Comparison of Financial Institution Regulators' Enforcement and  
Prompt Corrective Action Authorities (31-JAN-01, GAO-01-322R).	 
								 
GAO reviewed the legal authorities for the federal bank 	 
regulators, the Office of Federal Housing Enterprise Oversight	 
(OFHEO), and the Federal Housing Finance Board (FHFB)		 
(collectively referred to as financial institution regulators)	 
for taking actions when issues arise regarding the capitalization
and safety and soundness of the institutions they supervise.	 
Concerns were expressed that OFHEO and FHFB may not have the same
supervisory and enforcement powers as the bank regulators. GAO	 
found that the financial institution regulators have similar	 
types of powers and authorities, but they are not identical. Each
financial institution regulator administers its own statutory	 
scheme that contains authority to address unsafe and unsound	 
conditions and practices, as well as certain violative conduct.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-322R					        
    ACCNO:   577794						        
    TITLE:   Comparison of Financial Institution Regulators'	      
             Enforcement and Prompt Corrective Action Authorities             
     DATE:   01/31/2001 
  SUBJECT:   Bank examination					 
	     Banking regulation 				 
	     Comparative analysis				 
	     Financial institutions				 
	     Regulatory agencies				 

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GAO-01-322R

Financial Regulators' Enforcement Authorities United States
General Accounting Office

Washington, DC 20548

January 31, 2001 The Honorable Richard H. Baker Chairman, Subcommittee on
Capital Markets, Insurance, and

Government Sponsored Enterprises Committee on Financial Services House of
Representatives

Subject: Comparison of Financial Institution Regulators' Enforcement and
Prompt Corrective Action Authorities

Dear Mr. Chairman: This letter responds to your October 10, 2000, request
that GAO review and compare the legal authorities available to the federal
bank regulators, the Office of Federal Housing Enterprise Oversight (OFHEO),
and the Federal Housing Finance Board (FHFB) (collectively referred to as
financial institution regulators) for taking actions when issues arise
regarding the capitalization and safety and soundness of the institutions
they supervise. The federal bank regulators, OFHEO, and FHFB are responsible
for ensuring that the institutions they supervise are in a safe and sound
condition and that the activities of the regulated institutions and their
managing officials do not raise safety and soundness concerns. To fulfill
this responsibility, each financial institution regulator has an array of
statutory supervisory authorities, regulatory powers, and enforcement tools.
In your request letter, you expressed concern that OFHEO and FHFB may not
have the same supervisory and enforcement powers as the bank regulators. As
agreed, our objective was to describe the types of supervisory and
enforcement authorities (including prompt corrective action provisions)
available to financial institution regulators and highlight distinctions
between the specific authorities of the bank regulators, OFHEO, and FHFB.
Enclosure I provides a detailed side- by- side analysis of the respective
enforcement and prompt corrective action authorities of the bank regulators,
OFHEO, and FHFB.

To respond to this request, we reviewed relevant statutes, legislative
histories, agency opinions, and secondary sources relating to the
supervisory and enforcement authorities of the financial institution
regulators. We also met with agency officials from OFHEO and FHFB. We
conducted our work at OFHEO and FHFB headquarters between October and
December 2000.

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 2

Results in Brief

The financial institution regulators have similar types of powers and
authorities, but they are not identical. Each financial institution
regulator administers its own statutory scheme that contains authority to
address unsafe and unsound conditions and practices, as well as certain
violative conduct. The tools generally available to these regulators include
informal supervisory actions; formal enforcement actions involving notice to
the affected institutions, the opportunity for a hearing, and, if warranted,
the imposition of sanctions such as a cease and desist (C& D) order or civil
money penalties; and capital- based actions and restrictions generally
referred to as prompt corrective action (PCA) provisions.

Based on each regulator's powers and authorities, it appears that each
regulator has statutory tools available to address significant safety and
soundness concerns. However, because of differences in existing authorities
and regulatory discretion, it is likely that these regulators may approach
similar concerns differently. For example, some differences appear to exist
between OFHEO and the bank regulators regarding the grounds for issuing C& D
orders. In addition, in contrast to the bank regulators and FHFB, OFHEO
lacks authority to remove officers and directors, place an enterprise into
receivership, or bring suit on the agency's behalf (OFHEO must rely on the
Attorney General). These differences, in certain cases, may cause OFHEO to
rely on less direct measures.

In addition to these general enforcement authorities, the bank regulators
and OFHEO are required, or in certain instances authorized, to take
specified supervisory actions based on an institution's capital under the
PCA provisions. 1 Supervisory actions based on the PCA provisions differ
from formal enforcement actions in that they do not typically involve notice
and an opportunity for hearing. In addition, certain of the PCA provisions
are mandatory, thereby eliminating the regulator's discretion in deciding
whether or how to act.

Although FHFB's enabling statute requires FHFB to ensure that the Federal
Home Loan Banks (FHLB) remain adequately capitalized, it does not contain
provisions specifying particular supervisory actions that the Board must or
may take in response to an FHLB's undercapitalized condition, as is the case
for the bank regulators and OFHEO. The capital provisions of FHFB's enabling
statute do place certain restrictions directly on the FHLBs linked to the
statutorily prescribed capital requirements. FHFB officials pointed out that
they can use their other statutory tools to take the discretionary actions
found in the bank regulators' or OFHEO's PCA provisions; however, they are
not required to take such actions.

Although the classifications triggering PCA actions are the same for both
the bank regulators and OFHEO, the capital requirements underlying these
classifications are different. Certain differences also exist between the
bank regulators and OFHEO's PCA provisions. For example, it appears that
OFHEO's PCA scheme, in some

1 Each agency is required to ensure that the institutions it regulates
comply with capital requirements established by statute or regulation. As
noted later, OFHEO is in the process of adopting risk- based capital rules.
FHFB adopted final rules implementing a new risk- based capital structure
for the FHLBs that includes a statutory minimum capital standard.

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 3
instances, may provide for regulatory action at a lower level of capital
classification

than the bank regulators' PCA scheme, has fewer required actions imposed,
and provides OFHEO more discretion in determining specifically what action
to take. In addition, OFHEO's PCA provisions contain more notice and comment
provisions for the enterprises. These statutory notice and comment
requirements, which are absent from the bank regulators' PCA provisions, may
result in a longer PCA process for OFHEO.

