The Federal Deposit Insurance Corporation has revised its classification system for citing violations identified in compliance examinations. The new system, which will be used for compliance examinations started on or after October 1, 2012, could reflect the FDIC's increased focus on consumer compliance in the wake of the enactment of the Dodd-Frank Act and creation of the Consumer Financial Protection Bureau.
As described in Financial Institution Letter 41-2012, the new system consists of the following three levels:
Level 3/High Severity. These are violations that "have resulted in significant harm to consumers or members of a community" and for which the FDIC typically seeks aggregate restitution of more than $10,000. It also includes "pattern or practice" fair lending violations.
Level 2/Medium Severity. These are violations "reflecting systemic, recurring, or repetitive errors that represent a failure of the bank to meet a key purpose of the underlying regulation or statute." The effect on consumers may be "small, but negative" or potentially negative if uncorrected, and such violations may include those for which the FDIC seeks restitution of $10,000 or less.
Level 1/Low Severity. These are "isolated or sporadic" violations or "systemic violations that are unlikely to affect consumers or the underlying purposes of the regulation or the statute." Such violations usually result from individual instances, a failure to follow established procedures, or minor errors in the implementation of procedures.
An examination report will describe a Level 3 or 2 violation under a distinct header, with Level 3 violations shown first on the violations page. Management's response to a Level 3 or 2 violation will be included in the report's discussion of the violation. A Level 1 violation will be listed with a blanket statement indicating management's actions or intentions to address it, and the report will not include a Level 1 violation that is adequately addressed during the examination and does not indicate weakness in the bank's compliance system.
The new system replaces a two-level system in which violations were designated as either "significant" or "other." According to the FDIC, "[t]he change is intended to help focus the institution's attention on the most significant issues identified during the examination" so the institution can appropriately prioritize efforts to address them. A possible result of the new system is that FDIC examiners will classify violations that were previously placed in the "other" category and not considered serious as now having potentially serious consequences.
Ballard Spahr's Consumer Financial Services Group and Bank Regulation and Supervision Group include experienced lawyers who regularly assist clients on regulatory compliance issues. For more information, please contact CFS Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or firstname.lastname@example.org, CFS Group Practice Leader Jeremy T. Rosenblum at 215.864.8505 or email@example.com, John L. Culhane, Jr., at 215.864.8535 or firstname.lastname@example.org, or Keith R. Fisher in the Bank Regulation and Supervision Group at 202.661.2284 or email@example.com.