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Oct 21
2010
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LIFE UNDER AN ENFORCEMENT ORDER, PART ONEPosted by Jeff Gerrish in Jeff Gerrish on Community Banking   |
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What you can expect if your bank is heading towards getting federal paper
After assisting literally hundreds of community banks in connection with regulatory enforcement actions over the last 25 years, I thought an outside perspective on life under an enforcement order might be helpful. For purposes of this discussion, I will use the generic term "Order." All the enforcement actions by the federal agencies emanate from Section 8(b) of the Federal Deposit Insurance Act. The agencies generally use a slightly different content for their enforcement orders and call them by different names, but they all are born of the same authority.
FDIC, which supervises most of the community banks in the country, fortunately, approximately a year ago, eliminated for the most part the cease-and-desist order when a bank consents and moved to the "Consent Order." It has the same affirmative action content without the obnoxious inflammatory language contained in the prior cease-and-desist order. The Federal Reserve, for those banks that are state Fed-member banks, uses the most user-friendly document, normally called a "Written Agreement." Its content is "enforcement order lite" compared to the FDIC and Comptroller's Office (OCC) documents, but it is still an enforceable order. The OCC uses a variety of different titles for its documents, depending on the agency's view of the condition of the bank, but the most prevalent is the Formal Agreement. The content is similar, but not identical, to the Consent Order of the FDIC. The Office of Thrift Supervision (although it is going out of business, being merged with/acquired by/jammed into OCC) still uses Cease-and-Desist Orders.
Each of the agencies not only has different names for their Orders, but time the publication of those Orders differently as well. FDIC generally publishes its Consent Orders that were issued the prior month on the last Friday of the following month. The OCC does the same, except publishing mid-month. The Federal Reserve and OTS issue press releases immediately. This may be because they have fewer institutions to worry about.
In any event, this article is about "Life Under An Order."
When I contemplate a bank or thrift's life under an Order, it seems there are several major categories that need to be addressed, including:
• Compliance
• Strategic planning
• Capital
• Management
• Policies and procedures
• Reporting
Each of these is briefly discussed below.
Compliance with the Order
Even the compliance category, as a practical matter, has at least three parts.
The first is fear of non-compliance. The greatest concern of most boards in consenting to an Order, and once they are operating under an Order, is the fear of non-compliance. This fear is well justified, because the statutes and regulations are littered with references to the ability of the regulators to come after any offending party (technically known as an institution-affiliated party) with civil money penalties. The fear of non-compliance is genuinely a constant and ever-present concern through the life of the Order.
The second category is the risk of non-compliance. What actually happens when the bank cannot meet the capital target, when it is criticized for its policies and procedures, when the agencies come in after the fact and indicate that the bank does not have adequate management? That is a good question!
Will the agencies attempt to assess civil money penalties? If you listen to their standard "spiel" when they are negotiating with the bank, each agency indicates generally that if the bank makes a good-faith-effort toward compliance, then they will not pursue civil money penalties. Of course, when you try to get the good-faith language in the agreement, the agency will not do that because "we have never done that."
Historically, however, their good faith representation is accurate. From an outside perspective, it has been true, historically, that there have been very few civil money penalty actions against banks, boards or individuals, or institution-affiliated parties associated with cases of non-compliance with an Order.
The question, however, is not what has happened historically as much as it is what is going to happen prospectively when there are north of 1,000 formal actions? Will the good faith test still be relevant?
The third category is the bank's knowledge of non-compliance. When do you actually find out you are not in compliance? It is usually at the next examination. For example, something as simple as "The bank shall revise its loan policy to meet the criteria and criticism set forth in the examination," etc. The bank does that, submits it with its quarterly progress report and the examiner comes in at the next exam and criticizes the bank for being in non-compliance. The unfortunate part of this issue is the bank is not aware that it is in non-compliance and thought it was in compliance until the examiner comes in for the examination, which may be months if not years later, and tells the bank so. Once they are non-compliant, as a practical matter, there is no "cure" period provided in the Order.
Strategic planning under the order
Virtually every enforcement order requires the bank to prepare a three-year profit plan and to engage in strategic planning.
The regulators have forever been confused about the true difference between strategic planning for a community bank and profit planning and budgeting. They tend to mix the two. In any event, the bank is required, under most Orders, to engage in a planning process.
Think about this really! What is a strategic plan, under an Order?
