FORMAL ADMINISTRATIVE ACTIONS
FDIC policy to assess a formal or informal administrative action on banks rated a
composite 3, 4, or 5 (unless specific circumstances argue strongly to the contrary)
- Composite 3
- Rating implies that a bank has weaknesses which, if not corrected, could worsen
into a more severe situation. Remedial action is appropriate
- Composite 4 or 5
- Banks have problems of sufficient severity that warrant formal action
- Formal action will be pursued against all banks rated 4 or 5 where evidence of
unsafe or unsound practices are present (action will usually consist of Cease and
Desist Order)
Mere belief that bank management has recognized the problems and will implement
corrective action is not a sufficient basis to preclude action if the bank is still deemed to
warrant a composite rating of 3, 4, or 5.
ROE Containing a Basis for Section 8 Charges
- Mandatory that you consult with the RO before submitting a report of examination
containing the basis for possible Section 8 charges
- Only the FDIC BOD is authorized to make a finding of unsafe or unsound
- Separate memo to RD should detail each specific undesirable and objectionable
practice and the facts upon which that conclusion is based should be listed and
discussed in the order of importance under descriptive subheadings and captions.
Violations should be discussed under a separate heading. Memo should also include
any statements made by the Board and/or management, and when practices violate
Board established policies
- In memo suggest corrective measures (if present management is not considered
satisfactory, comment upon such matters)
- Memo to include names and home addresses of any individuals believed to be named
in a formal action to facilitate service on such individuals
- Equal Assess to Justice Act – accused parties may be able to recover their litigation
expenses from the agency if the position of the agency in the proceedings was not
substantially justified
- ROE serves as the FDIC’s primary evidence in Section 8 proceedings
- Consult with RO before discussing possible Section 8 action, when discussed with the
bank’s Board document this fact in memo to RO
Unsafe or Unsound Practices
- Can result from either action or lack of action by management
- Lack of Action Deemed Unsafe or Unsound
- Failure to provide adequate supervision and direction over the bank officers to
prevent unsafe or unsound practices, and violations
- Failure to make provision for an adequate ALLL
- Failure to post the general ledger promptly
- Failure to keep accurate books and records
- Failure to account properly for transactions
- Failure to enforce programs for repayment of loans
-
Failure to obtain or maintain on premises evidence of priority of liens on loans
secured by real estate
- Actions Deemed Unsafe or Unsound
- Inadequate level of capital
- Hazardous lending and lax collection practices
- Operating without adequate liquidity
- Operating without adequate internal controls, failing to segregate duties, failing to
reconcile differences in correspondent accounts
- Engaging in speculative or hazardous investment practices
- Paying excessive dividends
Unsafe or Unsound Conditions
- Some of the conditions (there are several)
- Very low net interest margin
- Excessive overhead expenses
- Excessive volume of loans subject to adverse classifications
- Excessive net loan losses
- Excessive volume of overdue loans
- Excessive volume of non-earning assets
- Excessive large liability dependence
Violations
- Many violations are subject to legal interpretation (thus use apparent in reports)
- Do not cite violations based on conduct
The FDIC has the burden of proof for all Section 8 charges
Section 8(a) Termination of Insurance
- Principal objective is to secure necessary corrections and not to terminate a bank’s
deposit insurance
- Section 8(a) to be applied only after all other means for accomplishing corrections
have proven unsuccessful or where the condition of the bank is so severe as to
preclude an attempt at correction through other means
- Bases for Action
- Institution or its directors have committed unsafe or unsound practices
- Institution or its directors 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
- Institution is in unsafe or unsound condition to continue operations
- A hearing (formal proceeding) will be held
- Failure of the bank to appear at the hearing is deemed as consent to the termination of
its insured status
- FDIC has the burden of proving the allegations through evidence at the hearing
- The judge makes a recommendation to the FDIC Board who then makes a final
written finding
Section 8(b) Cease and Desist Order
- C and D orders are used in situations where available facts and evidence reasonably
support the conclusion that a bank is engaging in or about to engage in an unsafe or
unsound practice or violation of law
-
Basis for C&D Order
- Bank is engaging, or has engaged, in unsafe or unsound practices
- Bank is violating, or has violated, a law, a rule, a 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
- A C&D order is issued after a hearing (if one is held)
- Order becomes effective 30 days after it is served upon the bank, or at the time
indicated if issued upon consent of the bank
- Order remains in effect until modified or terminated by the FDIC, or stayed or set
aside by a reviewing court
- Order can be issued against the bank, any director, officer, employee, agent, or other
person participating in the conduct of the affairs of such bank (any IAP)
- Order requires:
- The party to cease and desist from certain practices and violations AND
- Take affirmative action to correct the conditions resulting therefrom
- C&D permits the FDIC to prevent an unsafe or unsound practice or violation from
occurring (evidence must be strong)
- CMPs may also be imposed against the bank or any party participating in the conduct
of the affairs of the bank
- Failure to comply with the Order can lead to Section 8(a) action, petitioning US
District Court to enforce the Order, or imposition of CMPs
Evidence
- FDIC has the burden of proving formal charges set out in a Notice of Charges (Notice
is a statement of facts relating to the practices or violations and fixes a time and place
