The Federal Reserve Imposes Limits on a National Bank’s Growth

On February 2, 2018, the Federal Reserve (the “Fed”) announced a consent order with one of the country’s largest banks, that orders the bank to halt growth until it improves its corporate governance and risk management.

In September 2016, the bank, which is the third largest bank in the United States by assets and market capitalization, was fined $185 million by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, as well as the Los Angeles City Attorney’s Office, after the agencies and the Los Angeles City Attorney found that the bank had opened roughly 1.5 million unauthorized retail customer accounts between 2011 and 2015.  As a result of the investigation, the bank disclosed in a statement that it fired over 5,000 employees in connection with the misconduct over the five-year period.  More recently, the Fed said it was concerned to hear allegations that the bank charged hundreds of thousands of borrowers for unnecessary guaranteed automobile protection or collateral protection insurance for their automobiles.

Former Fed Chair Janet L. Yellen said in a statement issued on her last day as the Fed’s chair: “We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by [the bank] expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again.  The enforcement action we are taking today will ensure that [the bank] will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect customers.”

Under the terms of the consent order, while the bank will be allowed to continue to accept customer deposits and make consumer loans, the bank will not be allowed to increase its assets above its current level of about $2 trillion until it proves that its governance is substantially improved.  As part of the Fed’s demands, the bank must submit a remediation plan for approval by the Fed.  The plan must address actions that the bank will take to, among other things: (i) improve board effectiveness, including steps that the board will take to enhance oversight of senior management; and (ii) improve its risk management program, including a review of policies, procedures and practices at the bank for remediating customers that are harmed by the firm’s products or services or the misconduct of an employee.  The consent order also requires the bank to have an independent third party conduct a review of: (i) the bank’s improvements in effective oversight and governance of its operations, and (ii) enhancements to the bank’s compliance and operational risk management program.

In addition, as part of the Fed’s announcement, the agency said that the bank would replace four members of its 16-member board by the end of the year.  The boardroom changes were not mandated under the consent order.

The Fed’s announcement is available here: https://www.federalreserve.gov/newsevents/pressreleases/enforcement20180202a.htm.

The Fed’s consent order is available here: https://www.federalreserve.gov/newsevents/pressreleases/files/enf20180202a1.pdf.