Board of Governors of the Federal Reserve System

The Federal Reserve is issuing this letter to provide further explanation on its criteria for waivingor conducting pre-membership safety-and-soundness and consumer compliance examinations of insured depository institutions that are either (1) seeking to become state member banks;¹ or (2) merging with another institution where a state member bank would be the surviving entity.  Further, this letter provides clarification to previously issued guidance as to the eligibility criteria for when the Federal Reserve may waive a pre-membership or pre-merger examination.² 

Criteria for Waiving a Pre-Membership or Pre-Merger Examination

A safety-and-soundness or consumer compliance examination of a state nonmember bank, national bank, or savings association seeking to convert its status to a state member will not generally be required prior to the conversion if the institution seeking membership meets the criteria for "eligible bank," as set forth in the Board's Regulation H,³  plus the additional safety-and-soundness and consumer compliance criteria listed below (together referred to as "eligibility criteria").⁴   To meet the Regulation H "eligible bank" criteria, an insured depository institution must:

1. be well capitalized under Regulation H, subpart D, Prompt Corrective Action;
2. have a composite CAMELS rating of "1" or "2" (or equivalent composite rating for a savings association);
3. have a Community Reinvestment Act (CRA) rating of "outstanding" or "satisfactory";
4. have a consumer compliance rating of "1" or "2"; and
5. have no major unresolved supervisory issues outstanding (as determined by the Board or appropriate Federal Reserve Bank in its discretion), including adverse supervisory findings or ratings by the current primary regulator or Consumer Financial Protection Bureau (CFPB).⁵  

In addition, the insured depository institution seeking membership must meet the following additional safety-and-soundness criteria:

6. The management component of CAMELS is rated "1" or "2";
7. The on-site "close date"⁶ of the most recent full-scope safety-and-soundness examination is less than nine months from the date of the application for membership;
8. There have been no material changes to the bank's business model since the most recent report of examination and no material changes are planned for the next four quarters;⁷ and
9. The annual growth in total assets, measured as of the most recent quarter end on the institution's Consolidated Reports of Condition and Income, is under 25 percent and planned growth over the next year is less than 25 percent.

In cases where a state nonmember bank, national bank, or savings association is merging with a state member bank and the surviving institution is a state member bank, a safety-and-soundness or consumer compliance examination of the state nonmember bank, national bank, or savings association will not be required so long as the state member bank meets all of the eligibility criteria on an existing and pro-forma basis.  For example, the state member bank would not meet all of the eligibility criteria if its total assets were to increase by 25 percent or more on a pro-forma basis considering both organic growth and assets from the merging institution.  Other examples of situations that may cause the merging state member bank to not meet the eligibility criteria include, but would not be limited to, a change in senior leadership, a change in strategy, and a situation where the institution with which it is merging is rated less than satisfactory, has major unresolved supervisory issues, or brings new business lines or products to the state member bank.

Process for Determining Whether to Waive a Safety-and-Soundness Examination

In all cases, the Reserve Bank must consult with Board supervisory staff when determining whether to waive a safety-and-soundness examination under this policy.  Under certain circumstances, a pre-merger or pre-membership examination may be waived even when an institution fails to meet one or more of the safety-and-soundness related eligibility criteria. This can occur if the Reserve Bank, in consultation with Board supervisory staff, determines that conducting a safety-and-soundness examination would be unlikely to provide information that would assist in evaluating the statutory and regulatory factors that the Federal Reserve is required to consider in acting on themembership or merger application.  

Process for Determining Whether to Waive a Consumer Compliance Examination or CRA Review

For consumer compliance and CRA, the Reserve Bank should review the most recent supervisory information, including consumer compliance examinations, reviews, and risk assessments, from the appropriate primary banking regulatory agency and the CFPB, if applicable, and consult with applications staff and supervisory staff in the Board's Division of Consumer and Community Affairs (DCCA) when determining whether to waive a consumer compliance examination under this policy.  However, if the institution seeking to convert to a state member bank is rated less-than-satisfactory for consumer compliance, a pre-membership or pre-merger examination should be conducted. 

