A Closer Look at Enforcement Actions

To no surprise, the 4th quarter of 2013 demonstrated the continued increase of formal enforcement actions by federal regulatory agencies for financial institutions and nonbank financial institutions alike. Large civil money penalties are connected to these enforcement actions. Not to mention, the number of informal enforcement actions likely reached heightened records.

What are enforcement actions?

Federal regulators employ the use of enforcement actions as a standardized way for communicating deficiencies in a financial institution’s condition and for outlining corrective actions necessary to return the financial institution to sound condition and full compliance with laws and regulations. Enforcement actions usually establish timetables for required corrections to be resolved.

Can you identify the types of enforcement actions?

Each federal regulator follows policies and procedures for the initiation of an enforcement action. While the agencies may take a different approach as to whether an enforcement action should be instituted or the degree of severity of an enforcement action, the agencies all use similar enforcement tools and each agency labels these actions differently.  Also, keep in mind, that state banking regulators have the authority to generate enforcement actions, which for state-chartered institutions could result in dual enforcement actions. It’s important to recognize the various types of enforcement actions in the event that your financial institution may need to respond if an enforcement action is presented by your federal regulator. Also, it’s a good business practice to briefly analyze enforcement actions as they are released (more on this later).

There are two broad classifications of enforcement actions: informal and formal. Federal regulators utilize a variety of informal tools used in less serious circumstances; examples include:

Informal actions are not public and are not enforceable in court. While informal actions may seem minor; left unresolved, they can become a perpetual thorn and can evolve into much more serious actions.

Formal enforcement actions are enforceable and various actions include:

Because of the public nature of formal enforcement actions as well as the costs of corrective measures to comply with the action, a financial institution’s reputation is at stake. With the increase and severity of enforcements and the civil money penalties that follow, it is imperative that financial institutions take preventative measures to protect their reputations.

Why the increase in enforcement actions?

Since the financial crisis of 2007, we have witnessed a number of significant compliance breakdowns and the subsequent importance on consumer protection. State and federal regulators are now more vigilant evidenced by historic high rates of enforcement actions, and this trend may continue.  While enforcement actions are one of the unfortunate consequences of the financial crisis, your financial institution does not have to be one of the casualties.

Understand what’s being enforced – do you know?

With the Dodd-Frank Wall Street and Consumer Protection Act (Dodd-Frank Act) rollout, the spotlight is directed more towards consumer protection in all facets of financial services including fair lending, unfair and deceptive abusive acts and practices (UDAAP), and mortgage lending, not to mention others. As we’ve all experienced, financial institutions undergo regularly scheduled examinations. As regulators find deficiencies, dependent on the nature, scope and seriousness, regulators have a menu of options to issue informal or formal enforcement actions. The issues that typically arise from such examinations include capital, asset quality or management from the safety and soundness arena; or, BSA/AML compliance and consumer protection issues regarding compliance with consumer protection laws and regulations.

Just during the 4th quarter of 2013 we’ve seen the following enforcement actions surrounding:

Examples of Recent Actions

Here are examples of enforcement actions taken during the fourth quarter of 2013:

Do you know what to analyze when reviewing enforcement actions?

Reviewing enforcement actions does not have to be a lengthy or time-consuming process. It is a good business practice to peruse actions to glean any information that may shine light on any deficiencies in your compliance program. Self-identified deficiencies may be treated differently by your regulator. Each regulator releases enforcement actions and it is highly recommended to register your email address for news alerts with each agency. Listed below are steps to take in analyzing enforcement actions:

What preventative measures can you take to avoid the spotlight of a formal enforcement action?

As the saying goes ‘an apple a day keeps the doctor away’.  The same is true here. Acting with diligence in maintaining a compliant compliance program goes along way. While the following list is not exclusive, consider these tips of prevention:

While it appears that the economy continues to recover, regulators will maintain their vigilance by utilizing all enforcement tools to enforce rules and regulations. Maintain a system of sound governance, a strong compliance management system, and strong internal controls.


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