafe or unsound banking practices, or breaches of fiduciary duty; and
13. The existence of agreements, commitments orders, or conditions imposed in writing intended to prevent the violation, practice, or breach of fiduciary duty.

Question 4

The four factors that constitute the “Test of Gravity”

Answer 4

FDIC policy provides that civil money penalty recommendations should only be initiated when the fineable violation is believed to meet the test of gravity as required by FIRIRCA including consideration of the 13 relevant factors found in the interagency statement of policy and the existence of any one of the following criteria:

1. The violation causes the bank to suffer a substantial financial loss;
2. The violation is willful, flagrant, or otherwise evidences bad faith on the part of the bank or individual(s) involved in the violation (including repeated and/or multiple violations, if applicable);
3. The violation directly or indirectly involves an insider, or an associate of an insider, who benefits from the transaction in a material or substantial way; or
4. Previous supervisory means (i.e., specific supervisory comment or correspondence, Memorandum of Understanding, previous civil money penalty assessment, or Cease-and-Desist Order) have not been effective in eliminating or deterring violations.

Question 5

The maximum amounts for Tier 1, Tier 2, and Tier 3 penalties and what types of violations generate each penalty

Answer 5

Tiered penalty levels have been established. Tier 1 penalties of up to $5,500 per day may be assessed for most violations. If a party commits a violation, recklessly engages in an unsafe or unsound practice or breaches a fiduciary duty which is part of a pattern of misconduct, causes more than minimal loss to the institution or results in a pecuniary gain to such party, then the potential maximum penalty (Tier 2 penalty) increases to $27,500 per day. A Tier 3 penalty of the lessor of $1,100,000 or 1% of total assets may be assessed if a violation, unsafe or unsound practice, or breach of fiduciary duty is knowingly committed and causes a substantial loss to the institution or a substantial pecuniary gain to the violator.

Question 6

The primary corrective tools of the FDIC

Answer 6

While the use of reason and moral suasion remain the primary corrective tools of the FDIC, the Board of Directors has been given broad enforcement powers under Section 8 of the FDI Act. The Board has the power to terminate insurance (Section 8(a)), to issue Cease and Desist Actions (Section 8(b)) and, if deemed necessary, to immediately invoke a temporary Cease and Desist Action (Section 8(c)). In addition, the Board has been given the power to suspend or remove a bank officer or director or prohibit participation by others in bank affairs when certain criteria can be established (Sections 8(e) and (g)). Each of these powers and their scope and limitations are more fully discussed below.

Question 7

Composite rating of 4 or 5 required a Consent Order (formerly Cease & Desist Order); CO also generally used for 3 rated bank with obstinate management

Answer 7

True

Question 8

Only the FDIC Board of Directors is authorized to make a finding of “unsafe or unsound”

Answer 8

True

Question 9

If MOU or CO is recommended, EIC drafts a memo to the RO (separate from the ROE) detailing the weaknesses and proposed corrective actions

Answer 9

True

Question 10

The 7 examples of a Lack of Action Deemed “Unsafe or Unsound”

Answer 10

1. Failure to provide adequate supervision and direction over the officers of the bank to prevent unsafe or unsound practices, and violation(s) of laws, rules and regulations.
2. Failure to make provision for an adequate allowance for loan losses.
3. Failure to post the general ledger promptly.
4. Failure to keep accurate books and records.
5. Failure to account properly for transactions.
6. Failure to enforce programs for repayment of loans.
7. Failure to obtain or maintain on premises evidence of priority of liens on loans secured by real estate.

Question 11

The 6 examples of Actions Deemed “Unsafe or Unsound”

Answer 11

1. Operating with an inadequate level of capital for the kind and quality of assets held.
2. Engaging in hazardous lending and lax collection practices which include, but are not limited to, extending credit which is inadequately secured; extending credit without first obtaining complete and current financial information; extending credit in the form of overdrafts without adequate controls; and extending credit with inadequate diversification of risk.
3. Operating without adequate liquidity, in light of the bank’s asset and liability mix.
4. Operating without adequate internal controls including failing to maintain controls on official checks and unissued certificates of deposit, failing to segregate duties of bank personnel, and failing to reconcile differences in correspondent bank accounts.
5. Engaging in speculative or hazardous investment policies.
6. Paying excessive dividends in relation to the bank’s capital position, earnings capacity and asset quality.