In addition, if the review of supervisory information from the appropriate primary banking regulatory agency and the CFPB, if applicable, identifies significant weaknesses, a pre-membership or pre-merger consumer compliance examination may be warranted, with a focus on the particular area of concern, even if a bank has a consumer compliance examination rating of "1" or "2."⁸ In such cases, the Reserve Bank should also consult with applications and supervisory staff in DCCA.

Because membership in the Federal Reserve System does not confer deposit insurance, CRA does not, by its terms, apply to membership applications.  Nevertheless, a less-than-satisfactory CRA rating, especially if it reflects a chronic record of weak CRA performance, would presumably reflect unfavorably upon the abilities of management of the institution.  In these situations, it is appropriate for the Reserve Bank to include in the pre-membership examination a review of the institution's CRA performance, as well as management's plans and programs to ensure that the organization meets its CRA obligations going forward.

Documentation Requirement for a Waived Safety-and-Soundness or Consumer Compliance Examination 

The Reserve Bank must prepare and maintain documentation supporting its decision not to conduct a pre-membership or pre-merger safety-and-soundness or consumer compliance examination.  Documentation should include a memorandum summarizing how the institution meets each of the eligibility criteria or a justification for the waiver for cases where the institution does not meet one or more of the eligibility criteria.  The supporting memorandum should summarize the Reserve Bank's review of the two most recent full-scope safety-and-soundness and consumer compliance examinations conducted by the appropriate primary banking regulatory agency and, when applicable, the CFPB.

Scope and Documentation of the Safety-and-Soundness or Consumer Compliance Examination

All pre-membership or pre-merger safety-and-soundness or consumer compliance examinations can be risk focused and targeted, as appropriate, to the identified area(s) of weakness.  Furthermore, the Reserve Bank is not required to issue a report to the institution; however, the review should be documented in a memorandum that is maintained together with the application documents.

To fulfill the examination requirement for an insured depository institution or savings association that is a subsidiary of a bank holding company or savings and loan holding company (hereafter referred to as holding company) with consolidated assets equal to or greater than $50 billion, the supervisory team will generally rely on information gathered through the existing continuous monitoring program.  The team is also expected to consider findings from recent examinations that assessed specific risks, lines of business, or control functions, and from reviews such as the Comprehensive Capital Analysis and Review, the mid-cycle supervisory stress test for banks and holding companies, the holding company resolution plans, and the insured depository institution resolution plan.  In the event the results of continuous monitoring and prior examinations do not provide the information necessary to assess specific areas of weakness, the supervisory team will conduct a targeted examination.

Supervisory Expectations Post-Merger or Charter Conversion 

In all cases, the Reserve Bank remains responsible for adhering to the required frequency timeframes established byFederal Reserve policies and regulations for both safety-and-soundness and consumer compliance examinations.  When the statutory deadlinefor the examination of an insured depository institution seeking membership is approaching, or has passed, a Reserve Bank should conduct an examination of the institution as soon as is practical after it becomes a state member bank.  The Reserve Bank should notify Board supervisory staff if the examination mandate will be missed for whatever reason. 

In addition, for institutions with $10 billion or more in total consolidated assets, the Reserve Bank should complete the risk assessments and supervisory strategies required for safety-and-soundness no later than 30 days after the conversion or merger, regardless of whether the institution met the eligibility criteria.  In preparing the risk assessment and supervisory strategy for a state member bank that was formerly a savings association orthat acquired a savings association, the Reserve Bank should pay particular attention to activities conducted by any service corporation subsidiary that may not be permissible for a state member bank, where such activities have not yet been conformed.⁹   

For questions regarding this guidance, please contact:

• Division of Banking Supervision and Regulation:
  • Community Banking Organizations:  Laura A. Macedo, Senior Supervisory Financial Analyst, at (202) 452-5268, and Anthony B. Cain, Manager, at (202) 912-4377;
  • Regional Banking Organizations:  Keith J. Coughlin, Manager, at (202) 452-2056;
  • Large and Foreign Banking Organizations:  Kwayne Jennings, Manager, at (202) 452-3088, and Celeste M. Molleur, Manager, at (202) 452-2783;
• Division of Consumer and Community Affairs:  Carol Evans, Assistant Director, at (202) 452-2051, or Melissa Vanouse, Manager, Banking Applications, at (202) 452-3488.

In addition, institutions may send questions via the Board's public website.¹⁰ 

Notes: