In a move that should help stressed banks avoid public relations fiascoes, the Federal Deposit Insurance Corp. has toned down the harsh wording of orders it issues to such institutions.
The FDIC changed the name of its cease-and-desist order to the less ominous-sounding "consent order" (a term already used by other regulators) last month. The agency also softened the language in the order's standard introductory paragraphs.
The order retains its typically tough requirements. But industry insiders applauded the changes.
" 'Cease and desist' just sounds like a restraining order," said Pat Fahey, the chairman and chief executive of Frontier Financial Corp. in Everett, Wash., which received one in March. "I am glad they finally woke up and realized that it was not helping the recovery. I just wish the change was retroactive."
David Barr, an FDIC spokesman, said that the traditional cease-and-desist order will be issued to any banks that refuse to stipulate and instead seek an administrative hearing.
Only banks that consent will see the new softer version of the order, he said. "We are deleting or revising language that is not needed where the bank has consented to the corrective measures."
The FDIC has not made any of the new orders public so far. The agency typically releases orders a month after they've been signed; the most recent ones available from the agency were signed in September. However, several attorneys said they have worked on the new orders with clients, and at least one company, Evergreen Bancorp in Seattle, has made its Oct. 22 consent order with the FDIC public in a Securities and Exchange Commission filing.
Both the old orders and the new ones start similarly, with the bank stipulating to the agreement and agreeing to stop unsafe and unsound banking practices, without the bank admitting any wrongdoing. The older orders then went into a section entitled "Order To Cease and Desist" where the FDIC orders the bank to stop doing a laundry list of bad things, including having inadequate management and not enough capital.
Jeffrey C. Gerrish, a partner at the law firm Gerrish McCreary Smith PC in Memphis, said that section was boilerplate and unnecessary since the rest of the document outlines what the regulators demand of the bank. The new orders skip that part and go straight into the demands. The streamlining eliminates unnecessary risk, he said.
"This doesn't make the capital requirements any easier and it doesn't help with asset quality, but it does help the reputation and the liquidity of the bank from being hurt," said Gerrish, who, for months, has been pushing the FDIC to overhaul what he viewed as the antiquated and harmful wording of the orders.
Last year, Gerrish formed a group called Community Bankers Revolt to advocate for the change. However, he said last week that the revolt has been shelved for now because of the FDIC's receptivity.
Fahey said that in the days after Frontier disclosed its cease-and-desist order, it received a flood of calls from concerned customers.
"I believe a different name would have lessened the anxiety of our customers, since anxiety about banks overall is so high right now," he said. "My team and I spent a lot of time talking with individual customers and explaining to them what it meant."
Souring construction loans have eroded the $4 billion-asset Frontier's capital. The cease-and-desist order told it to raise capital by July. Despite the October collapse of a deal Frontier made to sell itself, Fahey said this month that he is optimistic his company will find another buyer.
Steven Reider, the president of Bancography, a consulting firm in Birmingham, Ala., said that in recent years, the Internet has made regulatory orders more readily accessible to local media outlets and consumers, increasing the potential damage for a bank that receives one.
"We are living in the age of the vigilante consumer who has become tremendously empowered by access to information. So having a document with arcane language just increases the chances it will be misunderstood," Reider said. "I would imagine that at least some of the motivation of the FDIC comes from a safety and soundness position."
Mark Chapman, the chief marketing officer of the $695 million-asset Tamalpais Bancorp in San Rafael, Calif., said his company tried to prevent any misinterpretations by the public when it entered into a cease-and-desist order with the FDIC in September. It put out a press release saying, "The term 'cease and desist' does not mean that the bank stops its normal banking operations."
The FDIC has given its Tamalpais Bank until Dec. 31 to boost its total risk-based capital ratio to 12% or come up with a plan to sell itself. On Sept. 30, the bank was only adequately capitalized after problem construction and commercial real estate loans decreased its cushion.
Though the FDIC's name and wording changes came too late to help Tamalpais, Chapman applauded them.
"We do appreciate the softening of the language," he said. "I thought the term 'cease and desist' was draconian and impactful on the mentality of our local residents."
Experts said the changes bring the FDIC in line with the Office of the Comptroller of the Currency, which has long used the term "consent order" for something a bank willingly signs, and reserves the term "cease and desist" for banks that take the matter to an administrative hearing.
"My speculation is that there was some concern that the FDIC was causing more harm than they were causing good by calling them cease-and-desist orders," said Frank Bonaventure Jr., a principal of the Ober Kaler law firm in Baltimore and a former senior counsel at the OCC. (He said he has not worked on any of the new consent orders.)
Kip Weissman, a partner at Luse Gorman Pomerenk & Schick PC, said he wished the FDIC would have followed the OCC's method a bit more closely. The OCC's consent agreement is more succinct and skips any mention of "unsafe and unsound banking practices." Instead, the OCC agreement very briefly says the bank stipulates to the order and goes straight to the corrective action.
"Getting rid of 'cease and desist' takes away the public taint to a certain extent," Weissman said. "But all these actions carry the same enforceability, so I would have liked to have seen them go as far as the OCC does."
But another banker said the changes will do little to save a drowning bank.
"I can tell you this, whatever they call them is not going to make a difference," said Lou Dunham, the CEO of the bank consultancy CAMELSolutions LLC in Chicago. Dunham was brought in to try to save Mutual Bank in Harvey, Ill., this year. He became its president and CEO in March, but the bank failed in July.
"No matter what they call it, as long as it is public, it is going to scare some people."