This report presents the results of the subject evaluation. The Troubled Assets Relief Program (TARP) Capital Purchase Program (CPP) authorizes the Department of the Treasury (Treasury) to purchase up to $250 billion of senior preferred shares from qualifying institutions. The federal banking agencies, including the FDIC, are responsible for receiving and reviewing CPP applications from their constituent institutions and making a recommendation to Treasury on whether CPP requests should be approved or denied. As of January 15, 2009, the FDIC had received applications from 1,615 institutions totaling almost $34 billion in award requests.
EVALUATION OBJECTIVE AND APPROACH
The objective of the evaluation was to assess the FDIC’s process and controls associated with reviewing applications from FDIC-supervised institutions to participate in the TARP CPP and forwarding approval recommendations to Treasury.
To accomplish our objective, we interviewed headquarters and regional Division of Supervision and Consumer Protection (DSC) officials involved in reviewing applications and making award recommendations to Treasury. We also evaluated case decision memoranda and supporting application documentation for applications to ensure that applicants met Treasury’s viability criteria. Finally, we compiled summary information regarding the supervisory characteristics of institutions recommended for CPP funding and, where disclosed, recipient institutions’ proposed usage of CPP funds. We performed detailed testing on applications forwarded to Treasury as of December 10, 2008 and evaluated application review activity as of January 15, 2009.
We performed our evaluation during December 2008 and January 2009 in accordance with the Quality Standards for Inspections. Details on our objective, scope, and methodology are provided in Appendix I.
In October 2008, the Congress passed and the President signed the Emergency Economic Stabilization Act of 2008 (EESA). The Act provides authority for the Federal Government to purchase certain types of troubled assets for purposes of providing stability to the economy and the nation’s financial system. The Act established the Office of Financial Stability within Treasury and authorized the TARP. Under the TARP, Treasury will purchase up to $250 billion of preferred stock through the CPP. The CPP is available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies. Treasury will determine eligibility and allocations for interested parties after consultation with the appropriate federal banking agency. Specifically, in the case of the FDIC, the Corporation will analyze CPP applications from state nonmember banks and make a recommendation to Treasury on whether a CPP request should be approved or denied.
DSC is responsible for CPP at the FDIC. DSC regional offices are performing the application review. Figure 1 provides an overview of the application review process.Figure 1: Overview of the CPP Application Review Process [ D ]
Status of the FDIC’s Efforts to Process CPP Applications
As of January 15, 2009, the FDIC had received 1,615 applications from FDIC-supervised institutions requesting almost $34 billion in TARP funding. The FDIC had recommended 408 applications to Treasury for approval, of which 267 had received awards as shown in Table 1.Table 1: Status of CPP Application Review and Award (dollars in millions)
FDIC officials indicated that Treasury instructed the federal banking agencies to process the publicly traded applicants first, followed by privately held corporations. DSC officials indicated that there were approximately 1,660 additional Subchapter S Corporations and mutual FDICsupervised institutions that could apply to the CPP once Treasury issues term sheets for participation.1 Table 2 presents application status information by the ownership structure of the applicants as of January 15, 2009.Table 2: Status of CPP Application Review and Award by Ownership Structure
* ATS did not specify ownership type information for 18 institutions.
On average, DSC regional offices are taking 16 calendar days from the time an application is received to review the application and forward the case decision to the FDIC Washington Area Review Panel (WARP). The WARP is taking an average of 17 additional days to complete its review and forward applications to Treasury.
For the 267 applications approved by Treasury, it took Treasury, on average, 7 days to notify the FDIC that the applicant had been approved for CPP participation. The remaining 141 FDIC-submitted applications awaiting Treasury approval, as of January 15, 2009, had been at Treasury for an average of 11 days. DSC officials estimated that the FDIC will complete its review of the remaining applications in the second quarter 2009.
Application Review Process and Internal Controls in Place
The FDIC has established controls to provide reasonable assurance that the Corporation complies with Treasury’s CPP guidance and to guide DSC’s review of CPP applications. The FDIC’s process for reviewing applications is consistent with guidance issued by Treasury. DSC also issued examination procedures that should enable the FDIC to measure participating institutions’ success in deploying TARP capital and ensure that the funds are used in a manner consistent with the intent of Congress.
Program Guidance to the Banking Industry and Examiners: The FDIC has issued guidance to state non-member institutions in the form of Financial Institution Letters (FIL), as follows:
On February 9, 2009, DSC issued Regional Director Memorandum 6300, Examination Guidance for Financial Institutions Receiving Subscriptions from the U.S. Department of the Treasury’s TARP CPP Program, to provide examiners with work steps for assessing compliance efforts of institutions participating in the CPP and for assessing how institutions are incorporating the interagency statement on responsible lending into their lending operations.