• The bank cannot engage in any expansion activities, because it would not get approval.
• The bank cannot grow, because it does not have the capital.
• The bank cannot begin new lines of business, because it cannot take the time to divert management's attention.
• So, the strategic plan for most banks under Orders is to "hunker down" if they have enough capital. If not, the plan is simply "to survive."
Management and the board of directors
Most Orders require the bank to have "adequate management." Some require a management study and virtually all Orders (from the FDIC, anyway) require the board to "increase their participation in the affairs of the bank."
When you are living under a Consent Order, how do you know if your management is acceptable? Sometimes, when a management study is required (a good waste of multi-thousand dollars in most cases), whoever does the outside management study will tell the board. I have had situations, however, when the management study said management was fine and the regulators came back at the next exam and said management was terrible.
You do not know whether management is acceptable until the regulators come in with the next exam and, again, as noted above, there is no cure period.
Similarly, how do you know if the board has appropriately "increased" its participation in the affairs of the bank? I have had numerous community bank boards and CEOs tell me there is no way the board could possibly "increase" their participation in the affairs of the bank. Yet, living under an enforceable order, the constant fear of violation or non-compliance is present such that it moves the board toward micromanagement. Even then, there is no affirmation that the board is doing the right thing until the next exam, if then.
Policies and procedures
Every order requires something (or many things) with respect to policies and procedures.
This covers everything from loans to asset/liability management to dealing with insiders to establishing an appropriate allowance for loan lease losses to addressing violations of law and the like.
Generally, there are two sources of guidance for a bank living under a Consent Order to make sure that it has appropriate policies and procedures.
The first is to address the criticisms in the exam report and the second is to make sure that anything specifically mentioned in the Order is addressed.
Notwithstanding having done all that, the bank can still be criticized for non-compliance with the Order because it may have missed one area that was addressed in neither of those places that the examiner, during the review, believes should have been included.
My favorite is posted on a previous blog entitled, appropriately, "The Examiner from Hell." That blog told the story of an examiner who cited the bank for a violation because they had not approved a certain policy "within 10 days of the effective date of the Order." The problem was the board had approved the policy 30 days before the effective date of the Order. In other words, the board was proactive and did things sooner than it was required under the Order. So, it was technically not in compliance with the Order, so the board was cited.
Again, living under an Order, you have the issue of fear of non-compliance with respect to policies and procedures because there is no way to tell whether things have improved until the next examination. This is notwithstanding the quarterly reporting addressed below.
Quarterly reporting
Every Order requires quarterly reporting by the bank to its primary federal and/or state regulator. The quarterly report generally is directed to the case manager or relationship manager or however that particular agency designates the person who has contact and direct supervision over the bank.
I am convinced that these quarterly progress reports, if they are in hard copy, get stacked in a special place in that person's office, perhaps to hold a potted plant at an appropriate level, or for some other purpose. If they are all electronic, then they get stacked similarly on the email until they are probably automatically deleted after a period of time.
In other words, the biggest complaint I receive from community banks under Orders is that they did what they were supposed to do, particularly with respect to policies and procedures, sent it in to the regional office, received no feedback whatsoever for months ... until the examiner comes in for the on-site examination and criticizes them.
The general response is, "We sent this in eight months ago, received no feedback and now you are coming to criticize us? Couldn't somebody have read this earlier?"
Progress reports, while mandated, receive very little attention, as best I can tell, from being on the ground.
Perhaps I should have called this piece "The Ode to Joy of Being under a Consent Order." Perhaps not!
Part two will appear next week. In the meantime, we invite bankers, board members, examiners, and anyone else who has had involvement in the examination or regulatory order processes to share their thoughts and experiences here. If you have questions of a general nature-not regarding specific banks or events-please email them to scocheo@sbpub.com for consideration for answering in future blogs.
Gerrish formerly served as Regional Counsel for the Memphis Regional Office of the FDIC, with responsibility for all legal matters, including cease-and-desist and other enforcement actions. Before coming to Memphis, Gerrish was with the FDIC Liquidation Division in Washington, D.C. where he had nationwide responsibility for litigation against directors of failed banks.
