OCC Issues Manual Revisions Expanding its Discretion to Impose Civil Money Penalties

OCC Issues Manual Revisions Expanding its Discretion to Impose Civil Money Penalties

December 2, 2022, Covington Alert

On Tuesday, November 29, 2022, the Office of the Comptroller of the Currency (OCC) issued a revised version of its Civil Money Penalties (CMP) Policies and Procedures Manual and Matrix (PPM 5000-7), which summarizes the agency’s policies and procedures governing the imposition of civil money penalties against national banks, other OCC-regulated institutions, and their institution-affiliated parties (IAPs). This note summarizes the changes as relevant to bank and institution CMPs.

In short, the revised manual increases the OCC’s discretion in determining how to apply the CMP matrix factors used to calculate appropriate CMP levels, while increasing the bar for receiving self-disclosure and remediation credit, and increasing potential penalties, particularly for the largest banks. The revisions also include language that may be important in redlining matters and matters involving fintech-focused banks. The changes are significant, and aim to provide the OCC with even greater enforcement discretion notwithstanding concerns about the adequacy of due process guardrails in the banking agency enforcement process. At the same time, some of the changes can be read as aligning the manual to actual OCC enforcement practice as it has evolved in recent years.

The bulletin accompanying the revised manual indicates that the OCC will begin using the updated matrix on January 1, 2023. Conduct that occurred when the prior version of the manual was operative may nonetheless be evaluated under the revised version.

OCC Discretion

The revised manual emphasizes the OCC’s discretion in determining the appropriate amount of CMPs, taking the position that 12 U.S.C. 1818(i) gives the OCC wide berth to consider “such other matters as justice may require” in setting CMPs. These revisions emphasize that the matrix is to be applied flexibly based on facts and circumstances.

Notably, the statutory language cited by the OCC appears in a section of the statute on mitigation of penalties. The OCC and the other banking agencies, however, have generally adopted the view that the statutory mitigation factors may be used as mitigating or aggravating considerations, and the OCC continues to adopt that position in the revised manual.

Self-Disclosure, Remediation, Restitution

The revised manual includes new discussions of self-disclosure and remediation, which replace the prior discussions of good faith and cooperation. It also substantially revises the discussion of restitution. The net effect of the changes is to impose demanding and specific obligations on institutions that seek to receive cooperation credit — although those obligations align, in certain respects, with pre-existing, informal OCC expectations.

The new language places particular emphasis on prompt self-disclosure, and on the conduct of horizontal reviews to identify similar issues in other areas. The manual now includes a statement that, in order to receive full self-identification credit, an institution cannot “undertake[] a lengthy investigation before making any disclosure to the OCC.” At the same time, an institution must take proactive steps to investigate “like conduct or deficiencies in other parts of the bank, as applicable.” Further, an institution cannot receive self-identification credit when the identification occurs as part of a review prompted by the OCC or another governmental authority — however, “[i]f, during such a review, a bank identifies and discloses separate and distinct conduct or deficiencies, including across other lines of business, it will be eligible for self- identification credit” for those issues.

Likewise, to receive full remediation credit, an institution must remediate not just the initially identified issues, but also “like conduct or deficiencies.” Further, remediation and restitution must be conducted “transparently” and in “good faith,” and remediation must proactively tackle the root causes of the relevant issue.

With respect to self-identification, remediation, and restitution, the manual again emphasizes that the OCC has discretion to adjust the matrix score based on the facts and circumstances.

Updated Penalty Amounts

The revised manual establishes increased potential penalties, particularly for large banks. Whereas the prior manual used the same penalty matrix column for all banks with total assets over $100 billion, the revised manual includes new columns, with higher penalty amounts, for banks over $500 billion and $1 trillion. The manual also establishes a new penalty column for banks between $15 billion and $50 billion, and increases penalty amounts for other banks as well.

The changes are substantial. For example, a $2 billion bank with a matrix score of 101 would previously have received a suggested penalty of up to $2 million. The same bank would now receive a suggested penalty of double that, i.e., up to $4 million. A $60 billion bank with a matrix score of 101 would see an increase from $30 million to $49 million. And a bank with the same matrix score and assets over $1 trillion would see an increase from $60 million to $280 million.

In evaluating these changes, it is relevant that the CMP matrix has not always been a reliable guide to OCC penalty amounts. Certain of the increased penalty ranges may be intended in part to align the manual to recent OCC practice.

Penalties for Fintech Banks, Foreign-Owned Institutions

The revised penalty matrix includes a note that may be particularly important for fintech banks, and for other institutions that handle significant volumes of transactions without maintaining a large asset base. The note states that “there may be cases when the relevant conduct reflects transaction volume on par with that of a much larger institution. In such cases, it may be appropriate to consider the table’s suggested CMP amount for an institution in a higher total asset category.”

The note also indicates that increased penalties may be appropriate for subsidiaries of foreign institutions where the asset size of the U.S. operations “do not reflect the size of the financial resources of these institutions or the impact of the conduct at issue.”

Injunctive Relief

The revised manual includes new language suggesting that the OCC may couple a CMP with injunctive relief, “such as business restrictions,” when an institution has not made sufficient progress in correcting deficiencies that were previously the subject of an enforcement action or that are “widespread or systemic.” The OCC has previously used business restrictions sparingly and only in the most serious cases, making the specific reference to such restrictions notable.

Redlining

The revised manual establishes a new “presumption” that harm to the public in redlining cases is substantial, counselling in favor of the imposition of higher CMPs. The manual comments in this regard that redlining “represents a failure to lend to minority consumers on a systemic basis.”

For more information on the changes to the OCC CMP manual, please reach out to any member of Covington’s bank regulatory enforcement team.