NALS Annual Education
Conference and National Forum
October 2-4, 2014
Houston, Texas
What Legal Professionals Should Know About
Bank Transactions with the FDIC
Jerry G. Sanchez
Senior Counsel
Cox Smith Matthews Incorporated
jsanchez@coxsmith.com
(214) 698-7835
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Jerry G. Sanchez provides legal and regulatory counsel for banks and finance companies on a
variety of consumer finance matters, including compliance with the Truth in Lending Act and
Regulation Z, the Truth in Savings Act and Regulation DD, the Equal Credit Opportunity Act and
Regulation B, the Fair Credit Reporting Act, the Federal Debt Collection Practices Act, RESPA and
Regulation X, the Electronic Funds Transfer Act and Regulation E, affiliated business arrangements,
electronic banking and E-commerce, the Fair Debt Collections Practices Act, bank and thrift powers,
federal preemption, legal lending limits, Texas home equity law and regulations, Federal and state
privacy laws and regulations, fiduciary activities, the USA PATRIOT Act amendments to the Bank
Secrecy Act and anti-money laundering regulations, and the Community Reinvestment Act. He
prepares and files varied financial regulatory applications and provides advice regarding legal and
regulatory issues, including corporate activities. For non-bank entities, Jerry guides clients through
state lending license and registration requirements, interest and usury limits, unfair and deceptive
trade practices, and state escheat laws.
During his tenure at the Federal Deposit Insurance Corporation (FDIC), Jerry G. Sanchez
advised management and examiners in an eight state region regarding a wide variety of supervision
and consumer compliance legal issues. He represented the FDIC in proceedings involving the
imposition of civil money penalties against state-supervised banks, and also advised and represented
the FDIC in “outlier” and “non-outlier” actions involving the Equal Credit Opportunity Act and
Regulation B claims against state-supervised banks. A graduate of the Southwestern Graduate School
of Banking at Southern Methodist University, Sanchez received his J.D. from the University of Texas
School of Law and his B.A. degree from the University of Texas at Austin. Sanchez currently serves as
Board Secretary for the Dallas-Fort Worth Hispanic Bankers Association and on the Advisory Council
for the University of Dallas, School of Ministry, and is also a member of the Dallas Bar Association.
2
History and Structure of the FDIC
History and structure of the FDIC:
 Created in 1933 when President Franklin Roosevelt signed the Banking Act
of 1933.
 Headquartered in the District of Columbia, with six regional offices: Atlanta,
Chicago, Dallas, Kansas City, New York City, and San Francisco.
 Managed by a five-person Board of Directors. Each director is appointed by
the President and confirmed by the Senate. No more than three of the
directors may be from the same political party.
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History and Structure of the FDIC
Martin Gruenberg is the current Chairman of the FDIC. (See picture below).
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History and Structure of the FDIC
Interesting facts:
 Since the start of FDIC insurance in 1934, no depositor has lost any insured
funds as a result of a bank or thrift institution failure [of course, depositors
have lost monies that were in excess of insured amounts].
 The FDIC receives no Congressional appropriations; it is funded entirely by
premiums banks and thrift institutions pay for deposit insurance coverage
and from earnings on investments in US Treasury securities.
 The FDIC insures roughly $9 trillion in deposits in US banks and thrifts.
5
History and Structure of the FDIC
Primary functions:
 Directly supervises over 4,500 banks and saving banks for operational safety
and soundness
 Examines any bank for compliance with consumer protection laws, including the
following, IF state nonmember bank has assets below $10 billion (otherwise the
Consumer Financial Protection Bureau (“CFPB”) has supervisory authority):
o Fair Credit Billing Act: protects consumers from unfair billing errors and establishes a
mechanism for consumers to address billing errors.
o Fair Credit Reporting Act: regulates the collection, dissemination, and use of
consumer information, including consumer credit information.
o Truth-in-Lending Act: designed to promote the informed use of consumer credit, by
requiring disclosures about its terms and cost to standardize the manner in which
costs associated with borrowing are calculated and disclosed.
o Fair Debt Collection Practices Act: seeks to eliminate abusive practices in the
collection of consumer debts, to promote fair debt collection, and to provide
consumers with an avenue for disputing and obtaining validation of debt information
in order to ensure the information's accuracy.
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History and Structure of the FDIC
 Examines banks for compliance with the Community Reinvestment
Act (“CRA”), which requires banks to help meet the credit needs of
the communities they were chartered to serve.
 Responds to and resolves bank and thrift institution failures.
 Insures deposit accounts.
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History and Structure of the FDIC
Overview of banking system:
 Banks may be federally or state chartered.
o Federally chartered banks and thrifts are regulated by the Office
of the Comptroller of the Currency (“OCC”).
o State chartered banks are regulated by the state in which they
are chartered plus a federal regulator, depending on whether the
bank joins the Federal Reserve.
 Stated chartered banks that join (“state member banks”) are
regulated by the Federal Reserve.
 State chartered banks that do not join (“state non-member
banks”) are regulated by the FDIC.
 The FDIC examines state non-member banks for
operational safety and soundness since their deposits
are insured.
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Deposit Insurance
 The FDIC insures deposits only
 What is included?
o
o
o
o
o
Checking Accounts
Savings Accounts
Money Market Deposit Accounts (“MMDAs”)
Certificates of Deposit (“CDs”)
Negotiable Order of Withdrawal (“NOW”) Accounts
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Deposit Insurance
 What is not included:
o Securities
o Mutual funds
o Bonds
o Life insurance
o Annuities
o Other types of investments that are not deposits (even if
purchased from an insured bank)
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Deposit Insurance
 What are the FDIC coverage limits?
o Single accounts: $250,000 per owner
o Joint accounts: $250,000 per co-owner
o IRAs and other certain retirement accounts: $250,000 per owner
o Revocable trust accounts: $250,000 for each unique eligible
beneficiary, subject to certain limitations and requirements
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Deposit Insurance
 FDIC’s Electronic Deposit Insurance Estimator:
https://fdic.gov/edie/index.html
 Use Bank Find or call 1-877-ASK-FDIC to verify a bank
or savings association is insured by the FDIC
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FDIC Symbol and Advertisements
The FDIC official sign (below) must be displayed at each teller
window where insured deposits are accepted
Insured depository institutions must state “Member of the
Federal Deposit Insurance Corporation,” “Member of FDIC,” or
“Member FDIC” in any advertisement promoting deposit products
and services
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Bank Failures
 A bank may be closed when it becomes critically
undercapitalized or is unable to meet its obligations to
depositors and others
 FDIC has two roles in bank failures
o Pay insurance to depositors up to the insurance limit
o Act as the “receiver” of the failed bank by assuming the task of
selling the failed bank’s assets and settling its debts
 FDIC notifies each depositor in writing by mailing the
notice immediately after the bank closes
 19 banks have been closed to date in 2014
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Laws and Regulations
 Federal Deposit Insurance Act (“FDI Act”)
o 12 U.S.C. §§ 1811-1835a
o Enacted in 1950
o Sets standards for admission of banks to federal deposit
insurance
o Authorizes FDIC to pursue enforcement actions
o Appoints FDIC as receiver
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Laws and Regulations
 FDIC Laws, Rules and Regulations
o 12 CFR Parts 301-371
o Advertisement of Membership (Use of “Member FDIC” Logo)
o Deposit Insurance Coverage
o Establishment, Relocation and Closing of Branches
o Merger Transactions
o Change in Bank Control
o Activities of Insured State Banks
o Establishment of Bank Subsidiaries
o Section 19 of the FDI Act (Consent to service by persons convicted of
certain criminal offenses)
o Golden Parachutes and Indemnification Payments
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Laws and Regulations
The FDIC Issues Various Types of Guidance, including :
 Advisory Opinions
 FDIC Statements of Policy
 FDIC General Counsel’s Opinions
 Financial institution letters
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Merger Transactions
Prior Written Approval Required To:
 Prior written approval of the FDIC (and other responsible agencies—
e.g., OCC, Federal Reserve, state regulator, as applicable), are
required for an insured depository institution to—
o merge or consolidate with any bank or institution;
o assume liability to pay any deposits made in, or similar liabilities
of, any bank or institution; or
o transfer assets to any bank or institution in consideration of the
assumption of liabilities for any portion of the deposits made in
such insured depository institution.
 Prior written approval of a merger transaction is NOT required IF the
responsible agency finds that it must act immediately in order to
prevent the probable default of one of the banks involved.
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Merger Transactions
o
o
o
o
Published Notice: Prior to the FDIC (and other responsible agency) approving a merger, the
applicants must publish notice of the proposed merger in a newspaper of general circulation
in the community or communities where the main offices of the banks involved are located.
Competitive Factors Report
 Before acting on any application for approval of a merger transaction, the FDIC and
responsible agency shall—
 request a report on the competitive factors involved from the Attorney General of the
United States; and
Monopolies: The FDIC (and other responsible agencies) shall NOT approve–
 any proposed merger transaction which would result in a monopoly, or which would be
in furtherance of any combination or conspiracy to monopolize or to attempt to
monopolize the business of banking in any part of the United States, or
 any other proposed merger transaction which may be substantially to lessen
competition, or which in any other manner would be in restraint of trade, unless it finds
that the anticompetitive effects of the proposed transaction are clearly outweighed in the
public interest by the probable effect of the transaction in meeting the convenience and
needs of the community to be served.
In every case, the FDIC (and other responsible agencies) shall take into consideration the
financial and managerial resources and future prospects of the existing and proposed
institutions, the convenience and needs of the community to be served, and the risk to the
stability of the United States banking or financial system (e.g., the deposit insurance fund).
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Branch Banks
 No State nonmember insured bank shall establish and operate any
new domestic branch unless it shall have the prior written consent of
the FDIC;
 No State nonmember insured bank shall move its main office or any
branch from one location to another without such consent. No
foreign bank may move any insured branch from one location to
another without such consent;
 No State nonmember insured bank shall establish or operate any
foreign branch, except with the prior written consent of the FDIC and
upon such conditions and pursuant to such regulations as the FDIC
may prescribe.
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Branch Banks
90 Days Notice to Federal Regulator

Identification of Closed Branch

Proposed Closing Date

Detailed Statement of Branch Closure Reasons

Statistical or Other Information Supporting
Branch Closing Consistent with Bank’s
Branch Closing Policy

Copy of Mailed Customer Notice
21
Branch Banks
 90 Days Mailed Customer Notice (separate mailing or statement
stuffer)
 30 Days Lobby Notice (conspicuous location)
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Institution-Affiliated Parties (“IAPs”)
GOLDEN PARACHUTES
The FDIC limits, by regulation, certain “golden parachute” payments or
indemnification payments. “Golden parachute” payments are large
severance payments made by insured banks to its senior executive
officers. Indemnification payments reimburse insiders certain expenses,
frequently legal costs.
The FDIC, by regulation, considers the following factors in determining
whether to prohibit golden parachute and indemnification payments:
 Whether there is a reasonable basis to believe that the IAP has
committed any fraudulent act or omission, breach of trust or fiduciary
duty, or insider abuse with regard to the depository institution that has
had a material affect on the financial condition of the institution.
 Whether there is a reasonable basis to believe that the IAP is
substantially responsible for—
o the insolvency of the depository institution;
o the appointment of a conservator or receiver for the depository institution; or
o the troubled condition of the depository institution, if applicable;
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Institution-Affiliated Parties (“IAPs”)
GOLDEN PARACHUTES
 Whether there is reasonable basis to believe that the IAP has
materially violated any applicable Federal or State banking law or
regulation that has had a material affect on the financial condition of
the institution.
 Whether there is a reasonable basis to believe that the IAP has
violated or conspired to violate federal criminal or financial laws.
 Whether the IAP was in a position of managerial or fiduciary
responsibility.
 The length of time the party was affiliated with the insured
depository institution and the degree to which—
o the payment reasonably reflects compensation earned over the period of
employment; and
o the compensation involved represents a reasonable payment for services
rendered.
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Institution-Affiliated Parties (“IAPs”)
GOLDEN PARACHUTES
 The term "golden parachute payment" does not include—
o any payment made pursuant to a retirement plan which is qualified (or is
intended to be qualified) under section 401 of the Internal Revenue Code of 1986
or other nondiscriminatory benefit plan;
o any payment made pursuant to a bona fide deferred compensation plan or
arrangement which the FDIC determines, by regulation or order, to be
permissible; or
o any payment made by reason of the death or disability of an IAP.
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Indemnification
Certain Indemnification Payments Prohibited.--No insured depository
institution or covered company may prepay the salary or any liability or
legal expense of any IAP if such payment is made—
 in contemplation of the insolvency of such institution or covered
company or after the commission of an act of insolvency; and
 with a view to, or has the result of–
o preventing the proper application of the assets of the institution to creditors; or
o preferring one creditor over another.
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Subsidiaries
PROCEDURES.--When an insured depository institution seeks to
establish or acquire a subsidiary or when a insured depository
institution elects to conduct any new activity through a subsidiary that
the insured depository institution controls, the insured depository
institution—
shall notify the FDIC or its primary regulator, as appropriate, not
less than 30 days prior to the establishment, or acquisition, of any
such subsidiary, and not less than 30 days prior to the
commencement of any such activity, and in either case shall provide
at that time such information as each such agency may, by
regulation, require; and
shall conduct the activities of the subsidiary in accordance with
regulations of the FDIC or its primary regulator, as appropriate.
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Deposit Insurance Assessment Rates
--Assessed against depository banks whose deposits are insured by
the FDIC (up to $250,000 per account).
--Based on asset size of depository bank. All rates are annual and are
in basis points which are cents per $100.00 of assessment base.
--Large and highly complex banks and newly insured depository banks
pay higher insurance premiums based on increased risk to FDIC
deposit insurance fund.
28
Activities of Insured State Banks
Permissible for National Banks?

