An investigation by the Federal Deposit Insurance Corporation Office of Inspector General (OIG) into the FDIC’s supervisory approach to financial institutions that offered a credit product known as a refund anticipation loan (RAL) has concluded that the FDIC “must candidly consider its leadership practices, its process and procedures, and the conduct of multiple individuals who made and implemented the decision to require three of its supervised institutions to exit RALs.” While few institutions were affected, the OIG called the FDIC’s actions an “aggressive and unprecedented” used of its supervisory authority that resulted in high cost to the impacted institutions. In response, Doreen R. Eberley, Director of the FDIC’s Division of Risk Management Supervision, stated that the FDIC believes that the FDIC’s activities “were supported by the supervisory record and handled in accordance with FDIC Policy.”
RALs. A RAL is a type of loan product, typically offered through a national or local tax preparation company in conjunction with the filing of a taxpayer’s income tax return. While legal, RALs ultimately were seen by the FDIC as risky to the banks and potentially harmful to consumers.
According to the OIG, in January 2008, the then-FDIC Chairman Sheila Bair, questioned why FDIC-regulated institutions would be allowed to offer RALs. Shortly thereafter, the FDIC began to try to cause banks it supervised to exit the business line. In late December 2010, the Office of the Comptroller of the Currency required an institution it supervised to exit RALs effective with the 2011 tax season. The Internal Revenue Service also withdrew access to an underwriting tool it formerly provided to tax preparers and banks that had been used to mitigate certain risks associated with RALs. Ultimately, the FDIC caused all three of its supervised institutions that then continued to facilitate RALs to exit the business in 2011 and 2012.
Findings. The OIG determined that the decision to cause the financial institutions to exit RALs was implemented by certain Division Directors, the Chicago Regional Director, and their subordinates, and was supported by each of the FDIC’s Inside Directors. Because the FDIC chose not to issue formal guidance on RALs, the rationale for its decisions was not fully transparent. Further, the OIG suggested that the absence of significant examination-based evidence of harm caused by RAL programs could have caused FDIC management to reconsider its initial assessment that these programs posed significant risk to the institutions offering them. However, the FDIC did not change its supervisory approach.
Rather, as a result of the decision, the Washington office pressured field staff to assign lower ratings in the 2010 Safety and Soundness examinations for two institutions that had RAL programs. In one instance a ratings downgrade appeared to be predetermined before the examination began. In another case, the downgrade further limited an institution from pursuing a strategy of acquiring failed institutions, which the FDIC used to its advantage to negotiate the institution’s exit from RALs.
Moreover, although the examiners in the field did not agree with lowering the ratings of the two institutions, the FDIC did not document these disagreements in one instance, and only partially documented the disagreement in another. The OIG reported that the Washington office also required that its staff change related examination report narratives.
When banks submitted underwriting plans to show their mitigation of perceived risk, the OIG concluded that the FDIC used only a cursory analysis. “It appears that the decision to reject the plans had been made before the review was complete,” said the OIG. The allegedly insufficient underwriting plans also formed the basis for an enforcement action against one of the banks. And when the FDIC’s Legal Division believed the pursuit of an enforcement remedy against the banks presented “high litigation risk,” the FDIC still chose to pursue the remedies.
The FDIC also used “strong moral suasion” to persuade each of the banks to stop offering RALs, which the OIG described as meetings and telephone calls where banks were abusively threatened by an FDIC attorney. In one instance, non-public supervisory information was disclosed about one bank to another as a ploy to undercut the latter’s negotiating position to continue its RAL program.
The OIG concluded that the FDIC’s actions ultimately resulted in large insurance assessment increases, reputational damage to the banks, as well as litigation and other costs for the banks that tried to remain in the RAL business.
FDIC response. In the lengthy response, Eberley noted that the report presented the OIG’s view of the “FDIC’s handling of its supervisory responsibilities with respect to these three financial institutions that offered RALs between five and eight years ago,” and that the FDIC believes that the FDIC’s supervision and enforcement activities “were supported by the supervisory record and handled in accordance with FDIC Policy.”
Eberley highlighted the FDIC’s safety and soundness concerns in regards to RALs in the years leading up to the institutions’ examinations and argued that the two banks were properly downgraded based on well-defined weaknesses. In addition, Eberley stated that while “some members of the Legal Division raised concerns about litigation risk,” the examination records supported approval of the enforcement cases.
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