Background

Four federal regulators oversee federally insured banks and thrifts and are
referred to in this report as the bank regulators. The Comptroller of the
Currency regulates nationally chartered banks; the Board of Governors of the
Federal Reserve System (FRS) regulates state- chartered banks that are
members of FRS, bank holding companies, and financial holding companies; the
Federal Deposit Insurance Corporation (FDIC) regulates state- chartered,
nonmember banks; and the Office of Thrift Supervision regulates all
federally insured thrifts, regardless of charter type, and their holding
companies. The bank regulators have a wide array of supervisory authorities
(including their examination and application review functions), regulatory
powers, and enforcement tools to monitor the safety and soundness of the
institutions they regulate. Under the Federal Deposit Insurance Act, each of
these regulators is charged with taking supervisory and enforcement actions
based on safety and soundness concerns, including capital- related concerns.

OFHEO is an independent regulator, within the Department of Housing and
Urban Development (HUD), whose primary mission is to oversee the financial
safety and soundness of Fannie Mae and Freddie Mac (collectively referred to
as the enterprises). 2 It was established by the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (Safety and Soundness Act). 3
OFHEO's primary means of fulfilling its mission include establishing and
ensuring compliance with capital standards for the enterprises, conducting
on- site examinations to assess their management practices and financial
condition, rulemaking, and taking enforcement actions as authorized under
the Safety and Soundness Act.

FHFB is an independent federal agency created by the Financial Institutions
Reform Recovery and Enforcement Act of 1989. 4 FHFB administers the Federal
Home Loan Bank Act (FHLB Act), under which its primary duty is to ensure the
safety and soundness of the FHLBs. 5 FHFB also is responsible for mission
oversight. FHFB supervises the FHLBs by, among other things, ensuring that
they satisfy capitalization requirements established pursuant to the act and
maintain the ability to raise funds in the capital markets. FHFB is
authorized to promulgate and enforce such regulations and orders that it
determines are necessary to carry out the provisions of the FHLB Act. The
Federal Home Loan Bank System Modernization Act of 1999 specified

2 The statute separately designates HUD as having oversight over the
enterprises' mission. This report does not address HUD's oversight function.
3 12 U. S. C. sect. 4511.

4 12 U. S. C.sect. 1422a( a)( 1)( 2000). 5 12 U. S. C. sect. 1422a.

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 4 FHFB's
administrative enforcement powers with respect to safety and soundness

matters. 6

A Range of Enforcement Tools Is Available to Financial Institution
Regulators

The tools available to financial institution regulators include informal
supervisory actions; formal enforcement actions involving notice to the
affected institution, the opportunity for a hearing, and, if warranted, the
imposition of sanctions, including civil money penalties; and PCA. Although
there are statutory, regulatory, and procedural differences among the
financial institution regulators, we have used these three basic categories
of enforcement tools for ease of description in this report.

Informal Supervisory Actions The most frequent and informal means by which
financial institution regulators address a safety and soundness or other
supervisory concern occurs in connection with a regulator's exercise of its
general supervisory function, such as examinations or reviews of reports.
For example, in the course of an examination, an agency might become aware
of a condition or conduct that it considers relevant to the institution's
safety and soundness or that raises other supervisory concerns. In such a
case, the agency typically will notify the institution of its determination
and give the institution an opportunity to correct the problem to the
regulator's satisfaction. This interaction is characterized as
“suasion.”

On the basis of the prevalence and severity of the circumstances and other
considerations, the regulator may require an action in which the institution
formally acknowledges the problem and commits to correct it. This type of
action may be a board of directors' resolution, a commitment letter, or a
memorandum of understanding. 7 An institution's failure to make a commitment
or honor the commitment it undertakes may justify a more formal enforcement
action. The bank regulators, OFHEO, and FHFB rely most often on these types
of

supervisory actions. 8 In fact, to date, OFHEO has relied exclusively on
these types of supervisory actions. OFHEO officials pointed out the
enterprises' willingness to

6 The Modernization Act is contained in Title VI of the Gramm- Leach- Bliley
Act, Pub. L. No. 106- 102; 12 U. S. C. sect. 1422b. 7 See Jackson, Howell E. and
Symons, Edward L., Regulation Of Financial Institutions 334- 335 (1999).

The board of directors' resolution involves a commitment by the institution
to respond to the deficiency in a way approved by the regulator. The
commitment letter is often used with respect to institutions that are in
good condition but have minor problems in isolated areas of activity. It is
prepared by the regulator and sent to the institution for execution. The
written memorandum of understanding reflects an agreement between the
regulator and the institution on what actions are to be taken. Typically, it
also is prepared by the regulator and contains provisions requiring the
institution to establish a business plan to correct the problems identified
by the regulator. 8 FHFB has a mechanism for achieving compliance with a
supervisory determination that operates in

the context of the supervisory process, but which can have the same effect
as a formal enforcement proceeding. Under FHFB's regulations, a supervisory
determination requiring mandatory actions, such as a finding in an
examination report, order, or directive, as well as any FHFB order or
directive concerning a safety and soundness or compliance matter, is final
unless the affected FHLB petitions FHFB for a review of the determination.
The determination remains in effect while the petition is pending. 12 C. F.
R. part 907 (2000). In December 2000, FHFB approved additional regulations
governing formal enforcement actions, such as C& D proceedings.

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 5 resolve
issues early and expeditiously. Under the Safety and Soundness Act, the

Director of OFHEO is required to provide Congress with an annual report that
includes a description of any actions taken by the Director, as well as the
results of enterprises' examinations. These disclosure provisions may
encourage early resolution of issues to avoid disclosure of OFHEO's
concerns. The bank regulators and FHFB do not have such a disclosure
requirement.