State bank may engage in w/o FDIC approval.
Not permissible for National Banks?

Prior FDIC approval required.
29
Community Reinvestment Act (“CRA”)
 The Community Reinvestment Act (“CRA”) is intended to
encourage depository institutions to help meet the credit needs of
the communities in which they operate, including low- and
moderate-income neighborhoods, consistent with safe and sound
operations. It was enacted by the Congress in 1977 (12 U.S.C.
2901).
CRA encourages banks to not just take deposits from their local
communities, but to also make loans.
Banks are periodically examined by the FDIC (or other
responsible agencies). The agencies exam 3 categories.
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Community Reinvestment Act (CRA”)
Lending Test
Investment Test
 Service Test
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Community Reinvestment Act (“CRA”)
Ratings:

Outstanding

Satisfactory

Needs To Improve

Substantial Non-Compliance
CRA ratings important for certain regulatory filings by banks, including
establishment of branch offices. No satisfactory rating = non-expedited
treatment of regulatory filings = non-approval of regulatory filings.
By regulation, among other factors, the FDIC takes into account the record of
performance under the CRA of each applicant in considering a filing for
approval of:
o
o
o
o
o
The establishment of a domestic branch;
The relocation of the bank's main office or a domestic branch;
The relocation of an insured branch of a foreign bank;
A transaction subject to the Bank Merger Act; and
Deposit insurance.
32
Conservatorship/Receivership of Insolvent Banks
FDIC appointed conservator or receiver of insolvent insured
depository banks.
Liquidate bank, and sell assets to other banks and financial entities.
Pay insured deposits of bank customers (up to $250,000 per
account).
Pay secured first, and then unsecured creditors only if any monies
left.
33
Section 19 of the Federal Deposit Insurance Act (12 U.S.C. 1829)
Prohibits, without the prior written consent of the FDIC, a person convicted of
any criminal offense involving dishonesty or breach of trust or money
laundering (covered offenses), or who has agreed to enter into a pretrial
diversion or similar program in connection with a prosecution for such
offense, from becoming or continuing as an institution-affiliated party (“IAP”),
owning or controlling, directly or indirectly an insured depository institution
(insured institution), or otherwise participating, directly or indirectly, in the
conduct of the affairs of the insured institution. In addition, the law forbids
an insured institution from permitting such a person to engage in any conduct
or to continue any relationship prohibited by section 19.
Section 19 applies, by operation of law, as a statutory bar to participation
absent the written consent of the FDIC. The purpose of an application is to
provide the applicant an opportunity to demonstrate that, notwithstanding the
bar, a person is fit to participate in the conduct of the affairs of an insured
institution without posing a risk to its safety and soundness or impairing
public confidence in that institution. The burden is upon the applicant to
establish that the application warrants approval.
34
Change of Director or Senior Executive Officer
By regulation, an insured state nonmember bank shall give the FDIC written
notice at least 30 days prior to adding or replacing any member of its board
of directors, employing any person as a senior executive officer of the bank,
or changing the responsibilities of any senior executive officer so that the
person would assume a different senior executive officer position, if:
The bank is not in compliance with all minimum capital requirements
applicable to the bank as determined on the basis of the bank's most
recent report of condition or report of examination;
The bank is in troubled condition; or
The FDIC determines, in connection with its review of a capital
restoration plan required under section 38(e)(2) of the FDI Act (12 U.S.C.
1831o(e)(2)) or otherwise, that such notice is appropriate.
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FDIC Informal Enforcement Powers
