THE TOOLS OF ENFORCEMENT: An Overview of the Enforcement Measures Most Commonly Used by Regulators

By Mason, Bernard | The RMA Journal, March 2017 | Go to article overview

THE TOOLS OF ENFORCEMENT: An Overview of the Enforcement Measures Most Commonly Used by Regulators


Mason, Bernard, The RMA Journal


The federal banking agencies and the Consumer Financial Protection Bureau (CFPB) have an array of tools they use to address noted violations of laws, rules, and regulations, as well as unsafe or unsound practices and breaches of fiduciary duty. How a bank responds to the findings and recommendations in a report of examination can be a key factor in whether a federal regulator will take an enforcement action and how severe that action will be.

Regulatory actions can generally be separated into two categories: informal and formal. Informal actions are voluntary commitments made by a banks board of directors. Such actions are designed to correct identified deficiencies and to ensure compliance with federal and state banking laws and regulations. Importantly, informal actions are neither publicly disclosed nor legally enforceable. Informal actions generally are used for banks with composite ratings of 3 or better.

Meanwhile, formal actions, because of their public nature, are more familiar tools in the regulatory arsenal. Public disclosure serves two purposes: 1) The threat of publicity itself may serve as a deterrent and as a "carrot" in achieving corrective action through earlier, more informal means; and 2) disclosure of enforcement actions serves as guidance to other industry participants regarding supervisory expectations (a tactic particularly employed by the CFPB).

What follows is an overview of the enforcement tools used most commonly by the regulatory agencies. Other types of actions not discussed here include termination of deposit insurance, required safety and soundness plans, commitment letters, individual minimum capital requirements, prompt corrective action directives, and capital directives.

Informal Actions

Board Resolution

A voluntary commitment made by the institution's board of directors, a board resolution directs the bank's personnel to take corrective action regarding noted deficiencies. This tool is used when a bank's overall condition is sound, but it is still necessary to obtain written commitments from a bank's board to ensure that identified problems and weaknesses will be corrected.

The regulator is not a party to a board resolution. Although board resolutions are not legally enforceable, a bank's failure to honor the commitments contained in a resolution could prompt more formal enforcement action.

Memorandum of Understanding

A memorandum of understanding (MOU) is generally used when a regulator has reason to believe that a board resolution would not adequately address the deficiencies noted during an examination. The regulator is a party to the MOU and drafts the document.

The requirements of an MOU are often similar to those contained in formal cease-and-desist orders. As with a board resolution, failure to comply with the terms of an MOU can result in more formal enforcement action.

Formal Actions

Unlike most informal actions, formal enforcement actions are authorized--and in some cases mandated--by statute. These actions are generally more severe and are publicly disclosed. Formal actions are enforceable through the assessment of civil money penalties and, with the exception of formal agreements, through the federal court system.

According to the OCC's "Enforcement Action Policy," PPM 5310-3, September 9, 2011:

"The presumption for formal action is particularly strong, regardless of a bank's composite CAMELS rating or capital levels, when it is experiencing significant problems or weaknesses in its systems and controls; serious insider abuse; substantial violations of law or serious compliance problems; material noncompliance with prior commitments to take corrective action; or failure to maintain satisfactory books and records or provide examiner access to books and records."

Cease and Desist

A cease and desist (C&D) order is issued to halt violations of law and requires affirmative action to correct any condition resulting from the violations. …

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