Question 12

The 7 examples of unsafe or unsound conditions

Answer 12

1. Maintenance of unduly low net interest margins.
2. Excessive overhead expenses.
3. Excessive volume of loans subject to adverse classification.
4. Excessive net loan losses.
5. Excessive volume of overdue loans.
6. Excessive volume of nonearning assets.
7. Excessive large liability dependence.

Question 13

Know who is considered an IAP

Answer 13

institution-affiliated party (director, officer, employee, controlling stockholder, independent contractor, etc.)

Question 14

Written agreements

Answer 14

action reserved for banks with capital deficiencies that are not caused by unsafe or unsound practices

Question 15

Capital directive

Answer 15

final order issued by FDIC to state-nonmember bank (only!) that fails to maintain capital levels at or above minimum requirements; used solely to correct capital deficiency

Question 16

8(a) – Termination of deposit insurance

Answer 16

Section 8(a) provides an effective method by which the FDIC’s Board of Directors can require insured banks to cease unsafe or unsound practices and violations and restore the bank to a safe and sound condition. The consequence of non-compliance, namely termination of insured status, is severe. The principal objective of Section 8(a), however, is to secure necessary corrections and not to terminate a bank’s deposit insurance.

Question 17

8(b) – Cease and Desist

Answer 17

Section 8(b) provides that the FDIC may issue and serve a Notice of Charges upon a State nonmember insured bank in the following instances:
1. The bank is engaging, or has engaged, in unsafe or unsound practices;
2. 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
3. There is reasonable cause to believe the bank is about to do either of the above.
Can be placed on a person or bank. Is active 30 days after the bank is notified.

Question 18

8(c) – Temporary Cease and Desist Order

Answer 18

Such an Order, accompanied by a Notice of Charges, can be issued against the bank or any director, officer, agent or other person participating in the conduct of the affairs of such bank. The Order becomes effective upon service and, unless set aside or limited by court proceedings, remains effective and enforceable pending completion of the administrative proceedings pursuant to Section 8(b) action.
Within 10 days after service of a Temporary Cease and Desist Order, the bank or such director, officer, employee, agent, or other person named may apply for an injunction setting aside, limiting or suspending the enforcement, operation or effectiveness of such Order. These actions will generally be held in U.S. District Court for the judicial district in which the home office of the bank is located or U.S. District Court for the District of Columbia.

Question 19

8(e) – Removal and prohibition of Institution Affiliated Parties; know the three conditions required to take an 8(e) action

Answer 19

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. It also allows the FDIC to prohibit the party from participating in the conduct of the affairs of any insured depository institution. Section 8(e) action may be taken only when it is determined, after notice and hearing, that

1. 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
2. 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
3. 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 20

8(g) – Suspension of an IAP; know the conditions under which this action can be taken

Answer 20

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 is: (1) 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 (2) 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. The policy of the Division of Supervision regarding such actions is that the desirability of seeking removal or suspension will be considered on a case-by-case basis. Voluntary suspensions shall not be sought pending a decision that the FDIC is prepared to pursue formal suspension or removal under Section 8(g).

Question 21

Lack of Action Deemed “Unsafe or Unsound”

Answer 21

1. Failure to provide adequate supervision and direction over the officers of the bank to prevent unsafe or unsound practices, and violation(s) of laws, rules and regulations.
2. Failure to make provision for an adequate allowance for loan losses.
3. Failure to post the general ledger promptly.
4. Failure to keep accurate books and records.
5. Failure to account properly for transactions.
6. Failure to enforce programs for repayment of loans.
7. Failure to obtain or maintain on premises evidence of priority of liens on loans secured by real estate.

Question 22

Actions Deemed “Unsafe or Unsound”

Answer 22

1. Operating with an inadequate level of capital for the kind and quality of assets held.
2. Engaging in hazardous lending and lax collection practices which include, but are not limited to, extending credit which is inadequately secured; extending credit without first obtaining complete and current financial information; extending credit in the form of overdrafts without adequate controls; and extending credit with inadequate diversification of risk.
3. Operating without adequate liquidity, in light of the bank’s asset and liability mix.
4. Operating without adequate internal controls including failing to maintain controls on official checks and unissued certificates of deposit, failing to segregate duties of bank personnel, and failing to reconcile differences in correspondent bank accounts.
5. Engaging in speculative or hazardous investment policies.
6. Paying excessive dividends in relation to the bank’s capital position, earnings capacity and asset quality.