The Federal Deposit Insurance Corporation (FDIC) recently announced (FIL-41-2012) a revision to the classification system for citing violations identified during compliance examinations. The revisions better communicate the severity of violations and help distinguish more serious violations from those more technical in nature.
Violations are assigned to one of three classifications based primarily on the impact on the consumer. The three levels are:

  • Level 3/High Severity – includes violations that may result in restitution to consumers in excess of $10,000 and pattern and practice violations of anti-discrimination laws.
  • Level 2/Medium Severity – include violations resulting in potential restitution to consumers in an amount below the Level 3 threshold and other systemic or recurring violations.
  • Level 1/Low Severity – involve isolated or sporadic violations. Level 1 violations that are adequately addressed during the examination and that do not indicate weakness in the compliance management system will not be included in the Report of Examination.

So far the other federal regulatory agencies are not following the FDIC’s lead. The new classification system will become effective for examinations started on or after October 1, 2012.
Action – FDIC-regulated banks, and companies that conduct compliance audits/reviews of FDIC-regulated banks, should modify their compliance audit programs to adopt the new violation classification system. Adopting the FDIC’s revised procedures will enable you to better predict examination outcomes.
While this method of classifying violations is new, it is not a shift in focus. Most examiners, bankers, and auditors already focus their attention on the types of violations that would be classified as level 2 or 3 violations.