12 USC 1831 - Prompt corrective action

View all text of Chapter 16 [§ 1811 - § 1835a]

§ 1831o. Prompt corrective action

(a) Resolving problems to protect Deposit Insurance Fund

(1) Purpose

(2) Prompt corrective action required

(b) DefinitionsFor purposes of this section:

(1) Capital categories

(A) Well capitalized

(B) Adequately capitalized

(D) Significantly undercapitalized

(E) Critically undercapitalized

(2) Other definitions

(A) Average

(i) In general

(ii) Agency may permit weekly averaging for certain institutions

(B) Capital distributionThe term “capital distribution” means—

(i) a distribution of cash or other property by any insured depository institution or company to its owners made on account of that ownership, but not including—(I) any dividend consisting only of shares of the institution or company or rights to purchase such shares; or(II) any amount paid on the deposits of a mutual or cooperative institution that the appropriate Federal banking agency determines is not a distribution for purposes of this section;

(ii) a payment by an insured depository institution or company to repurchase, redeem, retire, or otherwise acquire any of its shares or other ownership interests, including any extension of credit to finance an affiliated company’s acquisition of those shares or interests; or

(iii) a transaction that the appropriate Federal banking agency or the Corporation determines, by order or regulation, to be in substance a distribution of capital to the owners of the insured depository institution or company.

(D) Company

(E) Compensation

(F) Relevant capital measure

(G) Required minimum level

(H) Senior executive officer

(I) Subordinated debt

(1) Relevant capital measures

(A) In generalExcept as provided in subparagraph (B)(ii), the capital standards prescribed by each appropriate Federal banking agency shall include—

(i) a leverage limit; and

(ii) a risk-based capital requirement.

(B) Other capital measuresAn appropriate Federal banking agency may, by regulation—

(i) establish any additional relevant capital measures to carry out the purpose of this section; or

(ii) rescind any relevant capital measure required under subparagraph (A) upon determining (with the concurrence of the other Federal banking agencies) that the measure is no longer an appropriate means for carrying out the purpose of this section.

(2) Capital categories generally

(3) Critical capital

(A) Agency to specify level

(i) Leverage limit

(ii) Other relevant capital measures

(B) Leverage limit rangeThe level specified under subparagraph (A)(i) shall require tangible equity in an amount—

(i) not less than 2 percent of total assets; and

(ii) except as provided in clause (i), not more than 65 percent of the required minimum level of capital under the leverage limit.

(d) Provisions applicable to all institutions

(1) Capital distributions restricted

(A) In general

(B) ExceptionNotwithstanding subparagraph (A), the appropriate Federal banking agency may permit, after consultation with the Corporation, an insured depository institution to repurchase, redeem, retire, or otherwise acquire shares or ownership interests if the repurchase, redemption, retirement, or other acquisition—

(i) is made in connection with the issuance of additional shares or obligations of the institution in at least an equivalent amount; and

(ii) will reduce the institution’s financial obligations or otherwise improve the institution’s financial condition.

(2) Management fees restricted

(e) Provisions applicable to undercapitalized institutions

(1) Monitoring requiredEach appropriate Federal banking agency shall—

(A) closely monitor the condition of any undercapitalized insured depository institution;

(B) closely monitor compliance with capital restoration plans, restrictions, and requirements imposed under this section; and

(C) periodically review the plan, restrictions, and requirements applicable to any undercapitalized insured depository institution to determine whether the plan, restrictions, and requirements are achieving the purpose of this section.

(2) Capital restoration plan required

(A) In general

(B) Contents of planThe capital restoration plan shall—

(i) specify—(I) the steps the insured depository institution will take to become adequately capitalized;(II) the levels of capital to be attained during each year in which the plan will be in effect;(III) how the institution will comply with the restrictions or requirements then in effect under this section; and(IV) the types and levels of activities in which the institution will engage; and

(ii) contain such other information as the appropriate Federal banking agency may require.

