The U.S. Court of Appeals for the Federal Circuit has partially lifted a preliminary injunction that prevented the U.S. Department of Education (Department) from placing defaulted student loans with private collection agencies (PCAs).  Following this ruling, the U.S. Court of Federal Claims has ordered the Department to complete its efforts to reevaluate bids associated with a disputed contract procurement process by January 11, 2018.

The appeal to the Federal Circuit challenged a ruling of Judge Susan Braden of the U.S. Court of Federal Claims in consolidated lawsuits brought by several PCAs.  The PCAs challenged the Department’s 2016 award of several large business contracts to collect defaulted student loans.  The Department had stayed the 2016 large business contracts in response to the Government Accountability Office’s recommendation to reopen the contract competition, request and consider amended bids, and make a new award decision.

Despite the government’s self-imposed stay, in May 2017, the Court of Federal Claims issued a preliminary injunction that broadly enjoined the Department from (1) authorizing performance of the 2016 large business contracts, and (2) “transferring work to be performed under the contract at issue in this case to other contracting vehicle to circumvent or moot this bid protest.”  The injunction thus prevented the Department from placing defaulted student loans with PCAs under any other preexisting contracts, including 2014 small business contracts and award term extension (ATE) contracts that rewarded top performers under 2009 contracts.  The Court of Federal Claims asserted the broad injunction was necessary to maintain the status quo.  The court based its injunction ruling on, among other things, an article that stated the CFPB found the value of PCAs to be “highly questionable . . . but unquestionably expensive.”  The Department appealed the injunction ruling.

On August 21, 2017, the CFBP filed an amicus brief in the appeal.  Disagreeing with the Court of Federal Claims—and siding with the Trump Administration—the CFPB asserted that enjoining the Department from placing defaulted loans with PCAs harmed the public.  According to the CFPB, PCAs were a point of contact for borrowers to set up plans to rehabilitate default and, without such rehabilitation, borrowers were not eligible for other federal programs and interest would continue to accrue on loans during the collection delays caused by the injunction.  According to the CFPB “borrowers in default will be better off if they have access to [the Department’s] debt-collection contractors during the pendency of this litigation than if they do not.”

On December 8, 2017, the appellate court lifted the part of the preliminary injunction that barred the Department from “transferring work to be performed under the contract at issue in this case to other contracting vehicles to circumvent or moot this bid protest.”  Thus, the Department can continue to place defaulted loans with PCAs under its preexisting small business and ATE contracts. The appellate court’s ruling still prohibits the Department from authorizing performance of the disputed 2016 contracts.

The case continues to proceed in the district court before Judge Thomas C. Wheeler.  (Judge Braden transferred the case to Judge Wheeler on November 20, 2017 for “the efficient administration of justice.”)  On December 12, 2017, Judge Wheeler held a status conference to discuss allocation of the Department’s backlog of accounts in light of the ongoing injunction, as well as the status of the Department’s corrective action to reevaluate amended bids for the 2016 large business contracts.  The Department had previously advised that it intended to complete its corrective action by August 24, 2017—a deadline that expired more than three months ago.  At the status conference, the government’s counsel declined to provide the court with a new date certain for completion.  Instead, he reported that the Education Department was in the “final stages,” with the Source Selection Authority “in the process of determining which offerors will and will not receive final awards.”

Following the conference, Judge Wheeler noted his displeasure with the pace of the Department’s corrective action.  He ordered the Source Selection Authority to make its final award decisions and complete the corrective action by January 11, 2018.

A New York federal district court has dismissed the lawsuit filed by the New York Department of Financial Services (DFS) challenging the OCC’s authority to grant special purpose national bank (SPNB) charters to nondepository fintech companies.

When the DFS lawsuit was filed, we commented that because the OCC had not yet finalized the licensing process for fintech companies seeking an SPNB charter, the DFS was likely to face a motion to dismiss for lack of ripeness and/or the absence of a case or controversy.  Consistent with our expectations, the OCC filed a motion to dismiss the lawsuit in which its central arguments were that because it has not yet decided whether it will offer SPNB charters to companies that do not take deposits, the DFS complaint should be dismissed for failing to establish any injury in fact necessary for Article III standing and because the case was not ripe for judicial review.

