FDIC Releases Formal and Informal Enforcement Actions Manual

Michelle M. Lucci, CSS, CRCM
December 13, 2019
Read Time: min

The FDIC released its manual on Formal and Informal Enforcement Actions

For the first time, the FDIC released its manual on Formal and Informal Enforcement Actions to provide greater transparency to those processes. The FDIC has broad discretion to determine what form of corrective action to pursue.

The full range of formal and informal actions against insured depository institutions (IDI) and their affiliated parties (IAP) can be confusing for those that do not have a regulatory background.

The differences between formal and informal enforcement actions

Below is a breakdown of the two actions:

Informal Enforcement Actions

  • These are defined as voluntary commitments made by an IDI’s board of directors or an IAP. Informal actions are not legally enforceable and are not publicly disclosed or published.
  • They are particularly appropriate when the FDIC has communicated with management regarding supervisory concerns and has determined that management and the board of directors are committed to and capable of addressing these concerns with some direction.
  • Informal actions are generally appropriate for institutions that receive a composite rating of “3” for safety and soundness or consumer compliance.
  • An informal action can be pursued against higher rated IDI’s (composite rating of 1 or 2) to address specific facts and circumstances.

Generally, the two types of Informal Actions most commonly used by the FDIC are:

  • Bank Board Resolutions (BBRs) – informal commitments that may be drafted by the institution’s board of directors (and signed by the board) as a proactive measure to address issues noted during an examination or targeted review.
  • Memoranda of Understanding (MOU) – an informal agreement between an institution and the FDIC, which is signed by both parties (usually designated individual(s) in the Regional Office of the FDIC). The state authority may also be a party to the agreement. MOU’s are designed to address and correct identified weaknesses in the institution’s condition, violations, or unsafe or unsound practices.

MOUs are used in place of BBRs when the FDIC believes a more structured program or specific terms are needed to effect corrective action. MOUs are often used when the desired outcome was not achieved with a BBR already in place.

Both formal and informal actions can be changed during the life of the action, but the action must be modified to reflect the change. These changes are most often done following an examination or visitation.

An informal action may be terminated for numerous reasons, including:

  • Significant compliance with the action has been achieved;
  • The IDI’s condition has improved sufficiently, or practices or violations have been corrected;
  • A new formal or informal action has been issued, and the IDI merges or is closed.

Formal Enforcement Actions 

Formal actions are notices or orders issued by the FDIC against insured depository institutions or their affiliated parties. These actions are legally enforceable in a federal or state court. Most notices and final orders are published after issuance, as required by law.

There are various formal actions pursuant to Section 8 of the Federal Deposit Insurance (FDI) Act, including:

  • Termination of federal deposit insurance;
  • Cease and Desist and Consent Orders;
  • Personal Cease and Desist;
  • Removal, prohibition, or suspension;
  • Restitution; and
  • Civil money penalties.

Section 38 of the FDI Act authorizes the FDIC to issue Prompt Corrective Action directives to institutions that are less than adequately capitalized.

Transition to CECL with confidence.
Learn more

Cease and Desist Orders and Consent Orders are the most common to see published and referenced.

If the respondent institution or affiliated party stipulates to the issuance of the order, they are titled “Consent Orders.” If not and the order is issued through other available processes, it is titled “Order to Cease and Desist.”

A temporary order is usually issued in a severe situation. It becomes effective immediately, although the IDI and IAP have ten days to file an action in federal district court seeking to set aside the temporary order.

Essentially a C&D is a remedial action with the general purpose of assisting the IDI or IAP in resolving its problems that are the basis for supervisory concern. Section 8(b) of the FDI Act authorizes the FDIC to issue a C&D. A temporary order to cease and desist is issued under Section 8(c) of the FDI Act.

The grounds to issue a C&D is when an IDI or an IAP has engaged or is about to engage in an unsafe or unsound practice in the IDI, or a violation of the law and/or regulation.

Chapter 4 of the manual contains an extensive (but not all-inclusive) list of possible practices or violations and corrective provisions that an order can contain. The following two are the most common:

 Practice or Violation Corrective Provisions and Additional Considerations 
Inadequate capital State amount of required capital and/or the adoption of a capital plan. Capital ratios should be used in the formulation and recommendation of capital level provisions. For example, restore the leverage ratio to X% or increase total capital by $XXX.    
Inadequate allowance for ALLL or ACL Review current ALLL/ACL and make such entries as are necessary to provide an appropriate ALLL/ACL, considering the condition of the loan portfolio. Adjustments to the ALLL/ACL should be documented and provided to the regulatory authorities for review. 

Review and amend the methodology for determining the ALLL/ACL balance. 

Prospectively maintain an appropriate ALLL/ACL and require the IDI to amend prior Reports of Condition and Income to correct previous inaccuracies in the ALLL/ACL balance.         

Like the informal actions, formal actions can also be modified. Termination reasons are similar but include other facts that render the order necessary.

Each federal banking agency has established a public website to search for and view actions that are required to be published. 

 In addition, enforcement actions issued by the CFPB are available on the Consumer Financial Protection Bureau website.

This topic is an extensive one, which is reflected in the lengthy 135-page manual but understanding the common types of Informal and Enforcement Actions is a good foundation.

About the Author

Michelle M. Lucci, CSS, CRCM

Regulatory Compliance Manager
Michelle Lucci, Abrigo’s Regulatory Compliance Manager, has over 30 years of banking experience and is a Certified Sanctions Specialist (CSS), a Certified Regulatory Reporting Manager (CRCM) and a Certified Anti–money Laundering Specialist (CAMS). Prior to joining Abrigo, she served as a Commissioned FDIC Bank Examiner for both Risk Management and Consumer Compliance in the New York and Atlanta FDIC regions, acted as Examiner-In-Charge for

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.

 

Looking for Banker’s Toolbox? You are in the Right Place!

Banker’s Toolbox is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to Banker’s Toolbox Community Online.

Make yourself at home!