(C) Criteria for accepting planThe appropriate Federal banking agency shall not accept a capital restoration plan unless the agency determines that—

(i) the plan—(I) complies with subparagraph (B);(II) is based on realistic assumptions, and is likely to succeed in restoring the institution’s capital; and(III) would not appreciably increase the risk (including credit risk, interest-rate risk, and other types of risk) to which the institution is exposed; and

(ii) if the insured depository institution is undercapitalized, each company having control of the institution has—(I) guaranteed that the institution will comply with the plan until the institution has been adequately capitalized on average during each of 4 consecutive calendar quarters; and(II) provided appropriate assurances of performance.

(D) Deadlines for submission and review of plansThe appropriate Federal banking agency shall by regulation establish deadlines that—

(i) provide insured depository institutions with reasonable time to submit capital restoration plans, and generally require an institution to submit a plan not later than 45 days after the institution becomes undercapitalized;

(ii) require the agency to act on capital restoration plans expeditiously, and generally not later than 60 days after the plan is submitted; and

(iii) require the agency to submit a copy of any plan approved by the agency to the Corporation before the end of the 45-day period beginning on the date such approval is granted.

(E) Guarantee liability limited

(i) In generalThe aggregate liability under subparagraph (C)(ii) of all companies having control of an insured depository institution shall be the lesser of—(I) an amount equal to 5 percent of the institution’s total assets at the time the institution became undercapitalized; or(II) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time the institution fails to comply with a plan under this subsection.

(ii) Certain affiliates not affectedThis paragraph may not be construed as—(I) requiring any company not having control of an undercapitalized insured depository institution to guarantee, or otherwise be liable on, a capital restoration plan;(II) requiring any person other than an insured depository institution to submit a capital restoration plan; or(III) affecting compliance by brokers, dealers, government securities brokers, and government securities dealers with the financial responsibility requirements of the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] and regulations and orders thereunder.

(3) Asset growth restrictedAn undercapitalized insured depository institution shall not permit its average total assets during any calendar quarter to exceed its average total assets during the preceding calendar quarter unless—

(A) the appropriate Federal banking agency has accepted the institution’s capital restoration plan;

(B) any increase in total assets is consistent with the plan; and

(C) the institution’s ratio of tangible equity to assets increases during the calendar quarter at a rate sufficient to enable the institution to become adequately capitalized within a reasonable time.

(4) Prior approval required for acquisitions, branching, and new lines of businessAn undercapitalized insured depository institution shall not, directly or indirectly, acquire any interest in any company or insured depository institution, establish or acquire any additional branch office, or engage in any new line of business unless—

(A) the appropriate Federal banking agency has accepted the insured depository institution’s capital restoration plan, the institution is implementing the plan, and the agency determines that the proposed action is consistent with and will further the achievement of the plan; or

(B) the Board of Directors determines that the proposed action will further the purpose of this section.

(5) Discretionary safeguards

(f) Provisions applicable to significantly undercapitalized institutions and undercapitalized institutions that fail to submit and implement capital restoration plans

(1) In generalThis subsection shall apply with respect to any insured depository institution that—

(A) is significantly undercapitalized; or

(B) is undercapitalized and—

(i) fails to submit an acceptable capital restoration plan within the time allowed by the appropriate Federal banking agency under subsection (e)(2)(D); or

(ii) fails in any material respect to implement a plan accepted by the agency.

(2) Specific actions authorizedThe appropriate Federal banking agency shall carry out this section by taking 1 or more of the following actions:

(A) Requiring recapitalizationDoing 1 or more of the following:

(i) Requiring the institution to sell enough shares or obligations of the institution so that the institution will be adequately capitalized after the sale.

(ii) Further requiring that instruments sold under clause (i) be voting shares.

(iii) Requiring the institution to be acquired by a depository institution holding company, or to combine with another insured depository institution, if 1 or more grounds exist for appointing a conservator or receiver for the institution.

(B) Restricting transactions with affiliates

(i) Requiring the institution to comply with section 371c of this title as if subsection (d)(1) of that section (exempting transactions with certain affiliated institutions) did not apply.

(ii) Further restricting the institution’s transactions with affiliates.