* * *
* * *
After assisting literally hundreds of community banks in connection with regulatory enforcement actions over the last 25 years, I thought an outside perspective on life under an enforcement order might be helpful. For purposes of this discussion, I will use the generic term "Order." All the enforcement actions by the federal agencies emanate from Section 8(b) of the Federal Deposit Insurance Act. The agencies generally use a slightly different content for their enforcement orders and call them by different names, but they all are born of the same authority. FDIC, which supervises most of the community banks in the country, fortunately, approximately a year ago, eliminated for the most part the cease-and-desist order when a bank consents and moved to the "Consent Order." It has the same affirmative action content without the obnoxious inflammatory language contained in the prior cease-and-desist order. The Federal Reserve, for those banks that are state Fed-member banks, uses the most user-friendly document, normally called a "Written Agreement." Its content is "enforcement order lite" compared to the FDIC and Comptroller's Office (OCC) documents, but it is still an enforceable order. The OCC uses a variety of different titles for its documents, depending on the agency's view of the condition of the bank, but the most prevalent is the Formal Agreement. The content is similar, but not identical, to the Consent Order of the FDIC. The Office of Thrift Supervision (although it is going out of business, being merged with/acquired by/jammed into OCC) still uses Cease-and-Desist Orders.
Each of the agencies not only has different names for their Orders, but time the publication of those Orders differently as well. FDIC generally publishes its Consent Orders that were issued the prior month on the last Friday of the following month. The OCC does the same, except publishing mid-month. The Federal Reserve and OTS issue press releases immediately. This may be because they have fewer institutions to worry about.
In any event, this article is about "Life Under An Order."
When I contemplate a bank or thrift's life under an Order, it seems there are several major categories that need to be addressed, including:
• Compliance
• Strategic planning
• Capital
• Management
• Policies and procedures
• Reporting
Each of these is briefly discussed below.
Compliance with the Order
Even the compliance category, as a practical matter, has at least three parts.
The first is fear of non-compliance. The greatest concern of most boards in consenting to an Order, and once they are operating under an Order, is the fear of non-compliance. This fear is well justified, because the statutes and regulations are littered with references to the ability of the regulators to come after any offending party (technically known as an institution-affiliated party) with civil money penalties. The fear of non-compliance is genuinely a constant and ever-present concern through the life of the Order.
The second category is the risk of non-compliance. What actually happens when the bank cannot meet the capital target, when it is criticized for its policies and procedures, when the agencies come in after the fact and indicate that the bank does not have adequate management? That is a good question!
Will the agencies attempt to assess civil money penalties? If you listen to their standard "spiel" when they are negotiating with the bank, each agency indicates generally that if the bank makes a good-faith-effort toward compliance, then they will not pursue civil money penalties. Of course, when you try to get the good-faith language in the agreement, the agency will not do that because "we have never done that."
Historically, however, their good faith representation is accurate. From an outside perspective, it has been true, historically, that there have been very few civil money penalty actions against banks, boards or individuals, or institution-affiliated parties associated with cases of non-compliance with an Order.
The question, however, is not what has happened historically as much as it is what is going to happen prospectively when there are north of 1,000 formal actions? Will the good faith test still be relevant?
The third category is the bank's knowledge of non-compliance. When do you actually find out you are not in compliance? It is usually at the next examination. For example, something as simple as "The bank shall revise its loan policy to meet the criteria and criticism set forth in the examination," etc. The bank does that, submits it with its quarterly progress report and the examiner comes in at the next exam and criticizes the bank for being in non-compliance. The unfortunate part of this issue is the bank is not aware that it is in non-compliance and thought it was in compliance until the examiner comes in for the examination, which may be months if not years later, and tells the bank so. Once they are non-compliant, as a practical matter, there is no "cure" period provided in the Order.
Strategic planning under the order
Virtually every enforcement order requires the bank to prepare a three-year profit plan and to engage in strategic planning.
The regulators have forever been confused about the true difference between strategic planning for a community bank and profit planning and budgeting. They tend to mix the two. In any event, the bank is required, under most Orders, to engage in a planning process.
Think about this really! What is a strategic plan, under an Order?
• The bank cannot engage in any expansion activities, because it would not get approval.
• The bank cannot grow, because it does not have the capital.
• The bank cannot begin new lines of business, because it cannot take the time to divert management's attention.
• So, the strategic plan for most banks under Orders is to "hunker down" if they have enough capital. If not, the plan is simply "to survive."
Management and the board of directors
Most Orders require the bank to have "adequate management." Some require a management study and virtually all Orders (from the FDIC, anyway) require the board to "increase their participation in the affairs of the bank."