In dismissing the DFS lawsuit, the district court agreed with both of the OCC’s arguments.  As an initial matter, the court observed that the DFS’s claims were based on the premise that the OCC had reached a decision on whether it would issue SPNB charters to fintech companies (Charter Decision).  The court concluded, however, that the DFS had failed to show that the OCC had reached a Charter Decision.  In reaching its conclusion, the court pointed to statements made by former Acting Comptroller Keith Noreika indicating that the OCC was continuing to consider its SPNB charter proposal but had not made a decision as to its ultimate position.  It also noted that Joseph Otting, the new Comptroller, has not yet taken a public position on the SPNB charter proposal.

With regard to Article III standing, the court concluded that the injuries that the DFS alleged would result from the Charter Decision “would only become sufficiently imminent to confer standing once the OCC makes a final determination that it will issue SPNB charters to fintech companies.”  Such alleged injuries included the potential for New York-licensed money transmitters to escape New York’s regulatory requirements and for their consumers to lose the protections of New York law as well as the DFS’s loss of the funding it receives through assessments levied on the New York-licensed financial institutions that would obtain SPNB charters.  According to the court, in the absence of a Charter Decision, “DFS’s purported injuries are too future-oriented and speculative to constitute an injury in fact.”

With regard to ripeness, the court concluded that DFS’s claims were neither constitutionally nor prudentially ripe.  According to the court, the claims were not constitutionally ripe for the same reason that Article III standing was lacking–namely, the claims were not “actual or imminent” but instead were “conjectural or hypothetical.”  The court also found that the claims were not prudentially ripe because they were contingent on future events that might never occur–namely, an OCC decision to issue SPNB charters to fintech companies.

The court noted that it had received a letter from DFS requesting the court, if it dismissed the case on the basis of ripeness, to require the OCC to provide “prompt and adequate notice to the Court and [the DFS] if and when a decision is made to accept applications from so-called fintech companies for [SPNB charters], and (2) allow [the DFS] to reinstate the case on notice with adequate opportunity for the issues to be briefed and argued prior to the granting of any application by the OCC.”  The court stated that because it did not have subject matter jurisdiction, it could not grant the requested relief.  Nevertheless, the court suggested “that it would be sensible for the OCC to provide DFS with notice as soon as it reaches a final decision given DFS’s stated intention to pursue these issues and in consideration of potential applicants whose interests would be served by timely resolution of any legal challenges.”

Another lawsuit challenging the OCC’s SPNB proposal was filed in April 2017 by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court and in July 2017 the OCC filed a motion to dismiss in that case.   On December 5, the case was reassigned to Judge Dabney L. Friedrich.  Prior to the reassignment, the CSBS had filed a motion requesting oral argument and the court entered an order indicating that it would schedule oral argument if it “in its discretion, determines that oral argument would aid it in its resolution of Defendants’ motion.”

A bipartisan group of five House members introduced a bill (H.R. 4439) last month that is intended to address the so-called “true lender” issue, which creates risk with respect to some loans made by banks with substantial marketing and servicing assistance from nonbank third parties, and then sold shortly after origination. These loans have been challenged by regulators and others on the theory that the nonbank marketing and servicing agent is the “true lender,” and therefore the loan is subject to state licensing and usury laws.

This bill is a welcome accompaniment to the “Madden fix” bills that have been introduced in the House and Senate to eliminate the uncertainties created by the Second Circuit’s decision in Madden v, Midland Funding.  (The House bill was passed by the House Financial Services Committee last month.)  In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.

Both “Madden fix” bills would amend Section 85, as well as the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks, to provide that a loan that is made at a valid interest rate remains valid with respect to such rate when the loan is subsequently transferred to a third party and can be enforced by such third party even if the rate would not be permitted under state law.  (The same “Madden fix” provision is in the Appropriations Bill (H.R. 3354) passed by the House in September 2017.)

As we have previously observed, the enactment of legislation reaffirming the valid-when-made doctrine, like the adoption of the OCC’s proposal to create a fintech charter, would help some companies avoid Madden’s negative impact.  However, it would not help nonbank companies deal with the risk of a court or enforcement authority concluding that the nonbank company, rather than its bank partner, is the “true lender.”  Treating a nonbank as the “true lender” would subject the nonbank to usury, licensing, and other limits to which its bank partner would not otherwise be subject.

