Enforcement Trends: Criminal Charges and State Participation

Article excerpt

Regulators completed about 544 actions in 2003 to enforce a variety of federal banking laws, as well as the Gramm-Leach-Bliley Act, the USA Patriot Act, and the Sarbanes-Oxley Act.

The Office of the Comptroller of the Currency initiated 403, the Federal Reserve Board 53, the Federal Deposit Insurance Corp. 72, and the Office of Thrift Supervision 16. The Office of Federal Housing Enterprise Oversight brought its first three enforcement actions last year, all related to Freddie Mac's restatement.

Several trends are worth noting.

* The strategic defense of enforcement cases, whether on behalf of an institution or an individual, continues to become more complex as the involvement of a wide variety of civil and criminal authorities creates multiple fronts with multidimensional issues.

* Criminal investigations and charges are more likely to accompany bank enforcement actions than in the past, particularly in light of the tools that Sarbanes-Oxley has given prosecutors.

* State regulators and attorneys general have become much more active in enforcing consumer protection, civil, and criminal laws, particularly in subprime and predatory lending.

Civil money penalties are becoming larger. Freddie Mac and Credit Lyonnais each paid $100 million or more, the largest fines ever levied. The largest previously were in the $10 million to $20 million range.

The financial diversification of banks exposes them to a broader, more complex array of federal and state securities, insurance, and consumer protection regulators.

Unfair Consumer Practices

In its ever increasing quest to root out abusive lending practices by insured depository institutions or their affiliates, regulators continue to focus on the activities of credit card banks and subprime lenders. Approvals for even traditional mergers of these kinds of entities have carried enforcement-like conditions.

In November the OCC charged Clear Lake National Bank in San Antonio with unfair practices under the Federal Trade Commission Act. Clear Lake, which has since been acquired, made small "tax lien loans" to subprime borrowers. The loans were supposed to help borrowers pay off delinquent property taxes. But the OCC found that the fees and closing costs were extraordinarily high, ranging from 22% to 123% of the loan amounts, and were much higher than the charges for prime borrowers.

The agency also found that many of the fees were either clearly excessive or were charged for services that were not performed.

The OCC has relied on the FTC Act in other cases (e.g., Providian National Bank in June 2000). The agency cited violations of various banking laws in the Clear Lake action, but it did not specify what conduct each law prohibited or whether it could have relied on the FTC Act alone.


High-profile corporate scandals suggest that when bank customers become embroiled in such a case, banks will also be scrutinized.

In the aftermath of the Enron Corp. debacle, for example, the Fed entered into settlements in July with Citigroup Inc. and J.P. Morgan Chase & Co. The agency alleged that they had facilitated the creation of some of Enron's special-purpose entities and prepaid commodity-forward transactions. These cases raise critical and difficult questions about the due diligence a bank must complete and the judgments it must make regarding the legality of the transactions in which its customers are engaged.

In December the Fed, working with other domestic and foreign regulators, completed a decade-long investigation arising from the failure of Executive Life Insurance Co. The agency took action against Credit Lyonnais, a French bank with several offices in the United States, and its parent, Credit Agricole, which had acquired the bank in June. In a written agreement with the Federal Reserve Bank of New York, Credit Agricole agreed to comply with the restrictions imposed on Credit Lyonnais in the cease-and-desist order. …