Alert October 02, 2012

FDIC Issues New Classification System for Citing Consumer Compliance Violations

The FDIC announced that it revised the classification system for citing violations identified during compliance examinations to promote better communication with institutions and consistency in the classification system.  The revised classification system replaces the current two-level system with a three-level violation system.  The key purpose of the revision and the addition of a third level of violation, according to the FDIC, is to effectively communicate the level of severity of violations so that supervised institutions may “appropriately prioritize efforts” to address identified issues.

Under the new classification system, the violations are classified as “Level 3/High Severity,” “Level 2/Medium Severity” and “Level 1/Low Severity.” 

Generally, High Severity violations are those violations that “have resulted in significant harm to consumers or members of a community” and may result in restitution to consumers in excess of $10,000.  High Severity violations also include so-called “pattern or practice” anti-discrimination law violations.  Medium Severity violations are violations that reflect systemic, recurring, or repetitive errors that represent a failure of the bank to meet a key purpose of the underlying statute or regulation.  The effect on consumers of a Medium Severity violation may be “small, but negative” or potentially negative, if left uncorrected.  The FDIC will generally seek restitution of $10,000 or less for Medium Severity violations.  Low Severity violations include those relatively minor violations that are isolated or sporadic or a systemic violation that is unlikely to affect consumers or the underlying purposes of the regulation or statute.  The FDIC states that Low Severity violations will not be reflected in the FDIC’s final report of examination if they are appropriately addressed by the bank during the examination and do not reflect a weakness in the bank’s compliance system.  The revised classification system will become effective for examinations started or after October 1, 2012.