The “true lender” bill would amend the Bank Service Company Act to add language providing that the geographic location of a service provider for an insured depository institution “or the existence of an economic relationship between an insured depository institution and another person shall not affect the determination of the location of such institution under other applicable law.”  The bill would amend the Home Owners’ Loan Act to add similar language regarding service providers to and persons having economic relationships with federal savings associations.

It would also amend Section 85 of the National Bank Act to add language providing that a loan or other debt is made by a national bank and subject to the bank’s rate exportation authority where the national bank “is the party to which the debt is owed according to the terms of the [loan or other debt], regardless of any later assignment.  The existence of a service or economic relationship between a [national bank] and another person shall not affect the application of [the national bank’s rate exportation authority] to the rate of interest rate upon the [loan, note or other evidence of debt] or the identity of the [national bank] as the lender under the agreement.”  The bill would add similar language to the provisions in the Home Owners’ Loan Act and Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations and state-chartered banks.

While we might have preferred to see additional language in the bill’s findings that makes it even clearer how the bill is intended to apply (such as citations to cases that are examples of the analysis the bill seeks to correct or a direct statement that the lender’s identity should not be determined by who holds the predominant economic interest), the bill is certainly a very positive development as drafted.

On November 28, 2017, the Federal Reserve Board announced a Consent Order with Peoples Bank (Peoples) in Lawrence, Kansas.  The Order charges Peoples with violating Section 5 of the Federal Trade Commission Act (FTCA) by engaging in deceptive mortgage origination practices between January 2011 and March 2015.  According to the Order, Peoples “often” gave prospective borrowers the option of paying discount points (an amount calculated as a percentage of the loan amount) at the time of closing, in order to obtain a lower interest rate.  According to the Fed, this “regularly” led borrowers to pay thousands of dollars for discount points, but did not always result in a lower interest rate.  Peoples denies the charges, but has agreed to pay $2.8 million to a settlement fund for the purpose of making restitution to the affected borrowers.  Also, while not a part of the Order, Peoples has ceased taking new mortgage applications, and is in the process of winding down its mortgage lending operation.

Section 5 of the FTCA proscribes “unfair or deceptive acts or practices in or affecting commerce.”  Here, the Federal Reserve found that Peoples’ misrepresentations were deceptive because they were likely to mislead borrowers to reasonably conclude that they obtained a lower interest rate through the payment of discount points, when in fact, many did not receive a reduced interest rate, or received a rate that was not reduced commensurate with the price they paid for the discount points.  This was found to be material because it “relate[s] to the cost of the loan paid by the borrowers.

The Consent Order notes that Peoples’ loan disclosures “gave an accurate quantitative picture of the loans’ costs.”  But according to the Fed, Peoples (which had no written policy regarding discount points) misrepresented and/or omitted the nature of the discount points, which led many reasonable consumers to incorrectly assume they were receiving a rate based on the discount points they paid, when they actually received no benefit (or not the full benefit) from their payment.  This illustrates the need for mortgage lenders to ensure they are painting an accurate picture of their mortgage products at all stages of the origination process – including advertising, loan disclosures, and communications with prospective borrowers.

The FCC has issued a Report and Order and Further Notice of Proposed Rulemaking (Order) adopting new rules to allow voice service providers to proactively block calls from certain numbers that are suspected to be fraudulent. The November 16 Order seeks to prevent fraud or identity theft that often accompanies calls which “spoof” or manipulate Caller ID information. The new rules expressly authorize voice service providers to block robocalls that appear to be from telephone numbers that do not or cannot make outgoing calls, without running afoul of the FCC’s call completion rules.

The new rules apply to four types of calls: invalid numbers (such as those with fictional area codes); unassigned numbers; numbers assigned to a provider but not in use; and valid numbers that the subscriber has placed on a Do-Not-Originate (DNO) list. The DNO list prevents spoofing by blocking calls purporting to be from the legitimate numbers. Commissioner Rosenworcel, providing the lone point of dissent, noted that the new rules do not prohibit carriers from charging consumers for the call blocking services.