When you are living under a Consent Order, how do you know if your management is acceptable? Sometimes, when a management study is required (a good waste of multi-thousand dollars in most cases), whoever does the outside management study will tell the board. I have had situations, however, when the management study said management was fine and the regulators came back at the next exam and said management was terrible.
You do not know whether management is acceptable until the regulators come in with the next exam and, again, as noted above, there is no cure period.
Similarly, how do you know if the board has appropriately "increased" its participation in the affairs of the bank? I have had numerous community bank boards and CEOs tell me there is no way the board could possibly "increase" their participation in the affairs of the bank. Yet, living under an enforceable order, the constant fear of violation or non-compliance is present such that it moves the board toward micromanagement. Even then, there is no affirmation that the board is doing the right thing until the next exam, if then.
Policies and procedures
Every order requires something (or many things) with respect to policies and procedures.
This covers everything from loans to asset/liability management to dealing with insiders to establishing an appropriate allowance for loan lease losses to addressing violations of law and the like.
Generally, there are two sources of guidance for a bank living under a Consent Order to make sure that it has appropriate policies and procedures.
The first is to address the criticisms in the exam report and the second is to make sure that anything specifically mentioned in the Order is addressed.
Notwithstanding having done all that, the bank can still be criticized for non-compliance with the Order because it may have missed one area that was addressed in neither of those places that the examiner, during the review, believes should have been included.
My favorite is posted on a previous blog entitled, appropriately, "The Examiner from Hell." That blog told the story of an examiner who cited the bank for a violation because they had not approved a certain policy "within 10 days of the effective date of the Order." The problem was the board had approved the policy 30 days before the effective date of the Order. In other words, the board was proactive and did things sooner than it was required under the Order. So, it was technically not in compliance with the Order, so the board was cited.
Again, living under an Order, you have the issue of fear of non-compliance with respect to policies and procedures because there is no way to tell whether things have improved until the next examination. This is notwithstanding the quarterly reporting addressed below.
Quarterly reporting
Every Order requires quarterly reporting by the bank to its primary federal and/or state regulator. The quarterly report generally is directed to the case manager or relationship manager or however that particular agency designates the person who has contact and direct supervision over the bank.
I am convinced that these quarterly progress reports, if they are in hard copy, get stacked in a special place in that person's office, perhaps to hold a potted plant at an appropriate level, or for some other purpose. If they are all electronic, then they get stacked similarly on the email until they are probably automatically deleted after a period of time.
In other words, the biggest complaint I receive from community banks under Orders is that they did what they were supposed to do, particularly with respect to policies and procedures, sent it in to the regional office, received no feedback whatsoever for months ... until the examiner comes in for the on-site examination and criticizes them.
The general response is, "We sent this in eight months ago, received no feedback and now you are coming to criticize us? Couldn't somebody have read this earlier?"
Progress reports, while mandated, receive very little attention, as best I can tell, from being on the ground.
Perhaps I should have called this piece "The Ode to Joy of Being under a Consent Order." Perhaps not!
Part two will appear next week. In the meantime, we invite bankers, board members, examiners, and anyone else who has had involvement in the examination or regulatory order processes to share their thoughts and experiences here. If you have questions of a general nature-not regarding specific banks or events-please email them to scocheo@sbpub.com for consideration for answering in future blogs.
About the Author
Gerrish formerly served as Regional Counsel for the Memphis Regional Office of the FDIC, with responsibility for all legal matters, including cease-and-desist and other enforcement actions. Before coming to Memphis, Gerrish was with the FDIC Liquidation Division in Washington, D.C. where he had nationwide responsibility for litigation against directors of failed banks.
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Gerrish can be reached at jgerrish@gerrish.com, and the firm’s website, www.gerrish.com. - You can get word about these columns the week they are posted by subscribing to ABA Banking Journal Report e-letter. It's free and takes only a minute to sign up for Click here
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Michelle Lucci, CRCM,CAMS
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Very good points. The titles of the orders and language contained within are similar but they have very substantive differences. One important point that I think is worth mentioning is on the OCC's Formal Agreement. The OCC seems to favor this approach by a 2-1 margin over other actions. However, the Formal Agreements are not enforceable through the federal court system and a willful violation of a Formal Agreement is not grounds for appointing a receiver. |
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