Bank Subsidiaries and Affiliates_Part1.pdf

X. Other — Bank Subsidiaries and Affiliates Bank Subsidiaries and Affiliates These examination procedures were developed to provide examiners guidance regarding: 1. how to review bank subsidiaries and affiliates (including those that are not institution-affiliated parties (IAPs)) of an FDIC-supervis...

X. Other — Bank Subsidiaries and Affiliates Bank Subsidiaries and Affiliates These examination procedures were developed to provide examiners guidance regarding: 1. how to review bank subsidiaries and affiliates (including those that are not institution-affiliated parties (IAPs)) of an FDIC-supervised institution for compliance with consumer protection laws and regulations; 2. the information and documentation needed to determine whether an affiliate is an IAP; and 3. how to incorporate violations involving subsidiaries and affiliates in the Report of Examination (ROE). These procedures should be used when, in the course of an examination, visitation, or investigation, examiners believe an affiliate or subsidiary of a state non-member bank may have violated fair lending or other consumer protection laws and regulations. 1. any director, officer, employee, or controlling stockholder (other than a bank holding company) of, or agent for, an insured depository institution; 2. any other person who has filed or is required to file a change-in-control notice with the appropriate Federal banking agency under section 7(j); 3. any shareholder (other than a bank holding company), consultant, joint venture partner, and any other person as determined by the appropriate Federal banking agency (by regulation or case-by-case) who participates in the conduct of the affairs of an insured depository institution; 4. any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in • any violation of any law or regulation; • any breach of fiduciary duty; or • any unsafe or unsound practice, which caused or is likely to cause more than a minimal financial loss to, or a significant adverse effect on, the insured depository institution. Background FDIC examination authority over IAPs is derived from the Federal Deposit Insurance Act (FDI Act). The FDI Act permits examiners to examine affiliates of insured banks as needed to disclose the relationship between the bank and a given affiliate, as well as the effect of that relationship on the bank. 1 The term “affiliate” encompasses any company that controls, is controlled by, or is under common control with another company. Therefore, a subsidiary controlled by a nonmember bank, whether wholly owned or not, is considered an “affiliate” of the bank 2 for purposes of the FDI Act. The FDIC generally may only bring enforcement actions against insured state non-member banks and their IAPs. 3 Accordingly, while affiliates of FDIC-supervised banks should be reviewed in all cases, it is necessary to determine whether the affiliate qualifies as an IAP of the bank both in order to properly document violations of the affiliate in the ROE and to determine whether such violations can be pursued directly by the FDIC or must be referred to another agency. Once a potential violation of a consumer protection law or regulation is discovered during the review of the affiliate’s activities, then IAP status of the affiliate must be determined. An affiliate may be an IAP based on any one or more of the statutory bases set forth in section (u) of the FDI Act, 12 U.S.C. § 1813(u), where the term “institution-affiliated party” is defined as: ____________________ 1 2 3 12 U.S.C. § 1820(b)(4). Hereinafter “ affiliate” will include both subsidiaries (wholly owned or otherwise) and affiliates of the bank. 12 U.S.C. § 1813(u); 12 U.S.C. § 1818. M ost often, an affiliate or subsidiary of a bank could be an IAP: • • • as an agent of the institution under subsection; as a consultant, joint venture partner, or “other person” participating in the affairs of the institution under subsection; or, less likely, as an independent contractor whose misconduct has caused serious loss to, or an adverse effect on the institution. Examination Procedures 1. During the pre-examination process, an examiner should determine if the bank has an affiliate, and the relationship of that affiliate to the bank. Examiners should apply a riskfocused approach in determining if and to what extent an affiliate’s activities should be reviewed. The scope of the review of affiliate activity will be preliminarily established during the pre-examination process and should be refined during the examination as a result of discussions held or the presence of significant issues or violations. 2. Regardless of whether an affiliate is an IAP or not, examiners should review affiliates of FDIC-supervised banks. Affiliate activity is considered under many aspects of the examination process, such as during the review of Non-Deposit Insurance/Investment Products, Privacy of Consumer Financial Information, Fair Credit Reporting Act, Third-Party Risk, UDAP, RESPA, Fair Lending, and CRA, if applicable. Applicable examination procedures should be applied to the various activities of bank affiliates. Transactional testing may be necessary using examination procedures for applicable consumer laws and FDIC Consumer Compliance Examination Manual — November 2023 X–5.1 X. Other — Bank Subsidiaries and Affiliates regulations. If a review of the affiliate’s activities results in no apparent violation or issue, then determination of IAP status is not necessary, and no further examination procedures apply. 3. Once an examiner identifies a potential violation of a consumer protection law or regulation during his or her review of an affiliate’s activities, the next step should be to consult Legal to determine IAP status so that the FDIC can decide whether it has enforcement jurisdiction over the affiliate. An examiner initially should ascertain if this determination previously has been made (e.g., during a prior compliance or risk management examination). If so, verify that the facts relied upon in making the prior determination remain substantially unchanged. If a determination previously has not been made, the process of determining IAP status should begin as soon as a potential violation is discovered, but should not hold up the examiner’s review if discovered prior to the determination. 