Just as many bankers believed that the worst of the enforcement environment was behind them, a threat of “new” Consent Orders for some state non-member banks has arisen. These “new” orders are not reflective of banks for which the regulators have identified new problems but are instead based upon the FDIC’s apparent decision that orders that were “led” by state regulators are not adequate for the FDIC’s enforcement purposes. To illustrate this point, the new orders we have seen thus far have been substantively consistent with the existing state orders.
This movement by the FDIC comes at an unfortunate time given overall downward trend in the number of FDIC consent orders being issued as banks continue to identify and manage their problems. From a practical standpoint, the publication of a new FDIC order may result in perception that a bank’s condition is worsening when in fact the bank is well on its way to compliance with the existing state order.
As background, in some states, including Georgia and Florida, it has been the common practice of state regulators to issue a Consent Order (formerly referred to as an Order to Cease and Desist) following an examination led by the state regulator at which deficiencies were identified. If the FDIC led the examination, the FDIC would issue the order. If the state issued the order, the FDIC would acknowledge the order, specifically stating that the acknowledgement represented a commitment by the bank’s board of directors to the FDIC to comply with the order.
The FDIC has apparently concluded, however, that it needs to have an order in place that it issues (and not simply acknowledges) in order to meet its internal enforcement objectives. For banks receiving an order for the first time, this goal is being accomplished through the issuance of joint orders by the FDIC and the state regulator. We believe that a significant part of the FDIC’s analysis is centered on the definition of “well capitalized” in 12 C.F.R. §325.103, which requires that a bank not only meet or exceed the 5%, 6%, and 10% capital ratios that we are all familiar with but also that the bank not be subject to a written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC to maintain specific capital levels.
The FDIC believes that a bank meeting the statutory capital ratios could be deemed to continue to be “well capitalized” even if subject to a state-led order with a capital requirement. Because there are a number of important implications associated with a bank’s being less than well capitalized, including automatic application of interest rate caps on deposit products, we believe the FDIC wants to be sure that all institutions subject to orders are deemed less than well capitalized. There are also other legal implications of being subject to an order issued by a federal regulator, including those related to further enforcement actions such as civil money penalties.
If your institution is the subject of a state-led Consent Order or Order to Cease and Desist, you should expect the FDIC to ask your institution to consent to a “new” order following your next examination or in connection with any pending application. As is the case with all enforcement actions, we recommend that you consider the overall impact to your institution of consenting to the order as opposed to seeking an administrative hearing, keeping in mind that many of the order’s requirements are likely consistent with your goals to restore the condition of the bank.
In addition, we recommend that banks in this situation take measures to ensure that the new FDIC order is consistent with, or no broader than, the existing state-led order unless your bank’s circumstances justify broadening the scope of the existing order. We understand that some states are willing to take actions that eliminate duplication of regulatory burdens. Finally, because the FDIC-led orders will be published on the FDIC’s website, we recommend that institutions prepare a thoughtful public relations strategy to address any adverse publicity associated with the order.