The FCC  “strongly encourage[s]” providers to cooperatively share information about numbers that subscribers have requested to be blocked; however the FCC declined to prescribe a sharing mechanism and has not mandated that providers proactively block calls. The FCC made clear that a provider that blocks calls that do not fall within one of the four specific types of calls will be liable for violating Section 201(b) of the Communications Act and associated regulations, which generally prohibit call blocking as an unjust and unreasonable practice. The FCC’s new rules do not extend to text messages and prohibit the blocking of emergency calls.

The Notice of Proposed Rulemaking requests input in two specific areas. First, the FCC seeks comment on the optimal methods to rectify erroneously blocked calls, such as a formal “challenge” process with dedicated timeframes for correction. The Order only encourages companies to adopt procedures to easily identify and fix blocking errors—it does not mandate compliance with a particular mechanism. Second, the FCC seeks comment on ways to measure the effectiveness of its efforts to regulate robocalling. In particular, the FCC is interested to know whether it should institute reporting requirements and, if so, whether that reporting should include a measure of false positives blocked under the new rules. The FCC also invites comment on the benefits and costs of such requirements. Public comments may be submitted through January 23, 2018.

On November 13, members of the Senate Banking Committee announced that they had reached bipartisan agreement on “legislative proposals to improve our nation’s financial regulatory framework and promote economic growth.”  Following the announcement, a draft of a bill was released by Senator Mike Crapo, who chairs the Banking Committee.  A markup of the bill is scheduled for December 5, 2017. Observers believe that due to its bipartisan support, there is a strong likelihood that the bill will be enacted as part of a regulatory relief package.

We previously discussed the provisions of the bill relevant to providers of consumer financial services.  The following regulatory reform provisions are relevant to community banks generally, including those focused on the provision of consumer financial services:

Capital Simplifications for Qualifying Community Banks (Section 201).  The bill would require the federal banking agencies to establish a “Community Bank Leverage Ratio” of not less than 8% nor more than 10% for “Qualifying Community Banks.”  The Community Bank Leverage Ratio would be equal to the tangible equity capital to the average total consolidated assets.  A Qualifying Community Bank would be any insured depository institution or depository institution holding company with total consolidated assets of less than $10 billion that was not determined ineligible by its primary federal regulator due to its risk profile. (Factors considered in evaluating a bank’s risk profile would include (i) off-balance sheet exposures, (ii) trading assets and liabilities; (iii) derivative exposures; and (iv) other factors).  Any Qualifying Community Bank that met the new Community Bank Leverage Ratio would also be considered to have met generally applicable leverage capital requirements, generally applicable risk-based capital requirements, and any other capital or leverage requirements to which such insured depository institution and insured depository institution holding company is subject.  Any Qualifying Community Bank that was an insured depository institution would also be deemed well capitalized under Section 38 of the Federal Deposit Insurance Act (FDIA) and related regulations.  This would insulate a large number of community banks from the complexities of the Basel III capital framework.

Limited Exception for Reciprocal Deposits (Section 202).  The bill would provide that reciprocal deposits from an agent institution will not be considered to be funds obtained, directly or indirectly, by or through a deposit broker to the extent such reciprocal deposits do not exceed the lesser of (A) $5 billion and (B) 20% of the agent institution’s  total liabilities.  This change would benefit less than well capitalized financial institutions that would otherwise have to request a difficult to obtain waiver or would be ineligible to receive an  FDIC  waiver from the restrictions in Section 29 of the FDIA on the acceptance of brokered deposits.

Community Bank Relief (Section 203).  The bill would exempt banks with less than $10 Billion in assets from the Volcker Rule in Section 13 of the Bank Holding Company Act of 1956 (Prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds) so long as the total trading assets and trading liabilities of the bank and any company that controls the bank were less than five percent of total consolidated assets.

Short Form Call Reports (Section 205).  The bill would require federal regulators to prescribe regulations to simplify call reports for the insured depository institutions they supervise that (i) have less than $5 billion in total consolidated assets; and (ii) satisfy other criteria set out by such federal regulator.

Option for Federal Savings Associations to Operate as Covered Savings Associations (Section 206).  For federal savings associations with total consolidated assets equal to or less than $15 billion, the bill would provide the same rights and privileges as national banks upon notice submitted to the OCC.  Federal savings associations would continue to maintain such rights and privileges after such election, even if the total consolidated assets of the federal savings association subsequently exceed $15 billion.