for a hearing)
Consent Cease and Desist Orders
- FDIC attempts to obtain a Consent Cease and Desist Order in an effort to eliminate
hearings
- The Consent C&D Order is an agreement to a stipulation between the FDIC and the
bank’s Board whereby the bank agrees to the issuance of a C&D Order without
admitting or denying that any unsafe or unsound practices and/or violations of law or
regulation have occurred
- The stipulation provides for waiver by the bank of its rights to a hearing and its
consent to an agreed-upon Consent C&D Order
- If a satisfactory stipulation cannot be agreed upon, the FDIC gives notice of the time
and place for a hearing
Recommendation for Action
- Recommendation for action can occur at any time (during or not during an
examination)
Determination of Compliance
- On the report page Compliance With Enforcement Actions, document the facts
without statement of opinion the steps taken to comply with the Order
- You (examiner) do not draw conclusions regarding compliance or non-compliance
Section 8(c) Temporary Cease and Desist Proceeding
- Lengthy process
-
Provides the FDIC with the power to act with the utmost speed when the facts dictate
- Whenever the FDIC determines the violation or threatened violations or unsafe
and 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)
- Order can be issued against the bank or any IAP
- Order becomes effective upon service and, unless set aside or limited by court
proceedings, remains effective and enforceable pending completion/outcome of
Section 8(b) proceedings
- (Within 10 days after service of Temporary Order, the bank or the IAP may apply
for an injunction setting aside, limiting or suspending the enforcement, operation
or effectiveness of such Order)
Section 8(e) Suspension and Removal Procedures
Communicate with the RO so that the decision on whether to proceed with Section 8(e)
action can be made while examiners are still in the bank
- Section 8(e) gives the FDIC the power to:
- Order the removal of an IAP from office
- Prohibit the party from participating in the conduct of the affairs of any insured
depository institution
- Basis for Action
- IAP has violated any law or regulation, any final C&D 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 bank; 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 bank has suffered or will
probably suffered 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
IAP OR demonstrates willful or continuing disregard for the safety and soundness
of the bank
IAP can be immediately suspended or prohibited from participation in any manner in the
conduct and affairs of the bank pending completion of proceedings regarding removal if
the FDIC deems it necessary for the protection of the bank or the interests of the bank’s
depositors
- (Emergency suspension or order of prohibition remains effective pending completion
of proceedings unless the person affected applies within 10 days for stay of such
suspension and/or prohibition)
- Notice of intention for removal contains:
- Statement of facts constituting grounds for removal
- Fixes a time and place for a hearing (hearing to be held no earlier than 30 days
nor later than 60 days after the date of service (notice to IAP and bank))
- Officer – means an employee or officer with management functions
- Director – means an advisory or honorary director, trustee, etc.
Section 8(g) Suspension of an IAP
- FDIC may suspend an IAP from office or prohibit that individual from participating
in the conduct of the banks affairs if such party is:
- Charged in any information, indictment or complaint authorized by a US
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 interest of the
bank’s depositors or may threaten to impair public confidence in the bank
- In cases of indictment:
- Notify RO immediately
- Obtain a copy of the indictment
- FDIC must only show that an individuals continued service may threaten depositors
or public confidence (finding must be supportable)
- Individuals who meet the test of Section 8(g) will be notified and offered the option
of voluntary suspension. If individual does not opted for voluntary suspension formal
action will be necessary. Individual will be served a notice (a copy of the notice will
be sent to the bank) The notice will suspend and/or prohibit the individual from
participating in the affairs of the bank until the indictment is over or until the Order is
terminated
- If found not guilty, does not preclude the FDIC from taking action under Section 8(e)
- Within 30 days of notice the involved person may request to meet with the FDIC to
support their position. (Within 60 days FDIC must notify the individual of its
decision)
Written Agreements
- Used to address a bank operating with an unsafe or unsound level of capital:
- Tier 1 less than 3% (composite 1, no significant growth, strong bank)
- Tier 1 not less than 4% for all other banks
- Banks expected to maintain a RBC ratio of 8% with half of that total capital
consisting of Tier 1 capital
- Banks with Tier 1 Leverage Capital ratio of less than 2% is operating in an unsafe or
unsound condition
- Written agreement should only be used where problems are limited to a capital
deficiency that has not been caused by the unsafe and unsound practices of its
management (If the condition of a bank is so unsatisfactory that termination of
insurance should be initiated, FDIC should not seek to enter into a written agreement)
Capital Directives
- Final order issued by the FDIC to a bank that fails to maintain capital at or above its
minimum capital requirements
- Directive is not intended to address other weaknesses that may be present in a bank
- RO to send written notification of intent to the Bank
- Notification should indicate:
- The capital ratios that the bank will be required to attain and thereafter maintain
- The dollar amount of capital the bank will be required to raise
- Time period within which to reach the prescribed capital levels (not to exceed 180
days)
-
Bank has 14 days after receiving the notice to respond to the FDIC
Within 30 days the FDIC receives this response the FDIC should decide whether to
proceed with the directive
If bank does not respond within 14 days, the bank is deemed to have consented