Organizational Structure and Resources: On October 31, 2008, the FDIC Board delegated authority to the Director, DSC, to recommend to Treasury approval or denial of applications by state nonmember institutions to participate in the TARP CPP. This delegation required that recommendations regarding applications by institutions with total assets greater than $500 million and that do not meet Treasury’s CPP criteria for presumptive acceptance will require a recommendation from DSC that must be approved by the Chairman.
The Board also provided the Director, DSC, authority to recommend to Federal Reserve districts approval or denial of CPP applications filed by bank holding companies in cases where the largest insured depository institution is a state nonmember institution.
DSC has developed regional and Washington Office governance structures for implementing the CPP and has assigned regional and headquarters resources to the effort. The regions have more than 110 staff working on CPP applications. For the most part, the regional case managers review applications from those institutions that the case manager routinely oversees. As discussed later, most regions have also identified a regional coordinator or facilitator for the CPP effort. The Deputy Regional Director reviews and approves case manager recommendations for all applications. In some regions, Assistant Regional Directors may receive informational copies of case decision memoranda or may review the case manager’s decision.
DSC headquarters has about 20 staff working on the CPP, including three senior officials who serve on the WARP. The WARP performs a secondary review of all regional office recommendations. DSC’s Associate Director, Risk Management Policy Branch, is managing the overall CPP application review effort for the FDIC and is the FDIC’s representative on the CPP Interagency Council (CPP Council).
Procedures and Processing Guidelines: In addition to the FILs, mentioned earlier, DSC’s Washington Office issued the RO Processing Guidelines for TARP Capital Purchase Program, in October 2008. This document:
The guidelines note that applications should be processed within 5 business days after acceptance and then transmitted to the Washington Office.
Treasury Viability Criteria and Additional Treasury Guidance: On October 20, 2008, Treasury issued final viability criteria for the federal banking agencies to use in reviewing CPP applications. Treasury has not issued the viability criteria publicly. The Treasury viability criteria states that the CPP eligibility recommendation will be based on an assessment of the overall strength and viability of the applicant without considering potential funds received under the CPP. Treasury presents criteria for classifying applications as either recommended for approval, disapproval, or for additional review by the CPP Council. The viability criteria is based on the institution’s examination ratings and selected performance ratios.2
We confirmed that DSC used the Treasury viability criteria in assessing CPP applications from FDIC-supervised institutions.
We also confirmed that the FDIC utilized other Treasury-issued guidance and documents, such as the Treasury-issued TARP Capital Purchase Program Case Decision Memo. This 2-page document records the application review findings related to CAMELS and CRA ratings and selected performance ratios; includes an area for recording narrative comments related to the federal banking agency recommendation; and requests a brief summary of the viability assessment, supervisory strategy, and any material or relevant enforcement actions.
DSC officials indicated that Treasury has issued additional informal guidance by e-mail based on Treasury’s review of some of the earlier CPP applications. DSC has incorporated this additional informal guidance into its application review process.
Case Management Systems and Application Repository: The Dallas Regional Office Management Information Group (ROMIG) developed a MicroSoft Access®-based database for tracking information about CPP applications. Each regional office uses this Application Tracking System (ATS). ATS includes an individual institution “look-up” feature that presents detailed information about an applicant, including bank points of contact, capital ratios, and performance ratios. ATS also includes a reporting facility that is used to prepare the TARP CCP application activity report, which is discussed in more detail below.
DSC also developed a SharePoint® site that serves as a repository for case materials for applications forwarded by the regions to the Washington Office. DSC establishes a record for each applicant that includes an electronically scanned version of the institution’s CPP application, the case decision memorandum, a WARP quality assurance review form, and supporting documentation for the application from the case manager.3
The SharePoint® site organizes applications based on their process stage (e.g., by region, Washington Office, or pending review by Treasury). SharePoint® also includes a library of CPP policy and procedural documents.
Supervisory Review and Quality Assurance Processes: DSC has built in a number of levels of supervisory review of award recommendations and quality assurance controls at the regional and Washington Office level. In most of the regions, an Assistant Regional Director and the Deputy Regional Director (DRD) review the case decision memorandum. In addition, the WARP and DRD from the originating region review the regional recommendation and verify that the regional conclusions are well-reasoned and defensible.