Small Bank Holding Company Policy Statement (Section 207).  The bill would require the Board of Governors of the Federal Reserve System to revise the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” to increase the consolidated asset threshold thereunder from $1 billion to $3 billion, leaving the other requirements of such bank holding companies and savings and loan companies the same.  This change would allow bank holding companies with less than $3 billion in assets to avoid consolidated capital requirements and allow them to comply instead with less restrictive debt-to-equity limitations.

Examination Cycle (Section 211).  The bill would raise the threshold in Section 10(d)(4)(A) of the FDIA for small institutions eligible for 18-month examinations from $1 billion to $3 billion of total consolidated assets.

Enhanced Supervision and Prudential Standards for Certain Bank Holding Companies (Section 401).  The bill would raise the assets threshold for systemically important banks subject to enhanced prudential standards from $50 billion to $250 billion.  This amendment would take effect upon enactment for institutions with less than $100 billion in total consolidated assets, and would take effect 18 months after enactment for all other institutions.  This would reduce the number of institutions subject to enhanced standards.

Treatment of Certain Municipal Obligations (Section 403).  The bill would require the federal banking agencies to treat liquid, readily-marketable and investment grade municipal obligations as high-quality level 2B liquid assets for purposes of the final rule entitled “Liquidity Coverage Ratio: Treatment of U.S. Municipal Securities as High-Quality Liquid Assets.”

In September, our Firm announced that, effective January 1, 2018, it will merge with the law firm of Lindquist & Vennum.  I previously had the pleasure of introducing our future colleague and guest blog post author Amy Lauck, whose practice focuses on prepaid cards, mobile banking, and payment systems.

It is now my pleasure to introduce our future colleague Scott Coleman, who accepted my invitation to write a guest blog post about the bank regulatory provisions of the regulatory reform bipartisan bill that the Senate Banking Committee is scheduled to markup next week. For 25 years, Scott has represented banks and bank holding companies in connection with mergers, stock purchase transactions, branch purchase and assumption transactions, capital raising, corporate restructuring, branching, non-bank acquisitions, changes in bank control and charter conversions. He has also represented organizers seeking to form bank holding-companies, apply for deposit insurance, and charter new depository institutions. Scott has expertise in a wide array of bank regulatory requirements, interstate banking and branching, lending limits, Basel III and capital guidelines.

Although the CFPB’s leadership transition rightfully remains top of mind for many of our readers, we wanted to recap two developments related to serving consumers who are Limited English Proficient (LEP). In the days before Director Cordray’s resignation, the CFPB officially approved Fannie Mae and Freddie Mac’s final redesigned Uniform Residential Loan Application (URLA), which added a question about mortgage applicants’ language preference. The CFPB also released a report entitled “Spotlight on serving limited English proficiency consumers.” The report discusses how financial institutions can support access to financial products and services and promote financial literacy for LEP consumers.

Official approval of URLA under Regulation B

The Federal Housing Finance Agency recently directed Fannie Mae and Freddie Mac to add a question about mortgage applicants’ language preference to the URLA. The CFPB has issued an official approval of the final redesigned URLA under Regulation B of the Equal Credit Opportunity Act. It determined that the use of the URLA will not expose creditors to civil liability under the provisions of Regulation B that limit creditors’ inquiries about applicants’ race, color, religion, national origin, or sex. (Although the notice states that the CFPB focused on national origin in reviewing the language preference question, its technical determination covers these other types of information as well.) You can read about the CFPB’s initial approval of the redesigned URLA in September 2016 here.

Report on serving LEP consumers

The CFPB’s report primarily summarizes five practices for serving LEP consumers based on interviews with representatives from “several” financial institutions of various sizes and trade associations as well as the CFPB’s “broader understanding of the market.”