Formal Enforcement Actions In the event informal action is ineffective or
inappropriate, each financial institution regulator has more formal
enforcement tools available. Formal enforcement actions may include the
formal written agreement, the issuance of C& D orders, the suspension or
removal of officers and directors (except for OFHEO as discussed below), and
civil money penalties. A formal written agreement sets forth the specific
corrective and remedial measures that the regulator determines are necessary
to return the institution to a safe and sound condition. 9 A C& D order may
require an institution to halt specified conduct or to take affirmative
action to correct conditions resulting from the conduct.

Based on the respective statutory authorities of the bank regulators, OFHEO,
and FHFB, each appears to have statutory tools available to address
significant safety and soundness concerns. For example, all can issue
written agreements and C& D orders and impose civil money penalties.
However, there are differences between the bank regulators' authorities and
those of OFHEO regarding aspects of their C& D authorities; removal and
prohibition authorities applicable to officers and directors; and
receivership and litigation authorities, as highlighted below. These
differences, in certain cases, may cause OFHEO to rely on less direct
measures.

Cease and Desist Authorities The Safety and Soundness Act specifically
provides OFHEO with authority to issue a C& D order and impose civil money
penalties based on (a) conduct having an adverse effect on capital; (b)
misconduct by an executive officer or director resulting in unjust
enrichment or actual or likely substantial loss to the enterprise; (c)
conduct in violation of the Safety and Soundness Act and the enterprises'
charter acts, as well as conduct in violation of any order, rule, or
regulation under those laws (enforcement of HUD established housing goals is
excepted); and (d) the violation of any written agreement between the
enterprise and OFHEO. 10 The Federal Deposit Insurance Act (FDI Act)
provides that the bank regulators may issue a C& D order and impose civil
money penalties based on (a) an unsafe or unsound practice; or (b) a
violation of a law, regulation, or any condition imposed in writing by the
agency or any written

9 The formal written agreement, which must be signed by the institution's
board of directors, is used to address situations that may be serious, but
in which the regulator has confidence that the institution's management can
and will correct the problem by performing the agreed- upon measures. The
agreement has the effect of a consent order in that it obviates the need for
a notice and hearing to determine whether the condition or conduct at issue
violated any legal standard. An institution's breach of the agreement can
serve as grounds for issuance of a C& D order. Although an institution
cannot be forced to enter into a formal written agreement, it has an
incentive to do so because failure to enter such an agreement might raise
the potential for a more formal enforcement proceeding. 10 12 U. S. C. sect.
4631 (2000).

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 6 agreement
entered into with the agency. 11 FHFB also has specific authority to issue a

C& D order based on safety and soundness grounds or violative conduct. A few
differences exist in these authorities. First, the OFHEO C& D provision does
not specifically list an unsafe and unsound practice as grounds for issuing
an order (the bank regulators and FHFB have this ground listed). However,
OFHEO maintains that unsafe and unsound practices are violations of the
Safety and Soundness Act and, therefore, fall within the third listed ground
for issuing a C& D order. Second, the bank regulators can issue a C& D order
to any institution– affiliated party (IAP), which includes an
institution's directors, officers, controlling stockholders, and independent
contractors. 12 OFHEO may issue such an order only against an enterprise or
its affiliates, an executive officer, or director. 13 Similar to OFHEO, FHFB
may issue a C& D order against an FHLB, an executive officer, or director.
Finally, in contrast to the bank regulators and FHFB, there is no specific
statutory authority for OFHEO to issue a C& D order if an enterprise were to
violate conditions imposed in writing. Often, bank regulators issue
approvals of some action subject to conditions. Violations of conditions
that a bank regulator imposes in writing may be grounds for a C& D order and
may even subject bank officers to removal. Although OFHEO lacks this
explicit authority, it typically does not issue the type of conditional
approvals that the bank regulators issue.

Removal and Prohibition Authority

OFHEO does not have the same direct removal and prohibition authorities
applicable to officers and directors as the bank regulators and FHFB have.
The bank regulators may remove officers, directors, and other specified
parties or prohibit them from participating in the affairs of the
institution if the agency determines that the affected individual or entity
violated a law or regulation, a final C&D order, or a written condition or
agreement; or if it engaged in an unsafe or unsound practice; or breached a
fiduciary duty. The conduct must adversely affect the institution's
financial condition or have other specific consequences and must involve
either personal dishonesty or a willful disregard of the institution's
safety and soundness. 14 Under its statute, FHFB may take a similar action
if it determines that cause exists. OFHEO does not have similar explicit
removal or prohibition authorities. Rather, OFHEO, in connection with the
issuance of a C&D order, can, among other actions, direct

11 12 U. S. C. sect. 1818( c) (2000). 12 Under the FDI Act, an IAP is any
director, officer, employee, or controlling stockholder of an insured

institution, other than a bank holding company; any person who has filed or
is required to file a change- in- control notice as required under 12 U. S.
C. 1817( j); any shareholder (other than a bank holding company) or other
person who participates in the conduct of the affairs of the institution;
and any independent contractor who knowingly or recklessly participates in a
violation of any law or regulation, any breach of fiduciary duty, or any
unsafe or unsound practice, where such conduct caused or is likely to cause
more than a minimal financial loss to, or a significant adverse effect on,
the institution. 13 The Safety and Soundness Act defines “executive
officer” of an enterprise to mean the chairman of

the board; the chief executive officer; chief financial officer; president;
vice chairman; any executive vice president; and, any senior vice president
in charge of a principal business unit, division, or function. It also
provides that affiliates of Fannie Mae and Freddie Mac are considered to be
parts of the enterprise. Except as provided by OFHEO, an affiliate is any
entity that controls, is controlled by, or is under common control with an
enterprise. 12 U. S. C sect. 4502 (2000). 14 12 U. S. C. sect. 1818( e) (1994). In
addition, an IAP may be suspended, removed, or prohibited from

participating based on a final judgment, conviction, or plea agreement (and
suspended as a result of specified criminal charges).

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 7

the affected enterprise to hire a new employee to perform the job of the
officer or director at issue. 15 This action appears to be a less direct
measure than the removal authority afforded the bank regulators.

Litigation Authority Finally, in connection with the implementation of these
formal enforcement actions through the court system, only OFHEO must rely on
the Attorney General to bring suit on the agency's behalf. The bank
regulators and FHFB have independent litigation authority, which allows them
to bring suit on behalf of the respective agency.

