Final OCC/FDIC Rule Provides Greater Transparency and Consistency for Supervisory and Enforcement Activities

Purpose and Overview

By defining previously amorphous terms, raising the threshold for the issuance of MRAs, and providing greater guidance on how to develop acceptable remediation plans, the final rule and the revised PPMs limit regulatory overreach, ground supervision and enforcement in material financial risk, and make it easier for institutions to address regulatory concerns.

Key Aspects of the Final Rule

Unsafe or Unsound Practices. The final rule defines an unsafe or unsound practice as a practice, act, or failure to act that has departed from generally accepted standards of prudential operation and has either materially harmed the institution's financial condition or, if continued, is likely to materially harm the financial condition of the institution or present a material risk of loss to the Deposit Insurance Fund. This definition curtails arbitrary and subjective regulatory action based on nonfinancial concerns.

MRAs. The final rule provides a more rigorous standard for the agencies to issue MRAs, in alignment with the newly issued definition of an unsafe or unsound practice and focusing on financial harm. In general, the final rule provides that examiners may issue an MRA only for an act or failure to act that: (i) is an actual violation of a banking law or regulation; or (ii) is contrary to prudent standards of operation and has already materially harmed or could materially harm the institution's financial condition, or could present material risk to the Deposit Insurance Fund. By aligning MRA issuance with the new definition of unsafe or unsound practice and excluding nonfinancial concerns, the rule limits examiner discretion and addresses longstanding industry concerns—including those related to debanking—about the inconsistent or subjective use of supervisory findings.

Definition of Harm to Financial Condition. The final rule defines harm to financial condition as financial losses or other negative impacts to an institution's capital, asset quality, earnings, liquidity, or sensitivity to market risk. This effectively ties the definition of harm to all of the CAMELS rating components, with the exception of the "management" component.

Key Aspects of the Revised PPMs

Substantial Compliance. The revised PPM governing enforcement actions clarifies that the OCC may terminate an enforcement action once an institution has achieved "substantial compliance," meaning that the order's essential requirements are satisfied, even if minor, isolated technical requirements remain outstanding. Additionally, the OCC may modify or de-escalate an action when portions have been substantially remediated or are no longer necessary. This clarification is significant for institutions seeking to close formal or informal actions because it focuses the analysis on whether the underlying deficiency has been substantively cured, rather than on perfect technical completion.

Remediation. As institutions have learned, timely, effective, and well-documented remediation of MRAs can help institutions to close supervisory findings before they escalate to enforcement. The revised PPM governing MRAs assists institutions in developing remediation plans more likely to meet examiner expectations. For example, the PPM includes explanations of key terms often used in MRAs, so that institutions are not left to interpret the terms on their own. Moreover, the PPM highlights the importance of critical aspects of the remediation process, including board oversight in addressing MRAs (e.g., holding management accountable, directing management to develop and implement corrective actions in a timely fashion, and monitoring progress and effectiveness). Notably, the PPM explicitly addresses a key sticking point for institutions when trying to get an MRA closed, instructing examiners to close an MRA when corrective actions have been implemented and effectiveness validated, without waiting to assess sustained performance.