(i) In general

(ii) Retroactive restrictions prohibited

(D) Restricting asset growth

(E) Restricting activities

(F) Improving managementDoing 1 or more of the following:

(i) New election of directors

(ii) Dismissing directors or senior executive officers

(iii) Employing qualified senior executive officers

(G) Prohibiting deposits from correspondent banks

(H) Requiring prior approval for capital distributions by bank holding company

(I) Requiring divestitureDoing one or more of the following:

(i) Divestiture by the institution

(ii) Divestiture by parent company of nondepository affiliate

(iii) Divestiture of institution

(J) Requiring other action

(3) Presumption in favor of certain actionsIn complying with paragraph (2), the agency shall take the following actions, unless the agency determines that the actions would not further the purpose of this section:

(A) The action described in clause (i) or (iii) of paragraph (2)(A) (relating to requiring the sale of shares or obligations, or requiring the institution to be acquired by or combine with another institution).

(B) The action described in paragraph (2)(B)(i) (relating to restricting transactions with affiliates).

(4) Senior executive officers’ compensation restricted

(A) In generalThe insured depository institution shall not do any of the following without the prior written approval of the appropriate Federal banking agency:

(i) Pay any bonus to any senior executive officer.

(ii) Provide compensation to any senior executive officer at a rate exceeding that officer’s average rate of compensation (excluding bonuses, stock options, and profit-sharing) during the 12 calendar months preceding the calendar month in which the institution became undercapitalized.

(B) Failing to submit plan

(5) Discretion to impose certain additional restrictions

(6) Consultation with other regulators

(g) More stringent treatment based on other supervisory criteria

(1) In generalIf the appropriate Federal banking agency determines (after notice and an opportunity for hearing) that an insured depository institution is in an unsafe or unsound condition or, pursuant to section 1818(b)(8) of this title, deems the institution to be engaging in an unsafe or unsound practice, the agency may—

(A) if the institution is well capitalized, reclassify the institution as adequately capitalized;

(B) if the institution is adequately capitalized (but not well capitalized), require the institution to comply with 1 or more provisions of subsections (d) and (e), as if the institution were undercapitalized; or

(C) if the institution is undercapitalized, take any 1 or more actions authorized under subsection (f)(2) as if the institution were significantly undercapitalized.

(2) Contents of plan

(h) Provisions applicable to critically undercapitalized institutions

(1) Activities restricted

(2) Payments on subordinated debt prohibited

(A) In general

(B) ExceptionsThe Corporation may make exceptions to subparagraph (A) if—

(i) the appropriate Federal banking agency has taken action with respect to the insured depository institution under paragraph (3)(A)(ii); and

(ii) the Corporation determines that the exception would further the purpose of this section.

(D) Accrual of interest

(3) Conservatorship, receivership, or other action required

(A) In generalThe appropriate Federal banking agency shall, not later than 90 days after an insured depository institution becomes critically undercapitalized—

(i) appoint a receiver (or, with the concurrence of the Corporation, a conservator) for the institution; or

(ii) take such other action as the agency determines, with the concurrence of the Corporation, would better achieve the purpose of this section, after documenting why the action would better achieve that purpose.

(B) Periodic redeterminations required

(i) In general

(ii) ExceptionNotwithstanding clause (i), the appropriate Federal banking agency may continue to take such other action as the agency determines to be appropriate in lieu of such appointment if—(I) the agency determines, with the concurrence of the Corporation, that (aa) the insured depository institution has positive net worth, (bb) the insured depository institution has been in substantial compliance with an approved capital restoration plan which requires consistent improvement in the institution’s capital since the date of the approval of the plan, (cc) the insured depository institution is profitable or has an upward trend in earnings the agency projects as sustainable, and (dd) the insured depository institution is reducing the ratio of nonperforming loans to total loans; and(II) the head of the appropriate Federal banking agency and the Chairperson of the Board of Directors both certify that the institution is viable and not expected to fail.

(i) Restricting activities of critically undercapitalized institutionsTo carry out the purpose of this section, the Corporation shall, by regulation or order—

(1) restrict the activities of any critically undercapitalized insured depository institution; and

(2) at a minimum, prohibit any such institution from doing any of the following without the Corporation’s prior written approval:

(A) Entering into any material transaction other than in the usual course of business, including any investment, expansion, acquisition, sale of assets, or other similar action with respect to which the depository institution is required to provide notice to the appropriate Federal banking agency.

(B) Extending credit for any highly leveraged transaction.