Prompt Corrective Action In addition to authorizing the use of formal
enforcement proceedings, Congress established PCA schemes for both the bank
regulators and OFHEO (and not for FHFB, as discussed below) to mandate early
regulatory intervention for institutions having capital adequacy problems.
The purpose of PCA is to ensure that regulatory action is taken at the time
an institution becomes financially troubled in order to prevent a failure or
minimize resulting losses. 16 Under the PCA scheme applicable to the bank
regulators, the regulator is required to have regulations specifying capital
levels at which an institution is to be classified as well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, or
critically undercapitalized. OFHEO's PCA scheme does not provide for the
well- capitalized classification. With respect to both the bank regulators
and OFHEO, a PCA action is triggered by an institution's classification as
undercapitalized, significantly undercapitalized, or critically
undercapitalized. However, although the classification names triggering PCA
actions are the same for both the bank regulators and OFHEO, the definitions
of these classifications are different. 17 For example, as OFHEO officials
noted, an undercapitalized bank does not become significantly
undercapitalized until its capital diminishes by 25 percent below the levels
at which a bank becomes undercapitalized. Under the OFHEO PCA scheme, an
undercapitalized enterprise becomes significantly undercapitalized as soon
as the capital falls beneath the minimum capital standard. Furthermore, the
stringency of the capital standards differs because it reflects, in large
part, the difference in capital structures and risks of the regulated
institutions. Certain of the regulators' respective capital standards are
specified in statute, while others are set forth in regulation. In
conjunction with its PCA scheme, OFHEO is required to adopt risk- based
capital requirements and is in the process of doing so. 18

15 12 U. S. C. sect. 4631( d) (2000). 16 See Macey, Jonathan R. and Miller,
Geoffrey P., BANKING LAW AND REGULATION, 294- 296 (2d. ed. 1997);

See also Jackson, Howell E. and Symons, Edward L., Regulation Of Financial
Institutions (1999). These publications contain informative discussions of
the enforcement and supervisory authorities of the federal banking agencies.
17 The minimum capital standards for financial institutions are set forth in
both statute and/ or required

to be set forth in regulation. In the case of the enterprises (unlike
banks), the risk- based capital component as set forth in statute is a
forward- looking measure with a 10- year time horizon. The required risk-
based capital regulations, which have been proposed, have not yet taken
effect. 18 OFHEO's minimum capital rule is set forth at 12 C. F. R. pt. 1750
(2000). OFHEO's most recent

proposed rules for risk- based capital were published in April 1999 (64 Fed.
Reg. 18083). In December 2000, a final rule had not been promulgated,
although OFHEO announced that the final rule had been

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 8 Certain
differences, in addition to different capital requirements underlying the

classifications, exist between the bank regulators and OFHEO's PCA
provisions. Generally, the bank regulators' PCA provisions require the
regulator to take more actions at an earlier classification point. 19 For
example, all banks (including adequately capitalized ones) are generally
barred from making capital distributions if doing so would leave the
institution undercapitalized. 20 In the case of OFHEO, the statute does not
explicitly impose this restriction until the enterprise is undercapitalized,
and the distribution restriction is limited to those distributions that
would result in the enterprise being reclassified downward. However, the
enterprises must secure approval for any dividend that would leave them less
than adequately capitalized. In addition, the bank regulators are required
to take more actions against an undercapitalized institution than OFHEO is.
Specifically, a bank regulator is required to (1) increase its monitoring
and periodic review of the institution's efforts to restore capital (2) have
the undercapitalized institution submit a capital restoration plan
acceptable to the regulator (3) restrict its asset growth unless its growth
falls within specified exceptions and (4) provide prior approval of any
acquisition, branching, and new lines of business. The statute does not
require that the institution receive a notice or hearing in connection with
any of these required actions. 21 OFHEO does not have the same range of
required (or discretionary) actions in connection with an undercapitalized
enterprise. Instead, under OFHEO's PCA provisions, only two actions are to
be imposed upon an undercapitalized enterprise– the submission of an
acceptable capital restoration plan and the capital distribution restriction
set forth above. 22

Similarly, the bank regulators are required to take a defined set of actions
against significantly undercapitalized institutions. For example, in such
cases, the bank regulator must (1) require the sale of shares or obligations
sufficient to become adequately capitalized, or in specified instances,
require the merger or combination of the institution; (2) restrict affiliate
transactions; (3) restrict interest rates paid on deposits; and (4) restrict
senior executive officers' compensation. 23 In addition, the bank regulators
are provided the authority to take numerous other discretionary actions. 24
In response to a significantly undercapitalized enterprise, OFHEO is

sent to the Office of Management and Budget for clearance. On December 20,
2000, FHFB approved final rules implementing a new risk- based capital
structure for the FHLBs that includes a statutory minimum capital standard.
19 This letter does not evaluate the distinctions (or their effect) between
the classification categories.

20 This provision contains an exception that would allow an institution to
repurchase, redeem, retire, or otherwise acquire its own shares if (1) an
equivalent amount of shares or obligations are issued concurrently, and (2)
the transaction improves the institution's financial condition. 21 In
addition, the bank regulators have discretion to take additional actions
relating to an

undercapitalized institution normally applicable to significantly
undercapitalized institutions if the regulator determines that those actions
are necessary to carry out the purpose of the PCA provisions. 22 This
provision governing supervisory actions applicable to undercapitalized
enterprises (12 U. S. C. sect.

4615( c)) has an effective date of one year later than the date of the risk-
based capital regulations, which is later than the effective dates of
OFHEO's other PCA provisions (which take effect upon the first capital
classification of the enterprises). Because these regulations are not yet
effective, this provision is also arguably not yet effective. 23 The first
three actions are mandatory unless the regulator determines that they would
not further the

purpose of the section. 24 In response to a significantly undercapitalized
classification, a bank regulator can take one or more

actions prescribed by regulation for institutions that are critically
undercapitalized if necessary to

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 9 required
to take the same two actions as described above– requiring an
acceptable

capital restoration plan and ensuring compliance with capital distribution
restrictions. In addition, OFHEO has discretion to (1) limit the increase in
or order the reduction of the enterprise's obligations, (2) limit or
prohibit growth of assets or require a contraction of assets, (3) require
acquisition of new capital, (4) restrict activities, (5) reclassify the
enterprise as critically undercapitalized under certain circumstances, and
(6) appoint a conservator should certain financial conditions exist.