FDIC-Required Board Resolution
Commitment Letter
Memorandum of Understanding
Corporate Leverage
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FDIC Formal Enforcement Powers
Like the other federal bank regulators, the FDIC has broad enforcement
powers which it make take against insured depository banks, including the
following:
Terminating or suspending insurance;
Issuing permanent or temporary cease-and-desist orders (“C&Ds”);
Requiring affirmative actions to correct conditions resulting from violations;
Issuing capital directives to require depository institutions to increase
capita;
Restricting a depository institution's activities;
Suspending and/or removing depository institution officers and directors;
and,
Assessing civil money penalties (“CMPs”).
37
Examples of Informal and Formal FDIC Supervisory
and Enforcement Actions
Type of Corrective
Action
Description of Action
Informal Actions:
FDIC-Required Board
Resolution
Commitment Letter
Bank-generated document designed to address one or more
specific concerns identified by the FDIC. It is not a binding
legal document, but formal action can be initiated.
Document signed by bank representatives, reflecting specific
written commitments to take corrective action in response to
concerns identified by the FDIC. It is not a binding legal
document, but formal action can be initiated.
Memorandum of
A bilateral document similar to more formal enforcement
Understanding (“MOU”) actions in form and content. It is not a binding legal
document, but formal action can be initiated.
Corporate Leverage
An action by the FDIC to withhold or condition approvals as
part of the corporate approval process.
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Examples of Informal and Formal FDIC Supervisory
and Enforcement Actions
Type of Corrective
Action
Description of Action
Formal Actions:
Formal Written Agreements A bilateral document signed by the board and the FDIC. Its
pursuant to
provisions are set out in an article-by-article form to prescribe
12 USC 1818
necessary corrective action. Violation of a formal agreement can
provide the legal basis for more serious proceedings (e.g., a cease
and desist order).
Consent Order pursuant to Similar in format to a Formal Agreement. May be enforced through
12 USC 1818
application to a U.S. District Court. A Cease and Desist Order is
identical to a Consent Order but is imposed on an involuntary basis
following an administrative hearing.
Temporary Cease and Desist Interim order to impose immediate measures pending resolution of a
Order
final cease and desist order. May be challenged in U.S. district court
pursuant to 12 USC 1818 within 10 days of issuance but is effective on issuance.
Capital Directive pursuant to An order designed for establishing and enforcing capital levels and
12 CFR 325
for taking capital-related action. May be issued without a hearing
before an administrative law judge.
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Examples of Informal and Formal FDIC Supervisory
and Enforcement Actions
Type of Corrective Action Description of Action
Formal Actions:
Civil Money Penalties
Authorized civil money penalties for violations of law, formal
written agreements, final orders, conditions imposed in writing, and
certain unsafe and unsound banking practices and breach of fiduciary
duty.
Conservatorship
Places the rights to control or dispose of the bank in the hands of an
FDIC-appointed conservator.
PCA Measures
Mandatory and discretionary measures based on a bank’s PCA
category (e.g., restrictions).
Orders Enforcing Safety and
Soundness Standards pursuant
to
12 USC 1831p-1
Non-capital based supervisory restrictions for banks that fail to
comply with established safety and soundness standards. Following
agency notification of a deficiency, the bank may be directed to
submit a compliance plan. If the bank fails to submit a timely,
acceptable plan, or fails to adhere to an acceptable plan, the FDIC
may issue an order requiring the bank to take corrective action.
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QUESTIONS?
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