  1. Assessment of language needs based on Census Bureau demographic data or customer-provided language elections (such as on the URLA) and use of such information to build out capabilities to serve Spanish-speaking consumers or other LEP consumers in an institution’s footprint by, for example, branch hiring or in-language servicing for particular product lines.
  2. A centralized point of contact for internal technical assistance to employees at larger institutions. The point of contact may annually review processes and procedures for using non-English languages; evaluate which areas of business would most benefit from LEP services; develop quality control mechanisms; and establish translation and interpretation policies.
  3. Translation and interpretation systems at larger institutions that help ensure consistency and accuracy, including third-party interpreters. Institutions reported that they translate for meaning (rather than word-for-word), use back-translation (involving taking a translated document and having another party translate it back to English) and use bilingual glossaries.
  4. Human capital investments in foreign language fluency and cultural competency, including through hiring and training. Institutions that rely on contractors for translation services often retain some language experts on staff for quality control purposes.
  5. Interactions with LEP consumers in their preferred language take the form of verbal interpretations via phone and the ability to select a language setting for digital services like ATMs, websites and mobile applications, as well as other communications. Most institutions told the CFPB that their written contracts were available only in English, although some institutions provide translations of certain documents, including monthly statements and privacy notices.

The report also identifies a number of challenges financial institutions face in serving LEP consumers, such as the limited number of certified financial interpreters and translators (particularly for languages other than Spanish), the inconsistent translation of terms across the financial services industry, and preparing written materials at a reading level accessible to the average U.S. adult.

Importantly, the report notes that its purpose is to raise awareness about the issues that LEP consumers face in accessing financial products and services and share information about how financial institutions interact with LEP consumers. The report states that the practices described are not intended to be comprehensive or representative of the industry as a whole, nor does it constitute an endorsement of specific practices by the CFPB. (The CFPB also provided some guidance on serving LEP consumers in its Fall 2016 Supervisory Highlights, which we blogged about here.) Given that the report was issued prior to Director Cordray’s resignation, it remains to be seen how the “new” CFPB will approach issues of financial access and literacy among the LEP population.

The Department of Education (ED) has apparently declined a request by 39 members of Congress to reinstate the Memoranda of Understanding (MOUs) between ED and the CFPB.  The members of Congress, including Elizabeth Warren, Bernie Sanders, and Senate Health, Education, Labor and Pensions ranking Democratic member Patty Murray, penned a September 14th letter just one week after CFPB Director Richard Cordray made a similar request. ED had based the termination of the MOUs on the Bureau’s failure to forward Title IV federal student loan complaints and its issuance of guidance that conflicted with ED directives.

ED’s November 13th response, addressed to Senator Murray and signed by Acting Undersecretary James Manning, emphasized that the only statutory authority explicitly referencing the CFPB’s oversight of federal student loans pertains to ED’s coordination of complaint handling with the Bureau’s Private Education Loan Ombudsman. ED’s response further echoed its termination letter by reiterating that the rescission of the MOUs was warranted by the CFPB’s failure to direct nearly 13,000 federal student loan complaints to ED for resolution or to share servicers’ responses to such complaints. In particular, ED noted that the Bureau’s handling of complaints was the cause of “unnecessary confusion for borrowers” regarding the rules governing their loans.

In an update to its Policies and Procedures Manual (PPM), the Office of the Comptroller of the Currency (OCC) has revised PPM 5310-3, “Enforcement Action Policy,” dated September 9, 2011. The PPM sets forth the OCC’s policies and procedures for taking enforcement actions against banks, federal savings associations, federal branches, and agencies (“banks”).  The OCC notes that the principles in the PPM may also be considered in taking an enforcement action against a third-party service provider.  The update is effective December 1, 2017.

The PPM covers the following topics and changes to the September 9, 2011 PPM (“old PPM”):

