Alert October 02, 2012

FDIC Issues New Classification System for Citing Consumer Protection 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. According to the FDIC, the key purpose of the revision and the addition of a third level of violation 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.” Level 3 violations are those 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. Level 3 violations also include “pattern or practice” violations of anti-discrimination law. Level 2 violations are those 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 Level 2 violation may be “small, but negative” or potentially negative, if left uncorrected. The FDIC will seek restitution of $10,000 or less for Level 2 violations. Level 1 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. Level 1 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 is effective on examinations commenced on or after October 1, 2012.