Receivership Authority With respect to critically undercapitalized
institutions, the bank regulators must appoint a receiver, appoint a
conservator with FDIC's concurrence, or take other action with FDIC's
concurrence if it would better serve PCA purposes. Under OFHEO's PCA
provisions, OFHEO may appoint a conservator for a significantly
undercapitalized enterprise and, after appropriate notice, generally must
appoint one for a critically undercapitalized enterprise. 25 Unlike the bank
regulators, OFHEO lacks the authority to place an enterprise into
receivership. FDIC, as receiver, is empowered to take over the assets and
operate an insured depository institution, assuming all of its powers and
conducting all of its business. It may place the failed institution into
liquidation and sell its assets. A conservator, on the other hand, is
typically appointed to conserve (not dispose of) the assets of the entity.
Under OFHEO's conservatorship authority, it may terminate the
conservatorship if it is in the public interest and may be safely
accomplished and permit the institution to resume its operations. FHFB has
the statutory authority to liquidate or reorganize an FHLB “whenever
[FHFB] finds that the efficient and economical accomplishment of the
purposes of the [FHLB Act] will be aided by such action.” 26 To date,
neither OFHEO nor FHFB has had to rely on these provisions.

Capital Reclassification Authority In addition, both the bank regulators and
OFHEO have authority to reclassify an institution downward, into a lower
capital classification category, for statutorily prescribed reasons. In the
case of a bank, reclassification can occur if the regulator (1) determines
that the institution is in an unsafe or unsound condition, or (2) deems the
institution to be engaging in an unsafe or unsound practice. Notice and a
hearing are required in connection with the first type of discretionary
reclassification action. 27 Further, an undercapitalized institution is
treated as a significantly undercapitalized institution if it fails to
submit or implement an acceptable capital plan. OFHEO has discretion to
reclassify an enterprise downward if (a) the enterprise engages in conduct
that could result in a rapid depletion of core capital, (b) there are
significant

carry out the purposes of PCA. These actions include activities restrictions
and requiring regulatory approval of: (a) any material transaction other
than in the normal course of business, such as investments, expansion,
acquisitions, and asset sales; (b) extending credit for highly leveraged
transactions; (c) amendments to the charter or bylaws; and (d) material
changes in accounting methods and other matters listed by statute. See 12 U.
S. C. sect. sect. 1831o( f)( 5) & 1831o( i) (2000). 25 OFHEO's conservatorship
authority is not limited to the PCA regime.

26 12 U. S. C. sect. 1446. 27 Notice and an opportunity for a hearing are not
required if a reclassification action is in response to

the banking agency's having deemed an institution to be engaging in an
unsafe or unsound practice based upon a less- than- satisfactory rating for
asset quality, management, earnings, or liquidity.

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 10 declines
in housing prices, or (c) the enterprise fails to submit or comply with an

acceptable capital restoration plan. Although these bases for
reclassification are different, both sets of regulators are afforded broad
authority to reclassify their regulated institutions.

PCA Notice and Comment The bank regulators are authorized to take all but
two types of PCA actions (dismissal of certain directors or officers and
reclassification based on an unsafe or unsound condition) without giving the
subject institution notice and an opportunity to respond to the action.
OHFEO, on the other hand, must provide the affected enterprise a notice and
comment period in connection with a number of its PCA actions. Specifically,
OFHEO may not reclassify an enterprise or take any discretionary PCA- type
action, including the appointment of a conservator, without first notifying
the enterprise of the proposed action. The enterprise has 30 days from the
date it receives the notice to comment on the proposed action. OFHEO has
authority to shorten (or extend) the comment process. 28 After the comments
are received or the comment period expires, OFHEO must consider and respond
to the comments. Because of the statutory notice and comment requirements
contained in OFHEO's PCA provision, it may take OFHEO longer than the bank
regulators to implement many of its PCA actions.

Lack of Specific FHFB PCA FHFB's enabling statute does not contain
provisions specifying particular supervisory actions that the Board must or
may take in response to a FHLB's undercapitalized condition, as is the case
for the bank regulators and OFHEO. The capital provisions of FHFB's enabling
statute do place certain restrictions directly on the FHLBs linked to the
statutorily prescribed capital requirements. Specifically, the FHLB Act (a)
restricts an FHLB from redeeming its capital stock if, following the
redemption, the bank would fail to satisfy any minimum capital requirements;
(b) restricts an FHLB from making any distribution of its retained earnings
unless, following the distribution, the FHLB would continue to meet all
applicable capital requirements; and (c) requires each FHLB's capital plan
to provide for continuing FHLB review and adjustment of the minimum
investment required of each member of the FHLB to ensure that the FHLB
remains in compliance with the minimum capital requirements, and for prompt
compliance with such adjustments by each member. 29 The FHLB Act also
requires FHFB to ensure that the FHLBs remain adequately capitalized and
provides FHFB with authority to enforce its capital regulations. In addition
to these prohibitions and authorities, FHFB officials maintain that they can
use their statutory supervisory and enforcement tools to take the
discretionary actions found in the bank regulators' or OFHEO's PCA
provisions; however, they are not required to take such actions. The PCA
provisions applicable to bank regulators specifically state that PCA does
not limit their authority to take action in addition to (but not in
derogation

28 The timing and comment procedures are different in connection with the
appointment of a conservator. 29 These restrictions and requirements do not
specify particular actions for FHFB to take when a FHLB

becomes undercapitalized at a particular classification level, unlike the
case with the bank regulators and OFHEO.

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 11 of)
actions required under PCA. Similar language is found in OFHEO's PCA

provisions. 30

Conclusions

The bank regulators, OFHEO, and FHFB each have an array of statutory
supervisory and enforcement powers for ensuring that the institutions they
supervise are in a safe and sound condition. Each regulator has its own
statutory scheme that contains specific authorities to address unsafe and
unsound conditions and practices, as well as certain violative conduct.
Although it appears that each regulator has statutory tools available to
address significant safety and soundness concerns, differences do exist in
their authorities and OFHEO lacks certain authorities afforded the bank
regulators. For example, differences exist between OFHEO and the bank
regulators regarding the grounds for issuing a C& D order; and OFHEO lacks
authority to remove officers and directors and does not have receivership or
independent litigation authority. It is difficult to determine the impact of
these differences, particularly since OFHEO, to date, has not had to take
formal enforcement actions.

In connection with PCA authority, FHFB's enabling statute does not contain
provisions specifying actions to be taken should an institution become
undercapitalized, as is the case for the bank regulators and OFHEO. OFHEO's
PCA scheme differs in certain respects from that of the bank regulators.
OFHEO's PCA scheme, as compared to the bank regulators', may provide for
regulatory action later (in terms of capital classification) than the bank
regulators' PCA scheme, has fewer required actions imposed, and provides
OFHEO more discretion in determining specifically what action to take. In
addition, OFHEO's PCA provisions contain more opportunity for notice and
comment than the provisions applicable to the bank regulators. In light of
these differences, as well as the different capital requirements imposed on
the various regulated institutions, it is difficult to ascertain the impact
of the variations in the two PCA schemes.

Agency Comments and Our Evaluation

We obtained oral comments from FHFB and OFHEO on a draft of this letter.
FHFB's Managing Director and General Counsel and OFHEO's General Counsel
provided a number of technical comments, which we incorporated where
appropriate. The FHFB officials stated that in their view, certain FHFB
authorities were similar to PCA provisions. Specifically, they stated that
the capital provisions of FHFB's enabling statute do place certain
restrictions directly on the FHLBs linked to the statutorily prescribed
capital requirements. We revised our discussion to clarify the restrictions
cited by the FHFB officials.

As agreed with your office, we plan no further distribution until 30 days
from the date of this letter unless you publicly release its contents
earlier. We will then send copies to the Ranking Minority Member of the
Subcommittee on Capital Markets, Insurance,

30 See 12 U. S. C. sect. 4616( b).

GAO- 01- 322R Financial Regulators' Enforcement Authorities Page 12 and
Government Sponsored Enterprises; Representative Michael Oxley, Chairman,

and the Ranking Minority Member, House Committee on Financial Services;
Senator Phil Gramm, Chairman, and Senator Paul Sarbarnes, Ranking Member,
Senate Committee on Banking, Housing, and Urban Affairs; Armando Falcon,
Jr., Director of OFHEO; Allan I. Mendelowitz, Chairman of FHFB; and Mel
Martinez, Secretary of HUD. The letter will also be available on GAO's home
page at http:// www. gao. gov.

If you have any questions, please contact Thomas J. McCool at (202) 512-
8678, Lynn H. Gibson at (202) 512- 8153, or William B. Shear at (202) 512-
8678. Key contributors to this letter were Rosemary Healy and Paul G.
Thompson.

Sincerely yours, Thomas J. McCool Managing Director Financial Markets and
Community Investment

Lynn H. Gibson Associate General Counsel Office of the General Counsel

ENCLOSURE I ENCLOSURE I

GAO- 01- 322R Financial Regulators' Enforcement Authorities 13

Enforcement and Prompt Corrective Action Authorities

A. Formal Enforcement Authority

Bank Regulators OFHEO Finance Board

Formal Agreement Implied from general supervisory powers and enforcement
authorities.

Implied from general supervisory and enforcement authorities.

Implied from general supervisory and enforcement authorities.

C& D Order Against: insured depository institutions (IDI) and institution

affiliated parties (IAP). 1

Specified Grounds: (1) unsafe or unsound practice;

2 (2) violation of any

law, rule, regulation, written condition imposed in connection with granting

an application or request, or any written agreement.

C& D order may include affirmative order to correct conditions resulting

from violations and practices and limitation on activities or functions of

an institution or IAP. Against: enterprises (includes

affiliates), their executive officers, and directors.

Specified Grounds: (1) potential impact of conduct on core capital

(separate provisions for adequately capitalized and undercapitalized

enterprises)-- conduct that either “threatens significant
depletion”

(undercapitalized) or is “likely to result in material
depletion”

(undercapitalized); (2) misconduct by an officer or director resulting in
unjust

enrichment or actual or likely substantial loss to the enterprise;

Against: a Federal Home Loan Bank (FHLB), any executive officer or

director. Specified Grounds: (1) unsafe or

unsound practice; (2) violation of any law, order, rule, or regulation, any

written condition imposed in connection with granting any

application or other request, or any written agreement.

C& D may include affirmative order to correct conditions resulting from

violations and practices and limitation of activities and functions of FHLBs
or

1 Under the Federal Deposit Insurance Act (FDI Act), an IAP is any director,
officer, employee or controlling stockholder of an insured institution,
other than a bank holding

company; any person who has filed or is required to file a change- in-
control notice as required under 12 U. S. C. 1817( j); any shareholder
(other than a bank holding company) or other person who participates in the
conduct of the affairs of the institution; and any independent contractor
who knowingly or recklessly participates in a

violation of any law or regulation, any breach of fiduciary duty, or any
unsafe or unsound practice, where such conduct caused or is likely to cause
more than a minimal financial loss to, or a significant adverse effect on,
the institution.

2 In addition to a firm's capital status and practices relating directly to
its financial health, factors indicative of safety and soundness include the
safety and soundness

standards set forth in 18 U. S. C. sect. 1831p- 1 for federal banking agencies
to promulgate in regulations or guidelines. These standards relate to
operational and managerial matters such as, but not limited to, internal
controls, loan documentation, credit underwriting, interest rate exposure,
asset growth, asset quality, earnings and stock

valuation standards, and compensation.

GAO- 01- 322R Financial Regulators' Enforcement Authorities

14 3) conduct that violates the Safety and

Soundness Act or enterprise charter acts (except for provisions pertaining
to

HUD housing goals), or any order, rule or regulation under those laws, or
any

written agreement with OFHEO. C& D order may include affirmative

order to correct conditions resulting from violations and practices and an

order limiting activities or functions of the enterprise or any executive
officer

or director. IAP.

