Regulatory Enforcement Actions in Today’s Banking Environment
While most community banks may not have had the difficulty that the large money center banks have had since the mortgage market began to unravel, this is, none-the-less, a time that is testing bank managers and bank directors in banks of all sizes throughout the country – and the world for that matter. My banking career dates back to 1977, and the tough economic times and record-high interest rates of the late 1970s and early 1980s at times still seem fresh in my mind. That is the only period during my career that rivals today’s banking environment.
Then and Now – Major Differences and Similarities
The main difference between the economic environment back then and the current environment is that high unemployment caused a real estate crisis back then, but in today’s crisis, a real estate crisis caused high unemployment. Also, at that time, we had record-high interest rates and very high inflation versus the record low interest rates and the possibility of deflation now. The double-edge sword of high credit losses and deposit costs exceeding large segments of the average financial institution’s loan yields may have made our fundamental issues even greater to overcome then than now. As an industry, we were not as well capitalized back then as we are today. The greatest fear now is that we don’t know where the bottom is. The major similarity of then to now is that we see many banks that, by most measures, are considered to be well-managed, having less than desirable regulatory examinations and, in many cases, entering into a regulatory agreement.
Be Proactive in Your Response
While we are always sorry to learn that a bank is having difficulties, we understand that a regulatory enforcement action or just-less-than-ideal examination is a very tough experience. It is, however, very important for the board and management to remain positive and to aggressively lead the organization through this difficult but necessary regulatory process. It has been our experience that institutions that have been proactive and have embraced this trying time have fared relatively well, and often have stated that the organization was significantly improved by those changes. Institutions that fought the process or that proceeded from the prospective of only meeting regulatory demands ultimately did not fare as well. We urge you to not just do the minimum that is required, but to do more than is required. Don’t just meet a deadline, but beat the deadline.
Types of Regulatory Enforcement Actions
The current regulatory environment poses significant challenges for financial institutions, large and small. The regulatory agencies are closely scrutinizing how your bank does business and making demands for improvement. These challenges can come in two forms. If you are lucky, you may receive an informal enforcement action. Or, if issues are more serious, the bank may receive a formal enforcement action. The primary types of enforcement actions against banks and savings institutions are briefly summarized as follows:
Informal Actions
Commitment Letter: A Commitment Letter is a document signed by the bank’s board of directors on behalf of the bank and is acknowledged by an authorized regulatory official, reflecting specific written commitments to take corrective actions in response to problems or concerns identified by the regulator in its supervision of the bank. The document may be drafted by either the regulatory agency or the bank. A Commitment Letter is not a binding legal document. However, failure to honor the commitments provides strong evidence of the need for formal action.
Memorandum of Understanding: A Memorandum of Understanding (MOU) is a bilateral document signed by the bank’s board of directors on behalf of the bank and an authorized regulatory representative. An MOU is drafted by the regulator and in form and content looks very much like a formal regulatory enforcement action. It legally has the same force and effect as a Commitment Letter.
Safety and Soundness Plans: Safety and Soundness Plans are a less common form of informal action. A regulator issues to the bank a determination and notification of failure to meet safety and soundness standards and requires the submission of a safety and soundness compliance plan (collectively called a Notice of Deficiency). If the Safety and Soundness Plan is approved, it functions as an informal enforcement action. However, if the bank fails to submit an acceptable Safety and Soundness Plan or fails to in any material respect to implement an approved plan, the regulator will require the bank to correct the deficiencies.
Formal Actions
Consent Orders: A Consent Order is the title given by the regulator to an Order to Cease and Desist, which is entered into and becomes final through the board of directors’ execution on behalf of the bank of a Stipulation and Consent document. Consent Orders are signed by an authorized regulatory official. Its provisions are set out in article-by-article form and prescribe those restrictions and corrective and remedial measures necessary to correct deficiencies or violations in the bank and return it to a safe and sound condition. Violations of a Consent Order can provide the legal basis for assessing civil money penalties (CMPs) against directors, officers, and other institution-affiliated parties.