  • Types of enforcement actions. The PPM lists the types of informal and formal enforcement actions the OCC can take. (Such actions are described more fully in appendices A and B to the PPM.) The PPM clarifies that all nonpublic enforcement actions are considered “informal enforcement actions,” including commitment letters, MOUs, operating agreements, and certain conditions imposed in writing under 12 U.S.C. § 1818. It specifically identified Individual Minimum Capital Ratios (“IMCRs”) and Notices of Deficiency under 12 CFR § 30 as new categories of informal enforcement actions. Similarly, the PPM clarifies which actions constitute “formal enforcement actions.” The old PPM specified that formal enforcement actions include orders and formal written agreements under 12 U.S.C. 1818(b), capital directives under 12 U.S.C. § 3907, Prompt Corrective Action directives under 12 U.S.C. § 1831o, and safety and soundness orders under 12 U.S.C. § 1831p. The PPM’s definition of formal enforcement action includes all those things as well as “all enforcement actions enforceable by the OCC in federal court,” Graham Leach Bliley Act Agreements pursuant to 12 CFR § 5.39, and any action in which a civil money penalty is imposed. The PPA also reminds banks that entities subject to certain formal enforcement actions are also deemed to be in “troubled condition” under 12 C.F.R.§ 5.51.
  • Determination of appropriate supervisory or enforcement response. The PPM lists factors that examiners should consider when determining the appropriate response to a bank’s deficiencies and describes the general circumstances under which the OCC will have a presumption in favor of a formal enforcement action, the impact of a bank’s CAMEL or ROCA rating on the OCC’s response to deficiencies, and the OCC’s authority to place a bank into conservatorship or receivership. The changes that the PPM implements in this section do not appear to be substantive. The simply clarify the old PPM.
  • Decision authority. The PPM describes the OCC’s supervision review committees (SRC) that review or make enforcement decisions. While the old PPM specifically discussed the Examiner in Charge’s authority to recommend enforcement actions, the new PPM omits that discussion. In addition, the PPM adds a Major Matters Supervision Review Committee, which will have final authority to make enforcement decisions on major cases. These changes may indicate that enforcement decisions will be handled at a higher level within the OCC. Other changes to this section appear to be primarily organizational in nature.
  • Content of enforcement action documents. The PPM lists the information that must be contained in enforcement documentation once the OCC has determined which deficiencies must be addressed in an enforcement action. While the old PPM did not explicitly require that the underlying basis for the enforcement action be specified, that requirement was added by the PPM. The PPM also added a requirement that enforcement action documents explicitly guide the board or management’s corrective actions and facilitate OCC follow-up.
  • Timeliness of enforcement actions. The PPM states that, whenever possible, a proposed enforcement action should be presented to the bank within 180 days of the start of supervisory activity that results in a formal written communication containing any of five statements listed in the PPM.  In contrast, the old PPM required only that action be taken “as soon as practicable once the need for such action has been identified.” The PPM also states that enforcement action recommendations based on facts gathered through an order of investigation should be presented to the appropriate supervision review committee within 90 days of completion of the investigative work. (Appendix C to the PPM outlines the general process and timeline for each type of enforcement action.) Any extensions to that deadline must be approved by the appropriate deputy comptroller. Under the old PPM, enforcement decisions were to be made more quickly, generally within 15 days of certain key milestones. However, extensions and exceptions only had to be documented, not formally approved.
  • Follow-up activities. The PPM describes the enforcement action follow-up activities that examiners should undertake. The PPM implements certain changes to the timing of the OCC’s follow up. The changes appear designed to both give the OCC more flexibility in scheduling follow-up and to align the follow-up timing with the requirements of any enforcement action. The PPM also specifies that the follow-up should include both verification (assessing compliance) and validation (assessing effectiveness) of the bank’s remedial efforts.
  • Assessment of compliance with enforcement actions. The PPM states that upon the completion of follow-up activities, examiners must determine whether a bank has met the requirements of each article of the enforcement action and designate the article as “in compliance” or “not in compliance.” The PPM describes the circumstances under which each such designation should be used. The old PPM included a strong presumption in favor of escalated enforcement when the bank was not in compliance on certain types of issues. The PPM does not discuss this presumption.
  • Communication of enforcement action compliance. The PPM describes the contents of formal communications from examiners to a bank that discuss compliance with an enforcement action and the types of communications from a bank to the OCC that follow an enforcement action. This requirement was not contained in the old PPM.
  • Termination of enforcement actions. The PPM describes the circumstances that permit termination of an enforcement action and the considerations for determining when to escalate an enforcement action or replace an enforcement action with a less severe or comprehensive action. The old PPM did not include specific guidance on when and how an enforcement action would be escalated.
  • The PPM describes the supporting documentation related to an enforcement action that must be included in the OCC’s supervisory information systems. These documentation requirements were spread throughout the old PPM. Consolidating them into one section was likely done to improve consistency and accountability in documenting the enforcement process.
  • Public disclosure of enforcement actions. The PPM describes the public disclosures that the OCC can make in connection with an enforcement action. The PPM specifically reminds banks of the circumstances under which they can and must make such public disclosures. The old PPM did not include this additional guidance.