Civil money penalties, 15-day letters, and the enforcement process

Bank regulators have broad authority to impose civil money penalties (CMPs) against banks or institution-affiliated parties (IAPs) for violations of laws, regulations, and other written conditions or agreements. The OCC recently updated its policy on CMPs to change the factors considered in assessing CMPs. The new policy signals that the agency may be ramping up its enforcement efforts in certain areas and also provides useful guidance on how to avoid and, if necessary, respond to a potential enforcement action involving the imposition of CMPs.

Federal law allows bank regulators to impose CMPs on regulated banks, individual officers and directors, and other affiliated parties for violations of (a) any law or regulation,  (b) any final or temporary order, or (c) any condition imposed in writing or in any agreement with bank regulators. CMPs are divided into three tiers: Tier 1 applies to any violation, regardless of intent, pattern, or consequences. Tier 2 applies where the violation is part of a pattern of misconduct, is likely to cause more than a minimal loss to a bank, or results in pecuniary gain to the offender. Tier 3 applies where the violation knowingly or recklessly causes substantial loss to the bank or substantial gain to the offender. The regulators use a matrix setting forth various factors to consider in assessing the amount of a CMP.

On February 26, the OCC issued new guidelines, modifying its CMP matrix for the first time since 1993. The new guidelines make several modifications from the prior version, including the following notable changes:

  • There are separate matrices for banks and IAPs. Although the matrices are similar, the prior guidelines only had a single matrix for both.
  • The new bank matrix requires the OCC to take into account the size of a bank in assessing CMPs. While the OCC already does this as a matter of practice, the new matrix creates more concrete guidelines. For example, a bank with assets of less than $50 million faces a CMP of up to $10,000 for a lower tier violation, while a bank with assets of more than $100 billion faces a CMP of up to $15 million for the same matrix score. For all banks, CMPs are capped at 1% of the bank’s total assets.
  • Similarly, the new IAP matrix requires the OCC to take into account an individual’s ability to pay, but there are not concrete guidelines based on an individual’s net worth or income.
  • Both matrices add new factors to be considered in assessing CMPs. For example, the bank matrix now has a factor that considers the presence and effectiveness of a compliance program. Similarly, the IAP matrix adds a factor considering the individual’s responsibility for internal controls and the effectiveness of those controls. Both matrices also place a new emphasis on BSA violations.
  • Both matrices change the weight to be given to certain existing factors. For instance, the bank matrix increases the weight given to violations that are intentional, that continue after notification by the OCC, or that are similar to prior violations. Likewise, the IAP matrix increases the weight given to violations when they are intentional or result in gain for the individual.

Many of these changes merely formalize practices that were already in effect. However, they may provide additional guidance and leverage to use in responding to a 15-day letter. Bank regulators send a 15-day letter when they are considering bringing an enforcement action against a bank or IAP. The purpose of a 15-day letter is to give the recipient an opportunity to respond in writing to the allegations and to negotiate a settlement before the regulator brings an enforcement action. If settlement negotiations do not result in a consent order, the regulator typically brings an enforcement action against the bank or IAP, although there may be a significant amount of time (a year or more in some cases) between the 15-day letter and the enforcement action. The enforcement action allows both the regulator and the bank or IAP to conduct discovery and ultimately to present their positions in a hearing on the merits before an administrative law judge (ALJ). The ALJ then issues a recommended decision, which the Comptroller must accept or reject. Finally, the bank or IAP has the right to appeal the Comptroller’s ruling to a federal court of appeals. The entire process can take as long as five years.

Because of the time and expense associated with this process, full hearings on the merits are rare, and appeals all the way to the court system are even rarer. In addition, banks and IAPs that continue to work in the banking industry have an incentive to settle because they have to continue working with the regulators. However, it is important to understand the process as well as the policy behind the CMPs because (1) it can help banks avoid trouble at the outset, and (2) it provides guidance for a bank or IAP to consider in negotiating a CMP after receiving a 15-day letter.