FDIC and OCC Issue Final Rule Defining “Unsafe or Unsound Practice” and Establishing Standards for Issuing Matters Requiring Attention

On September 1, the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) published a final rule in the Federal Register defining an “unsafe or unsound practice” for purposes of section 8 of the Federal Deposit Insurance Act as a practice, act, or failure to act that is contrary to generally accepted standards of prudent operation and either has materially harmed the institution’s financial condition or, if continued, is likely to materially harm its financial condition or present a material risk of loss to the Deposit Insurance Fund. The rule also revises the supervisory framework for issuing matters requiring attention and other supervisory communications and is intended to focus supervisory and institution resources on material financial risks. The final rule becomes effective November 2.

On September 1, the FDIC published an interim final rule in the Federal Register implementing changes to the reciprocal deposit exception under the Federal Deposit Insurance Act. The changes expand the range of institutions that may qualify as “agent institutions” and, for certain institutions, increase the amount of reciprocal deposits that may be excluded from treatment as brokered deposits by replacing the prior general cap with a tiered calculation based on an institution’s total liabilities. The rule also provides clarifications regarding the reciprocal deposit framework to facilitate and simplify compliance. The interim final rule became effective September 1, and comments must be received by October 1.

On August 25, the FDIC, the National Credit Union Administration (NCUA), the OCC, the Consumer Financial Protection Bureau, the Department of Housing and Urban Development, the Department of Justice, and the Federal Housing Finance Agency published in the Federal Register a notice rescinding the February 2022 “Interagency Statement on Special Purpose Credit Programs Under the Equal Credit Opportunity Act and Regulation B” to clarify that creditors may not discriminate against borrowers based on prohibited characteristics. Federal law does not authorize any generalized remedial “equity” initiatives absent specific cases of unlawful discrimination, and creditors should not rely on the rescinded statement or other related issuances going forward. The rescission became effective August 25.

On September 2, the Board of Governors of the Federal Reserve System, the FDIC, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, the NCUA, and the OCC issued a joint statement clarifying that Suspicious Activity Report (SAR) confidentiality requirements do not prohibit banks and credit unions from communicating with customers about potentially fraudulent or other suspicious transactions or an institution’s intention to close an account for potentially fraudulent or other suspicious activity, so long as the communications do not reveal the existence of a SAR. The statement explains that institutions may discuss the underlying facts, transactions, and documents on which a SAR is based and provides examples of customer communications that typically would not violate SAR confidentiality requirements. The statement does not alter existing Bank Secrecy Act legal or regulatory requirements or establish new supervisory expectations.

On August 21, the FDIC announced the closure and receivership of Tioga-Franklin Savings Bank (Philadelphia, Pennsylvania). Second Federal Savings and Loan Association of Philadelphia has assumed substantially all deposits and agreed to purchase certain assets of Tioga-Franklin Savings Bank. The only branch of Tioga-Franklin Savings Bank is being retained as a branch of Second Federal Savings and Loan Association of Philadelphia, and the deposits will remain insured by the FDIC. The FDIC estimates that Tioga-Franklin Savings Bank’s failure will cost the Deposit Insurance Fund approximately $5.5 million.