(C) Amending the institution’s charter or bylaws, except to the extent necessary to carry out any other requirement of any law, regulation, or order.

(D) Making any material change in accounting methods.

(E) Engaging in any covered transaction (as defined in section 371c(b) of this title).

(F) Paying excessive compensation or bonuses.

(G) Paying interest on new or renewed liabilities at a rate that would increase the institution’s weighted average cost of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the institution’s normal market areas.

(j) Certain Government-controlled institutions exemptedSubsections (e) through (i) (other than paragraph (3) of subsection (e)) shall not apply—

(1) to an insured depository institution for which the Corporation or the Resolution Trust Corporation is conservator; or

(2) to a bridge depository institution, none of the voting securities of which are owned by a person or agency other than the Corporation or the Resolution Trust Corporation.

(k) Reviews required when Deposit Insurance Fund incurs losses

(1) In generalIf the Deposit Insurance Fund incurs a material loss with respect to an insured depository institution on or after July 1, 1993, the inspector general of the appropriate Federal banking agency shall—

(A) make a written report to that agency reviewing the agency’s supervision of the institution (including the agency’s implementation of this section), which shall—

(i) ascertain why the institution’s problems resulted in a material loss to the Deposit Insurance Fund; and

(ii) make recommendations for preventing any such loss in the future; and

(B) provide a copy of the report to—

(i) the Comptroller General of the United States;

(ii) the Corporation (if the agency is not the Corporation);

(iii) in the case of a State depository institution, the appropriate State banking supervisor; and

(iv) upon request by any Member of Congress, to that Member.

(2) Material loss incurredFor purposes of this subsection:

(A) Loss incurredThe Deposit Insurance Fund incurs a loss with respect to an insured depository institution—

(i) if the Corporation provides any assistance under section 1823(c) of this title with respect to that institution; and—(I) it is not substantially certain that the assistance will be fully repaid not later than 24 months after the date on which the Corporation initiated the assistance; or(II) the institution ceases to repay the assistance in accordance with its terms; or

(ii) if the Corporation is appointed receiver of the institution, and it is or becomes apparent that the present value of the outlays of the Deposit Insurance Fund with respect to that institution will exceed the present value of receivership dividends or other payments on the claims held by the Corporation.

(B) Material loss definedThe term “material loss” means any estimated loss in excess of—

(i) $200,000,000, if the loss occurs during the period beginning on January 1, 2010, and ending on December 31, 2011;

(ii) $150,000,000, if the loss occurs during the period beginning on January 1, 2012, and ending on December 31, 2013; and

(iii) $50,000,000, if the loss occurs on or after January 1, 2014, provided that if the inspector general of a Federal banking agency certifies to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives that the number of projected failures of depository institutions that would require material loss reviews for the following 12 months will be greater than 30 and would hinder the effectiveness of its oversight functions, then the definition of “material loss” shall be $75,000,000 for a duration of 1 year from the date of the certification.

(3) Deadline for reportThe inspector general of the appropriate Federal banking agency shall comply with paragraph (1) expeditiously, and in any event (except with respect to paragraph (1)(B)(iv)) as follows:

(A) If the institution is described in paragraph (2)(A)(i), during the 6-month period beginning on the earlier of—

(i) the date on which the institution ceases to repay assistance under section 1823(c) of this title in accordance with its terms, or

(ii) the date on which it becomes apparent that the assistance will not be fully repaid during the 24-month period described in paragraph (2)(A)(i).

(B) If the institution is described in paragraph (2)(A)(ii), during the 6-month period beginning on the date on which it becomes apparent that the present value of the outlays of the Deposit Insurance Fund with respect to that institution will exceed the present value of receivership dividends or other payments on the claims held by the Corporation.

(4) Public disclosure required

(A) In generalThe appropriate Federal banking agency shall disclose any report on losses required under this subsection, upon request under section 552 of title 5 without excising—

(i) any portion under section 552(b)(5) of that title; or

(ii) any information about the insured depository institution under paragraph (4) (other than trade secrets) or paragraph (8) of section 552(b) of that title.

