Alert May 25, 2010

OTS Revises Handbook Section on “Fraud and Insider Abuse”

The OTS issued updated guidance (the “Updated Guidance”) in a revised version of Section 360 of the OTS’s examination handbook concerning fraud and insider abuse.  Included among the revisions made in the Updated Guidance are: (1) a discussion on suspicious activity report (“SAR”) filing and reporting requirements and the applicability of the related “safe harbor” provisions for SAR filers, (2) updated statistics and red flags concerning mortgage fraud, identity theft, check fraud and payment card fraud; and (3) a discussion on fraud risk management and detection of fraud.

The Updated Guidance also includes a brief summary of the FDIC’s white paper entitled “Impact of New Activities and Structures on Bank Failures,” which examines the four depository institution failures from 1997 through 2007 whose resolutions were most costly to the FDIC.  Examples of high risk new activities and complex operating structures noted by the FDIC in those four failures of depository institutions were: (a) rapid growth in securitization of subprime loans; (b) information technology fueling rapid growth in a national deposit market; and (c) heavy reliance on outsourcing, adversely affecting complex organizational and operating structures.  The OTS characterizes these failures as having arisen from unsafe and unsound practices that were a form of insider abuse, although they may not have involved criminal activities.