Removal and Prohibition

Removal or prohibition action can be taken against any IAP. Grounds:

violation of law, regulation, final C& D order, written condition, or
written

agreement, engagement in unsafe or unsound practice or breach of fiduciary

duty, where the conduct relates to actual or probable financial loss or

other damage or has other specified consequences and involves dishonesty

or mental culpability. Suspension or prohibition can be taken against any

IAP if necessary to protect institution or interests of depositors.
Additional

grounds for removal or prohibition relate to certain officers, directors and

IAP for culpable violations of specific statutes related to banking.

Additional grounds exist for IAP suspension or removal based on

No specific authority, but authority exists to require enterprises to hire

qualified officers or directors to remedy conditions resulting from conduct
or

violations upon which a C& D order has been entered.

May remove or suspend “for cause” a director, officer, employee,
or agent of

an FHLB or joint office.

GAO- 01- 322R Financial Regulators' Enforcement Authorities

15 criminal proceedings: Suspension or

prohibition pending outcome of criminal charges against IAP for crime

of dishonesty or violation of specified statutes; removal or prohibition for

conviction or plea agreement involving same offenses.

Civil Money Penalties First tier: violation of law, regulation, final
enforcement order, written

condition or agreement or temporary C& D order; violation of removal,

suspension, or prohibition order; violation of monetary transaction and

report requirements. Amount: Not more than $5,000 for each day the

violation continues. Second tier: any violation of law, etc.,

reckless unsafe or unsound practice, or breach of fiduciary duty, that is
part of

a pattern of misconduct, causes more than a minimal loss, or results in

pecuniary gain or benefit. Amount: Not more than $25,000 for

each day the violation, practice, or breach continues.

Third tier: knowing violation of law, etc., engagement in unsafe or unsound

practice, breach of fiduciary duty and knowingly or recklessly causes

substantial loss or substantial pecuniary gain or benefit. Amount:

Grounds: (1) violation of the Safety and Soundness Act, the charter acts

(except for provisions relating to housing goals) and any order, rule, or

regulation under any such act; (2) violation of any final or temporary

PCA- type order or final or temporary C& D order; (3) violation of written

agreement; or (4) conduct that causes or is likely to cause a loss to the

enterprise. First tier (available against enterprises

only): may be imposed only for violations described in paragraphs (1)

through (3), above. Amount: not more than $5,000 for each day of the

violation. Second tier: any violation or conduct

constituting grounds for CMP that is part of a pattern of misconduct or

involved recklessness and caused or likely would cause a material loss.

Amount: Against an officer or director

– no more than $10,000 for each day Same as OFHEO, but with respect to

the pertinent statutes, regulations, etc.

GAO- 01- 322R Financial Regulators' Enforcement Authorities

16 (1) persons other than IDI – not more

than $1,000,000 for each day the violation, practice of breach continues;

(2) IDI-- not to exceed the lesser of $1,000,000 or 1 percent of total
assets

per day the violation, practice, or breach continues.

that the violation or conduct continues; against an enterprise– not
more than

$25,000 per each day the violation or conduct continues.

Third tier: any violation or conduct constituting grounds for CMP if it was

knowing and caused or would likely cause a substantial loss to the

enterprise. Amount: Against an officer or director-- not more than $100,000
for

each day the violation or conduct continues; against an enterprise–
not

more than $1,000,000 per each day the violation or conduct continues.

Termination of Insurance

FDIC may terminate deposit insurance based on (1) unsafe or unsound

practice by the IDI, its directors, or trustees; (2) unsafe or unsound

condition to continue operations; (3) violation by institution, directors,
or

trustees of any applicable law, regulation, order, written condition

imposed by FDIC or written agreement between the IDI and FDIC.

N/ A N/ A B. PCA Provisions

Bank Regulators OFHEO Finance Board

Undercapitalized Mandatory: (1) timely submission of acceptable capital
restoration plan

(CRP); (2) close monitoring of condition and compliance with CRP;

Mandatory: (1) timely submission of acceptable CRP; (2) statutory

prohibition on capital distribution if it would make undercapitalized
enterprise

FHFB's enabling statute does not contain provisions specifying particular

supervisory actions that the Board must or may take in response to a FHLB's

GAO- 01- 322R Financial Regulators' Enforcement Authorities

17 (3) statutory restrictions on asset

growth; (4) agency approval of acquisitions, branching, and new

business lines. Discretionary: regulator has discretion

to take actions applicable to significantly undercapitalized

institutions, if necessary. significantly or critically

undercapitalized. Discretionary: reclassification if (a)

enterprise fails to submit a timely CRP

“substantially in compliance” with statutory requirements for
CRP or

OFHEO does not approve CRP; or (b) enterprise failed to make, in good faith,

reasonable efforts necessary for compliance and fulfill the compliance

schedule approved by OFHEO.

undercapitalized condition, as is the case for the bank regulators and

OFHEO. The capital provisions of FHFB's enabling statute do place

certain restrictions directly on the FHLBs linked to the statutorily

prescribed capital requirements. Specifically, the FHLB Act (a) restricts

an FHLB from redeeming its capital stock if, following the redemption, the

bank would fail to satisfy any minimum capital requirements; (b)

restricts an FHLB from making any distribution of its retained earnings

unless, following the distribution, the FHLB would continue to meet all

applicable capital requirements;

and (c) requires each FHLB's capital

plan to provide for continuing FHLB review and adjustment of the

minimum investment required of each member of the FHLB to ensure

that the FHLB remains in compliance with the minimum

capital requirements, and for prompt compliance with such

adjustments by each member. The FHLB Act also requires FHFB to

ensure that the FHLBs remain adequately capitalized and provides

FHFB with authority to enforce its capital regulations

. In addition to these prohibitions and authorities,

FHFB officials maintain that they can

GAO- 01- 322R Financial Regulators' Enforcement Authorities

18

use their statutory supervisory and enforcement tools to take the

discretionary actions found in the bank regulators' or OFHEO's PCA

provisions.