(B) Exception

(5) Losses that are not material

(A) Semiannual reportFor the 6-month period ending on March 31, 2010, and each 6-month period thereafter, the Inspector General of each Federal banking agency shall—

(i) identify losses that the Inspector General estimates have been incurred by the Deposit Insurance Fund during that 6-month period, with respect to the insured depository institutions supervised by the Federal banking agency;

(ii) for each loss incurred by the Deposit Insurance Fund that is not a material loss, determine—(I) the grounds identified by the Federal banking agency or State bank supervisor for appointing the Corporation as receiver under section 1821(c)(5) of this title; and(II) whether any unusual circumstances exist that might warrant an in-depth review of the loss; and

(iii) prepare and submit a written report to the appropriate Federal banking agency and to Congress on the results of any determination by the Inspector General, including—(I) an identification of any loss that warrants an in-depth review, together with the reasons why such review is warranted, or, if the Inspector General determines that no review is warranted, an explanation of such determination; and(II) for each loss identified under subclause (I) that warrants an in-depth review, the date by which such review, and a report on such review prepared in a manner consistent with reports under paragraph (1)(A), will be completed and submitted to the Federal banking agency and Congress.

(B) Deadline for semiannual reportThe Inspector General of each Federal banking agency shall—

(i) submit each report required under paragraph (A) expeditiously, and not later than 90 days after the end of the 6-month period covered by the report; and

(ii) provide a copy of the report required under paragraph (A) to any Member of Congress, upon request.

(6) GAO review

(l) Implementation

(1) Regulations and other actions

(2) Written determination and concurrence required

(m) Other authority not affected

(n) Administrative review of dismissal orders

(1) Timely petition required

(2) Procedure

(A) Hearing requiredThe agency shall give the petitioner an opportunity to—

(i) submit written materials in support of the petition; and

(ii) appear, personally or through counsel, before 1 or more members of the agency or designated employees of the agency.

(B) Deadline for hearingThe agency shall—

(i) schedule the hearing referred to in subparagraph (A)(ii) promptly after the petition is filed; and

(ii) hold the hearing not later than 30 days after the petition is filed, unless the petitioner requests that the hearing be held at a later time.

(i) by order, grant or deny the petition;

(ii) if the order is adverse to the petitioner, set forth the basis for the order; and

(iii) notify the petitioner of the order.

(3) Standard for review of dismissal ordersThe petitioner shall bear the burden of proving that the petitioner’s continued employment would materially strengthen the insured depository institution’s ability—

(A) to become adequately capitalized, to the extent that the order is based on the institution’s capital level or failure to submit or implement a capital restoration plan; and

(B) to correct the unsafe or unsound condition or unsafe or unsound practice, to the extent that the order is based on subsection (g)(1).

(o) Transition rules for savings associationsSubsections (e)(2), (f), and (h) shall not apply before July 1, 1994, to any insured savings association if—

(1) before December 19, 1991—

(A) the savings association had submitted a plan meeting the requirements of section 1464(t)(6)(A)(ii) of this title; and

(B) the Director of the Office of Thrift Supervision had accepted the plan;

(2) the plan remains in effect; and

(3) the savings association remains in compliance with the plan or is operating under a written agreement with the appropriate Federal banking agency.

(Sept. 21, 1950, ch. 967, § 2[38], as added Pub. L. 102–242, title I, § 131(a), Dec. 19, 1991, 105 Stat. 2253; amended Pub. L. 102–550, title XVI, § 1603(d)(1), Oct. 28, 1992, 106 Stat. 4079; Pub. L. 103–325, title VI, § 602(a)(64), Sept. 23, 1994, 108 Stat. 2291; Pub. L. 104–208, div. A, title II, § 2704(d)(14)(AA)–(CC), Sept. 30, 1996, 110 Stat. 3009–494; Pub. L. 104–316, title I, § 106(d), Oct. 19, 1996, 110 Stat. 3831; Pub. L. 109–171, title II, § 2102(b), Feb. 8, 2006, 120 Stat. 9; Pub. L. 109–173, § 8(a)(36)–(39), Feb. 15, 2006, 119 Stat. 3615; Pub. L. 110–289, div. A, title VI, § 1604(b)(1)(D), July 30, 2008, 122 Stat. 2829; Pub. L. 111–203, title IX, § 987, July 21, 2010, 124 Stat. 1936.)