Cease and Desist Orders: Aside from its title, a Cease and Desist Order is identical in form and legal effect to a Consent Order. However, a Cease and Desist Order is imposed on an involuntary basis after issuance of a Notice of Charges, hearing before an administrative law judge, and final decision and order issued by the Comptroller. Any Cease and Desist Order is reviewable by a U.S. court of appeals. Cease and Desist Orders can be used to order affirmative corrective action. Moreover, a willful violation of a final Cease and Desist Order is itself grounds for receivership.
Temporary Cease and Desist Orders: A Temporary Cease and Desist Order is an interim order issued by the regulator and is used to impose measures that are needed immediately pending resolution of a final Cease and Desist Order. Such orders are typically used only when immediately necessary to protect the bank against ongoing or expected harm. A Temporary Cease and Desist Order may be challenged in U.S. district court within ten days of issuance, but is effective upon issuance and remains effective unless overturned by the court or until a final order is in place.
Formal Written Agreements: A formal written agreement (“Formal Agreement”) is a bilateral document signed by the board of directors on behalf of the bank and an authorized regulatory official. Like a Consent Order, its provisions are set out in article-by-article form and prescribe those restrictions and corrective and remedial measures necessary to correct deficiencies or violations in the bank and return it to a safe and sound condition. Violations of a Formal Agreement can provide the legal basis for assessing civil money penalties (CMPs) against directors, officers and other institution-affiliated parties. However, unlike a Consent Order, Formal Agreements are not enforceable through the federal court system. Another important difference between a Formal Agreement and a Consent Order is that willful violation of a Consent Order may be used as grounds for appointment of a receiver while with a Formal Agreement it may not. The decision to utilize a Formal Agreement instead of a Consent Order is largely driven by negotiation strategy and the discretion of the delegated decision-making official.
PCA Directives: Under 12 USC 18310 and 12 CFR 6 (Prompt Corrective Action or PCA), insured banks are subject to various mandatory and discretionary restrictions and actions depending upon the bank’s PCA capital category. Mandatory restrictions and actions are effective upon the bank being noticed that it is in a particular PCA capital category. Discretionary restrictions and actions are imposed on the bank through the issuance of a PCA Directive. If circumstances warrant, the regulator may issue a PCA Directive that is immediately effective. Otherwise, the normal process for issuing such a PCA Directive begins with the issuance of a Notice of Intent to Issue a Directive. The bank is given an opportunity to respond to the Notice of Intent, explaining why the proposed directive is not necessary or offering suggested modifications to the proposed directive. A PCA Directive is preferred when the supervisory office anticipates the bank may be a candidate for early resolution. A PCA Directive can enhance the regulator’s use of resolution options later because, e.g., failure to submit or implement a capital restoration plan required in a PCA Directive is grounds for receivership.
Safety and Soundness Orders: The regulator issues to the bank a determination and notification of failure to meet safety and soundness standards and requires the submission of a safety and soundness compliance plan (collectively called a Notice of Deficiency). If the bank fails to submit an acceptable plan or fails in any material respect to implement an approved plan, the regulator must, by order, require the bank to correct the deficiencies, and the regulator may, by order, require the bank to take any other action that the regulator determines will better carry out the purposes of 12 USC 1831p-1. The regulator must also take certain additional action against a bank that has not corrected a deficiency if the bank has experienced either extraordinary growth over the past 18 months, or within the past 24 months commenced operations or underwent a change in control. If circumstances warrant, the regulator may issue an order that is immediately effective.
Otherwise, the normal process for issuing such an order begins with the issuance of a Notice of Intent to issue an order. The notice identifies the safety and soundness deficiencies, and describes the proposed actions which would be included in the order and the time-frame for complying with the proposed actions. The bank is given an opportunity to respond to the Notice of Intent, explaining why the proposed order is not necessary or offering suggested modifications to the proposed order. A Safety and Soundness Order has essentially the same force and effect as a Cease and Desist Order. However, unlike a Cease and Desist Order, a willful violation of a Safety and Soundness Order is not itself grounds for receivership.
Young & Associates Article Source:http://www.articlesbase.com/banking-articles/regulatory-enforcement-actions-in-todays-banking-environment-1294640.html
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