The Federal Reserve Board has updated its guidance on the circumstances under which a federal reserve bank may, after consulting with the Fed’s staff, waive a consumer compliance or safety and soundness examination of a financial institution that wants to become a Federal Reserve System state member bank. The guidance also applies when a bank that is not a state member bank is merging with a state member bank if a state member bank will be the surviving entity after the merger. Prior guidance from 2011 has been rescinded (SR 15-11/CA 15-9).
In the case of a charter conversion, the bank ordinarily must satisfy nine separate criteria before a federal reserve bank can waive the otherwise-required pre-membership examination. Additional considerations apply in the case of a merger. The guidance adds that a safety and soundness examination can be waived if it would not furnish information that would be useful in the Fed’s consideration of the charter conversion or merger, even if some of the criteria are not met.
Charter conversion waivers. Five of the nine criteria are set by Reg. H—Membership of State Banking Institutions in the Federal Reserve System (12 CFR Part 208). These require the bank to:
- be well-capitalized;
- have a composite CAMELS rating of “1” or “2”;
- have a Community Reinvestment Act rating of “outstanding” or “satisfactory”:
- have a consumer compliance rating of “1” or “2”; and
- have no major unresolved supervisory issues with either its current primary regulator or the Consumer Financial Protection Bureau.
Four additional safety and soundness criteria must be met.
Consumer compliance examinations. Before deciding whether to waive a consumer compliance examination, the federal reserve bank staff members are to look at the bank’s recent consumer compliance examinations, reviews, and risk assessments from the bank’s current regulator as well as information from the CFPB, the guidance says. An examination should not be waived if the bank has a less-than-satisfactory consumer compliance rating.
Moreover, an examination might be called for even if the rating is “1” or “2,” the guidance says. If the information from other agencies reveals significant weaknesses, an examination targeted on the area of concern should be considered.
A low CRA rating also would be relevant even though the CAR does not apply directly to Federal Reserve System membership, the guidance warns. This is because a poor CRA rating “presumably would reflect unfavorably on the abilities of management.” A CRA performance review might then be needed.
Examination scope. A pre-merger or pre-membership examination can be targeted on areas of identified weaknesses, according to the guidance. No report of examination is required, but the examination results should be documented as part of the application process. For larger institutions, the federal reserve bank staff is expected to rely on information generated by the continuous monitoring process to the extent possible.
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- The bank’s CAMELS management component must be either “1” or “2.”
- The “close date” of the most recent full-scope safety-and-soundness examination must be less than nine months from the date of the membership application.
- There may not have been any material changes to the bank's business model since the most recent report of examination and there may be no material changes planned for the next four quarters.
- The annual growth in total assets shown by the most recent Call Report must have been less than 25 percent, and planned growth over the next year also must be less than 25 percent.
Consumer compliance examinations. Before deciding whether to waive a consumer compliance examination, the federal reserve bank staff members are to look at the bank’s recent consumer compliance examinations, reviews, and risk assessments from the bank’s current regulator as well as information from the CFPB, the guidance says. An examination should not be waived if the bank has a less-than-satisfactory consumer compliance rating.
Moreover, an examination might be called for even if the rating is “1” or “2,” the guidance says. If the information from other agencies reveals significant weaknesses, an examination targeted on the area of concern should be considered.
A low CRA rating also would be relevant even though the CAR does not apply directly to Federal Reserve System membership, the guidance warns. This is because a poor CRA rating “presumably would reflect unfavorably on the abilities of management.” A CRA performance review might then be needed.
Examination scope. A pre-merger or pre-membership examination can be targeted on areas of identified weaknesses, according to the guidance. No report of examination is required, but the examination results should be documented as part of the application process. For larger institutions, the federal reserve bank staff is expected to rely on information generated by the continuous monitoring process to the extent possible.
For more information about examination rquirements, subscribe to the Banking and Finance Law Daily.