The only exception to this supervisory review process is for applications that are withdrawn at the regional level. If the region suggests that an institution withdraw its application, that recommendation or decision is not reviewed by the Washington Office. As discussed earlier, DSC has delegated this responsibility to the regional offices.
With respect to quality assurance, most of the regions have assigned a case manager to serve as a regional CPP facilitator to ensure that Washington Office and Treasury guidance is disseminated, ensure that case decision memoranda are complete, monitor regional progress in reviewing applications, and compile any regional CPP reporting information or statistics.
Status Reporting to the FDIC Board and Chief Operating Officer: DSC is utilizing the ATS to produce a weekly activity status report of CPP application review activity for the FDIC Board of Directors and the Chief Operating Officer (COO). This report includes information such as:
This report is beneficial in assessing DSC progress in reviewing applications, the number of applicants that have withdrawn from consideration, and the number and amount of Treasury awards.
Examination Procedures for Monitoring Compliance with Award Provisions: As discussed earlier, DSC issued Regional Director Memorandum 6300, Examination Guidance for Financial Institutions Receiving Subscriptions from the U.S. Department of the Treasury’s TARP CPP Program, in February 2009, which provided examination work steps for:
FDIC Compliance with Treasury Viability Criteria
As discussed earlier, Treasury has established viability criteria for the banking agencies’ use in making a CPP recommendation. DSC officials stressed that the CPP was a Treasury program and that Treasury had developed parameters for the program, including criteria for assessing an applicant’s financial viability. Treasury guidance indicates that the banking agency should forward applicants with unacceptable performance ratios to the CPP Council for review. Treasury also presented several mitigating factors that the banking agencies could consider in making application recommendations.
We reviewed the case decision memoranda and supporting application documentation for each of the 172 institutions, as of December 10, 2008, for which the FDIC had recommended presumptive approval to Treasury or for further review by the CPP Council. We verified that most of the 172 institutions met the Treasury criteria. Seventeen of the 172 institutions (10 percent) did not meet at least one of the Treasury viability criteria. However, we verified that in each of the 17 cases, the FDIC case decision memorandum discussed mitigating factors. As of February 11, 2009, Treasury had approved 13 of the 17 cases and one institution had withdrawn. Table 3 presents additional information about the 17 cases and mitigating factors.
* Bank performance ratio was within 10 percentage points of Treasury performance criteria.
As shown above, in 13 of the 17 cases involving mitigating factors, the FDIC forwarded the case decision memorandum to the CPP Council for additional review as contemplated in Treasury’s guidance. However, the FDIC did not forward four of the applications not meeting Treasury’s criteria to the CPP Council. The ability of the FDIC, and other federal bank regulators, to consider mitigating factors when making application decisions adds discretion to the process and inherently increases the risk of inconsistency. The use of secondary review panels such as the WARP and CPP Council helps to address that additional risk. Accordingly, we recommended that DSC reiterate to regional officials that all applicants being recommended to the Treasury for approval that do not meet one or more of the Treasury viability criteria be forwarded to the CPP Council for further review.
Evaluation of Reasons for CPP Applicant Withdrawals
We also evaluated reasons for application withdrawals and concluded that a little more than one-half of the 57 banks that had withdrawn as of December 10, 2008 withdrew voluntarily. DSC officials indicated that it was rare for a federal banking agency or Treasury to formally deny a CPP application because the decision becomes public and could negatively impact the public’s perception of the institution. Instead, the banking agencies or Treasury encourage institutions that do not meet the viability criteria to informally withdraw their application. Institutions may withdraw voluntarily because they are no longer interested in participating in the CPP or may withdraw based on the FDIC’s suggestion that they do not meet the criteria for a presumptive recommendation for approval.
We asked the regional offices to provide information about the circumstances for withdrawals for the 57 banks that had withdrawn as of December 10, 2008. Table 4 presents information about withdrawal activity and reasons for the FDIC suggesting that applicants withdraw.Table 4: Analysis of Reasons for Applicant Withdrawals
According to case decision information in the ATS, three institutions that the San Francisco Regional Office suggested withdraw from consideration were well-capitalized and technically met the Treasury performance ratio criteria. We followed up with regional management who indicated that, in all three cases, poor bank management was the region’s primary concern in recommending that the three institutions withdraw.
We also noted that case decision memoranda for the three institutions identified concerns related to liquidity, asset quality, and enforcement action activity.
As discussed earlier, the use of mitigating factors--in these cases to recommend that applicants withdraw from consideration--increases the risk of inconsistency. We recommended that in cases where an applicant technically meets the Treasury criteria, but the regional office concludes that the applicant is not a viable candidate for CPP funding, that the region forward the application to the Washington Office for review.
During a January 13, 2009 Risk Analysis Center presentation, a DSC official indicated that the number of withdrawals had increased to 112 and that a number of banks had voluntarily withdrawn as a result of the additional monitoring measures and conditions on the use of TARP funds proposed by the Chairman of the House Financial Services Committee. As of January 15, 2009, 127 institutions had withdrawn.
Characteristics of Applicants Recommended for Approval
Most of the 408 institutions that the FDIC had recommended to Treasury for CPP approval as of January 15, 2009, had a composite “2” rating and Capital component rating of “2” at their most recent safety and soundness (S&S) examination. Most of the 172 institutions in our detailed sample had a “2” compliance examination rating and a “satisfactory” CRA rating. About 15 percent of the 408 institutions (59 institutions) had some form of enforcement action.
Table 5: Composite “3-Rated” CPP Applicants Not Meeting Treasury Criteria
We also noted that three institutions’ composite ratings were downgraded following the FDIC’s submission of the application to the CPP Council, but before Treasury made a CPP award decision. We determined that in each case, the regional office notified the Washington Office, which notified Treasury of the ratings changes. Two of the banks subsequently withdrew. FDIC officials provided other examples of ratings changes or applicant deterioration information that the FDIC communicated to Treasury.
Table 6: CPP Applicants Forwarded to Treasury with a Capital Component Rating of “3”
We confirmed that the FDIC submitted institutions 2 and 5 to the CPP Council for further review, as required. Institutions 2 and 5 were well-capitalized, but did not meet all of Treasury’s CPP viability performance ratios. As of February 11, 2009, Treasury had remanded both institutions back to the FDIC for additional support on the institutions’ viability.
Enforcement Actions: We also reviewed the 172 institutions for evidence of S&S or compliance enforcement actions. The CPP National Daily Report indicated that 33 institutions recommended for presumptive approval had outstanding formal or informal enforcement actions. Representatives from each region also stated that, when reviewing an application, case managers review the Formal and Informal Action Tracking (FIAT) System to determine whether the applicant is under any existing or pending enforcement actions, including compliance enforcement actions related to fair lending or unfair and deceptive acts or practices (UDAP).8 We researched the nature of each enforcement action as presented in Table 7.Table 7: OIG Analysis of Enforcement Actions
Note: Several institutions had multiple enforcement actions.
As of January 15, 2009, the 408 institutions recommended for approval or further review collectively had 34 BBRs, 23 MOUs, and 3 C&Ds.
We confirmed that the regional offices do not coordinate with FDIC’s Legal Division regarding whether CPP applicants are subject to any enforcement or legal action. DSC regional officials indicated that DSC usually initiates enforcement actions and thus would be aware of an applicant’s enforcement action history. Although we believe that some coordination with the Legal Division would be prudent, we acknowledge that the possibility of DSC not being aware of an enforcement action is remote. Accordingly, we are not making a formal recommendation in this regard. However, we would suggest that DSC be open to identifying non-burdensome forms of coordination with the Legal Division to ensure that CPP applicants recommended for approval do not have historical or pending predatory lending or consumer-related enforcement actions that could be potentially embarrassing for the Corporation.9
Applicants’ Proposed Use of CPP Funds
DSC officials initially told us that Treasury did not specify limits on institutions’ use of CPP funds and indicated that the FDIC did not intend to track applicants’ use of funds. FDIC officials stressed that the CPP was Treasury’s program and noted that CPP application forms developed by Treasury did not require applicants to state their intended use of CPP funds.
However, we did note that in its initial announcement of the program, the FDIC advised that state nonmember banks could use the CPP to bolster capital or to support acquisitions of other institutions. Specifically, FIL-109-2008, stated: "Participation in this low-cost capital program can bolster financial strength, or potentially support acquisitions, both of which ultimately allow for prudent lending that may currently be constrained by capital levels."
DSC officials initially told us that money is fungible and that it would be difficult for examiners to track for what purpose state nonmember institutions used CPP awards, especially in situations where an institution received capital contributions from other, non-TARP sources.
DSC representatives from most of the regions told us that they did inquire about applicants’ proposed use of CPP funds. One regional representative told us that while it might not be possible to track “dollar-for-dollar” how CPP funds were used, it should be relatively easy for examiners to detect whether a TARP recipient had increased business and consumer lending. At least one regional DSC representative also defended institutions’ practice of using CPP funding to bolster capital and noted that shoring-up an institution’s capital position was a means to an end that would place an institution in a more solid position to lend responsibly.
Based on our review of 172 applications, about 44 percent of the applicants (76 institutions) indicated proposed uses for CPP funds despite not being required to do so. In most of those cases, the applicant stated it intended to use funds to bolster capital, increase lending, or acquire other institutions. Table 8 presents the most common reasons stated.
Table 8: Most Common Stated Uses of TARP CPP Funds
* Some applicants stated multiple proposed uses of funds.
On January 12, 2009, the FDIC issued FIL-1-2009, Monitoring the Use of Funding from Federal Financial Stability and Guaranty Programs, advising insured institutions that they should track their use of capital injections, liquidity support, and/or financing guarantees obtained through recent financial stability programs. The FIL suggested that the tracking would be part of a process for determining how these federal programs have improved the stability of the institution and contributed to lending to the community and providing such information to investors and the public in shareholder reports and financial statements.
On January 13, 2009, the FDIC’s COO testified before the Committee on Financial Services, U.S. House of Representatives, on Use of TARP Funds Under the Emergency Economic Stabilization Act of 2008. The COO reported that the FDIC was preparing examination guidance for evaluating participating banks’ compliance with EESA, the CPP securities purchase agreements, and success in implementing the goals of the November 2008 interagency statement on responsible lending.10 The COO noted that examiners would be reviewing institutions for the following:
The COO also encouraged the development of a troubled asset program that met three principles of accountability, transparency, and viability.
Regarding transparency, the COO noted that participants in the program should be required at the outset to show how participation would expand prudent lending activity and should provide the government with a plan for using the funds to facilitate new lending, with definable metrics for measuring performance.
OVERALL CONCLUSIONS AND RECOMMENDATIONS
The FDIC is making progress in reviewing CPP applications and making award recommendations to Treasury. The Corporation has established controls to provide reasonable assurance that it complies with Treasury’s CPP guidance as it carries out that process. Based on our review, we determined that the FDIC followed the Treasury guidance for substantially all of the applications we reviewed. Finally, DSC has also developed examination procedures that will allow the Corporation to measure participating institutions’ success in deploying TARP capital and ensure that the funds are used in a manner consistent with the intent of the Congress.
To further enhance controls over the application review process, we recommend that the Director, DSC:
CORPORATION COMMENTS AND OIG EVALUATION
DSC management provided a written response, dated March 18, 2009, to a draft of this report. The response is presented in its entirety in Appendix II. Management concurred with both recommendations and proposed actions to be completed by March 27, 2009 that were responsive to both recommendations. A summary of management’s responses to our recommendations is presented in Appendix III.
During our evaluation, we identified other matters that were not specifically related to our evaluation objective. We intend to report separately to DSC on those other matters.
OBJECTIVE, SCOPE, AND METHODOLOGY
Our objective was to assess the FDIC’s process and controls associated with reviewing applications from FDIC-supervised institutions to participate in the TARP Capital Purchase Program and forwarding approval recommendations to Treasury. To accomplish our objective, we interviewed headquarters and regional DSC officials involved in reviewing applications and making award recommendations to Treasury. We also evaluated case decision memoranda and supporting application documentation to ensure that applicants met Treasury’s viability criteria. Finally, we compiled summary information regarding the supervisory characteristics of institutions recommended for CPP funding and, where disclosed, recipient institutions’ proposed usage of CPP funds.
We selected a test date of December 10, 2008. The FDIC had recommended 172 applications for approval to Treasury as of that date. We reviewed the case decision memoranda and supporting documentation in the SharePoint® application repository system for all 172 applications. We confirmed that the applications met Treasury’s viability criteria. In cases where an applicant did not meet the criteria, we checked for mitigating factors, additional discussion, or consideration by the CPP Council. We also analyzed ATS information as of January 15, 2009 to obtain more recent program status information.
We relied on application information and supporting documentation in the SharePoint® application repository system. We did not independently verify or validate information within the ATS or SharePoint® site with source documents (such as examination reports or call reports). We did not evaluate the merits of individual applications or conclude whether individual applicants should or should have not been recommended for CPP funding.
Specifically, our work included the following:
We performed our evaluation from December 2008 through January 2009, in accordance with the Quality Standards for Inspections.
MANAGEMENT RESPONSE TO RECOMMENDATIONS
This table presents the management response on the recommendations in our report and the status of the recommendations as of the date of report issuance.
|Last updated 4/06/2009|