Significantly Undercapitalized or

Undercapitalized and fails to submit

or materially implement CRP.

Mandatory: regulator shall take the following actions unless they do not

serve PCA purposes: (1) require sale of shares or obligations sufficient to

become adequately capitalized or, if one or more grounds exist for

appointing a conservator or receiver, require institution to be acquired by
an

insured depository institution holding company or combine with another

institution; (2) restrict transactions with affiliates; and (3) restrict
interest

rates paid on deposits. Also, agency approval is required for bonuses or

increased compensation to senior executive officers.

Discretionary (or mandatory use of at least one of the following, if agency

determines combined actions (1) through (3), above, would not further

PCA purposes): (1) recapitalization; (2) restrict affiliate transactions;
(3)

restrict amounts of interest paid on deposits; (4) restrict asset growth;
(5)

restrict activities by institution or subsidiary posing excessive risk to
the

institution; (6) require improvement of management (including dismissal of

Mandatory: (1) require timely submission of an acceptable CRP; (2)

prohibit any capital distribution that would result in reclassification as

critically undercapitalized and require OFHEO approval for any other capital

distribution. Discretionary: OFHEO may (1) limit

increase or order reduction of obligations of enterprise; (2) limit or

prohibit asset growth or require contraction of assets; (3) require

acquisition of new capital in form and amount determined by OFHEO; (4)

require termination, reduction, or modification of any activity determined

to create excessive risk; (5) reclassify as critically undercapitalized if
(a) CRP

is not in substantial compliance with statutory requirements or is not

approved, or (b) enterprise failed to make in good faith reasonable efforts
to

comply with CRP (same as reclassification standards for

undercapitalized); (6) appoint conservator subject to statutory

standards if OFHEO determines core capital to be less than statutory

See above.

GAO- 01- 322R Financial Regulators' Enforcement Authorities

19 directors and senior executive

officers); (7) prohibit deposits from correspondent banks; (8) require prior

approval by the Federal Reserve Board of capital distribution by controlling

holding company; (9) require divestiture actions under certain

circumstances; (10) require any other action the agency determines to serve

PCA purpose better than those listed, including actions specifically

applicable to critically undercapitalized institutions.

Discretion to impose additional restrictions if necessary: agency may

impose one or more activities restrictions prescribed by FDIC

regulation for critically undercapitalized institutions.

minimum capital and alternative remedies are unsatisfactory. (Statutory

standards include written determination that enterprise (a) is not likely to
pay

obligations in the normal course of business, (b) has incurred or faces

substantial depletion of core capital and timely replenishment is unlikely,
(c)

concealed or refused inspection of material books and records, or (d)

willfully violated or is in violation of a final C& D order.)

Critically Undercapitalized

Statutory requirements: (A) compliance with FDIC- prescribed (by

order or regulation) activities restrictions and prohibitions against

the following: (1) entering material transactions outside the normal course

of business; (2) extending credit for highly leveraged transactions; (3)

amending charter or by- laws (unless necessary to comply with

Statutory requirement: Conservator to be appointed unless OFHEO, with

concurrence of Treasury, determines that appointment would have serious

adverse effects on economic condition of national financial markets or the

financial stability of the housing finance market and the public interest

would be better served by taking some other authorized enforcement action.

See above.

GAO- 01- 322R Financial Regulators' Enforcement Authorities

20 requirements); (4) material change in

accounting methods; (5) engaging in covered transactions with affiliates (as

defined in 12 U. S. C. sect. 371c( b) (Section 23A of the Federal Reserve

Act); (6) paying excessive compensation or bonuses; (7) paying

interest on new/ renewed liabilities above prevailing rates; (B) stop

payments of principal and interest on subordinated debt; (C) agency must

appoint a receiver or FDIC- approved conservator or take other FDIC

approved action if it better achieves PCA purposes; (D) receiver must be

appointed if institution remains critically undercapitalized for 270 days

unless agency and FDIC see improvement and certify the institution

is not expected to fail. Reclassification If an agency determines an
institution

to be in unsafe or unsound condition after notice and an opportunity for

hearing, or deems the institution to be engaging in an unsafe or unsound

practice based on a less- than satisfactory examination rating for

asset quality, management, earnings, or liquidity, the agency may:

(1) reclassify a well capitalized institution as adequately capitalized;

(2) treat an adequately capitalized institution as undercapitalized; (3)

subject an undercapitalized institution Based on conduct or asset values

OFHEO may reclassify an enterprise one grade lower if (a) conduct not

approved by OFHEO could result in a

“rapid depletion of core capital”; or (b) the “value of
the property subject to

mortgages held or securitized by” the enterprise has decreased
significantly

(OFHEO may reclassify adequate– to undercapitalized, under- to
significantly

undercapitalized, and significantly– to critically undercapitalized.)

(Reclassification also may be based on See above.

GAO- 01- 322R Financial Regulators' Enforcement Authorities

21 to one or more actions authorized for

significantly undercapitalized institutions.

undercapitalized or significantly undercapitalized classifications if

statutory requirements for capital restoration plans are not satisfied.)

Conservatorship, or Receivership,

Closure Authority to appoint a receiver or

conservator; receiver required if other action fails to restore capital. See
PCA

based on “critically undercapitalized” classification.

Authority only to appoint a conservator. See PCA based on

“significantly undercapitalized,” or

“critically undercapitalized” classifications.

FHFB may liquidate or reorganize a FHLB if it finds that the efficient and

economical accomplishment of the purposes of the FHLB Act will be

aided by such action. C. Ancillary Authorities

Bank Regulators OFHEO Finance Board

Independent litigation authority

Have independent litigation authority. Has no independent litigation
authority. OFHEO may request Attorney General

to bring judicial enforcement action with respect to “any effective
notice or

order” issued in formal enforcement proceedings or pursuant to its PCA

type authority. Judicial enforcement of CMP by Attorney General or by

OFHEO under direction and control of Attorney General.

Has independent litigation authority. Subpoena authority Has subpoena
authority in connection

with administrative enforcement proceedings.

Same as bank regulators. Same as OFHEO. (250004)
*** End of document ***