4. If apparent violations exist and no IAP determination previously has been made, then during the examination proper documentation should be gathered to determine the relationship of any affiliates and the bank utilizing the guidance below. The Region should consult the Legal Division early in the process to discuss and determine which of the areas outlined below would be most fruitful in determining whether the affiliate is an IAP and in identifying the additional information or documentation necessary to support an IAP status determination. The first and most important step in the analysis of IAP status is to fully understand the relationship between the bank and its affiliate with regard to its operations and its structure. Analysis of IAP status is fact-specific and can be complex. This includes, among other things, the extent to which the affiliate is involved in the activities of the bank. IAP determinations can also require an in-depth analysis of the effect of the affiliate’s operations on the bank’s financial stability and viability. As a threshold matter, identify the asset size of the bank and the asset size of the affiliate. As you gather the information and documentation below, keep in mind that no single fact or element will prove institution affiliated or non-affiliated status. • X–5.2 What is the legal relationship between the bank and the affiliate? ° What is the contractual relationship between the bank and the affiliate? ° Are the bank and the affiliate under common control (e.g., under the same holding company structure)? ° How much of the affiliate is owned by the bank? (e.g., Is it a wholly owned subsidiary? If not, does the bank have a majority or minority interest? What is the bank’s ownership percentage of interest? What is the amount of the bank’s investment?) • • What is the management relationship between the bank and the affiliate? ° Does the composition of the board of directors of the affiliate mirror or overlap with the board of directors of the bank? ° Do the affiliate and the bank share management or employees? If so, are expenses for the affiliate’s employees reflected on the bank’s Call Report? ° Does the affiliate influence or have the ability to affect bank policies, procedures, activities, or operations? What is the financial relationship between the bank and the affiliate? ° ° ° Has the bank funded affiliate loans either directly or indirectly through funding a revolving line of credit to the affiliate? If so, what are the amount and terms of the loan? Who else lends to the affiliate and what proportion of the outstanding credit comes from the bank versus outside sources? What is the ratio of the bank’s total assets to the loan(s) or line(s) of credit to the affiliate? What is the percentage of the bank’s total net income that is derived from the affiliate services or accounts? What effect would the failure or bankruptcy of the affiliate have on the bank? How closely is the bank’s success linked to the affiliate’s success? ° • Are customers referred between the bank and the affiliate? If so, on what basis? If so, what are the percentages of total referrals made and received by each entity, respectively? ° If any customers are referred between the bank and affiliate, are any referral fees paid? ° Are there any shared resources between the bank and affiliate (such as compliance consulting firms, audit firms, or marketing firms)? What is the professional relationship between the bank and the affiliate? ° What services does the affiliate perform for the bank? ° Who prepares and files the HM DA LAR on behalf of the bank? ° If the affiliate makes loans, does the affiliate file its HM DA LAR independently, or with the bank? Does the bank claim the affiliate’s loans for CRA credit? ° FDIC Consumer Compliance Examination Manual — November 2023 X. Other — Bank Subsidiaries and Affiliates ° ° What is the affiliate’s involvement in developing the bank’s loan program? ▪ Does the affiliate develop the terms and conditions of the bank’s loan program(s)? If so, to what extent does the bank participate? ▪ Does the affiliate set underwriting standards for the bank (or vice versa)? ▪ Who prepares marketing materials for the bank’s loan programs? If the affiliate is involved, what is the level of the bank’s oversight? To the extent that solicitation materials are reviewed for legal compliance, whose attorney does so? Who has final approval of the solicitation and marketing materials? • ▪ ▪ To what extent does the affiliate receive loan applications, engage in underwriting activities, service loans, etc.? Does the affiliate participate in credit decisions for loans originated by the bank? Are the decisions of the affiliate subject to review by the bank? What type of review does the bank conduct? Who closes the loans? In whose name? ° ° ° ° ° Does the affiliate share the same website as the bank? Does the website of the affiliate contain references or links to the bank (and vice versa)? Who sends the bank’s marketing materials to potential customers? In whose name are the materials sent? Do the affiliate’s marketing materials and solicitations reference the bank? Do other public representations demonstrate a link between the bank and the affiliate? Gathering Documents: The following are examples of types of documents that may be relevant in conducting an IAP analysis. This list is not allinclusive and examiners are encouraged to gather and consider any and all relevant documentation. What is the Bank’s involvement in loan funding? ▪ Who funds the loans? • ▪ What percentage of loans funded by the bank are originated by the affiliate? • ▪ If the affiliate focuses on one or a few loan categories, what portion of the loans the bank funds in those categories are originated by the affiliate? ▪ ° What is the physical proximity between the affiliate and the bank? Do they share office space? If so, is the space leased or provided at no cost to the affiliate? If not, are the offices in close proximity to each other? How do the bank and the affiliate define their relationship to the public? ° Does the affiliate refer loan customers to the bank (and vice versa)? ° What is the affiliate’s involvement in loan processing? ▪ ° ° To what extent do the bank and affiliate purchase loans from each other? What percentage of loans made by one entity are purchased by the other entity? ▪ To what extent does the bank buy participation interests from the affiliate or vice versa? Are such purchases pursuant to an agreement? If the loans are sold to investors: 1) Does the bank guarantee any warranty obligation of the affiliate in the Loan Sale Agreement? 2) How are the participation interests, if any, transferred to investors? Are there any other facts or information that connect the affiliate with the bank, or that otherwise may be relevant? FDIC Consumer Compliance Examination Manual — November 2023 • • • • • • Contracts or other written agreements between the bank and the affiliate; E-mails or other written correspondence between the affiliate and the bank relating to any services or programs conducted by the affiliate of the bank that are relevant in defining the relationship between the bank and its affiliate; Documentation relating to transactions conducted, and compensation arrangements between the affiliate and the bank; Policies governing the relationship between the affiliate and the bank and any other pertinent policies and procedures; Documents relating to marketing materials, transactions, loan terms and conditions, underwriting standards, and the extent to which the affiliate is involved; If the bank’s website refers to the affiliate, a screen shot of that page, and other relevant pages, if any; If the affiliate’s website refers to the bank, a screen shot of that page, and other relevant pages, if any; HM DA LARs; X–5.3