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Financial Institutions Reform, Recovery, and Enforcement Act

Posted by Dmitry Gorin | Jan 11, 2024

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 is a pivotal and complex piece of legislation that has substantially transformed the financial landscape in the United States. 

In modern times, FIRREA has also given the federal government additional tools to impose severe financial penalties in certain instances of fraud—without necessarily proving guilt "beyond a reasonable doubt." 

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989
The FIRREA adopted several new federal regulations for savings and loan institutions.

The FIRREA includes regulatory reform, establishing an independent insurance agency to provide deposit insurance and the provision of improved supervision and enforcement powers. It amends the Federal Deposit Insurance Act to authorize the Federal Deposit Insurance Corporation (FDIC) to insure deposits held at savings associations and commercial banks.

It also revises some definitions for the Federal Deposit Insurance Act. It specifies that the Director of the Office of Thrift Supervision (DOTS) will be considered the appropriate Federal banking agency for a savings association or a loan holding company.

The FIRREA was the government's response to a crisis caused by risky investment practices by many savings and loan institutions. These were essentially community-based businesses concentrating on savings and mortgages.

Many had low real estate investment requirements, and federal agency oversight did not recognize it until it was too late. The savings and loans industry invested heavily in risky mortgages, which went bust. 

The act aimed to create a more efficient and productive base to build the industry and safeguard future transactions. It did lead to dramatic changes to the savings and loan industry and its federal regulations, including deposit insurance. Let's discuss some of the critical points in this law and how it may affect those accused of violations.

What are the Origins of FIRREA?

The 1980 savings and loan crisis saw over 1,000 banks fail and cost taxpayers an estimated $160 billion, exposing significant weaknesses in the nation's financial regulatory framework. 

In response, Congress passed FIRREA to reform, recover, and enforce regulations within the financial industry. The legislation sought to address the rampant misconduct and fraud that had contributed to the crisis and prevent similar occurrences in the future. 

What Are the Key Provisions of FIRREA?

FIRREA was designed to restore public confidence in the country's financial system through a comprehensive overhaul of regulatory structures and enforcement mechanisms. 

This involved abolishing several agencies, establishing new ones, and setting new rigorous capital standards for savings associations and banks. Here's a quick snapshot of some of the most notable provisions of the law:

  •  Abolished the Federal Savings and Loan Insurance Corporation (FSLIC) and effectively replaced it with the FDIC-administered Savings Association Insurance Fund (SAIF).
  • Abolished the Federal Home Loan Bank Board (FHLBB).
  • Created the Bank Insurance Fund (BIF).
  • Endued Fannie Mae and Freddie Mac with new responsibilities to provide accessible funding for home loans for lower and middle-income families.
  • Created the Office of Thrift Supervision (OTS) to oversee the nation's savings institutions better. In 2011, the OTS merged with the Office of the Comptroller of the Currency (OCC).
  • Expanded the enforcement powers of federal banking agencies, enabling them to impose substantial civil penalties for violations.
  • Enhanced the ability of regulators to remove and prohibit individuals from participating in the affairs of any insured depository institution.
  • New federal regulations for savings and loan institutions and real estate appraisal professionals were adopted.
  • Improved regulatory structures and enforcement mechanisms in the financial industry to protect consumers and maintain market integrity.
  • Created civil enforcement authority for relevant agencies to impose significant enforcement penalties for violations.
  • The Appraisal Subcommittee (ASC) was established within the Examination Council of the Federal Financial Institutions Examination Council.
  • Agencies must issue the ratings of the Community Reinvestment Act (CRA) publicly and write performance evaluations using facts and data to support their conclusions.

How is FIRREA Related to Financial Crimes?

One unique provision of FIRREA is that while it is a civil enforcement law, it empowers the Department of Justice and other federal banking authorities to impose severe civil penalties for certain financial crimes. 

It enumerates 14 federal criminal "predicate offenses" for which it can be used to impose significant civil fines. These include, but are not limited to: 

What makes FIRREA so appealing to prosecutors is that because it is civil enforcement, they do not have to prove guilt "beyond a reasonable doubt" as they do to procure a criminal conviction. 

They only need to prove guilt using the "preponderance of the evidence" standard. This has proven to be a powerful tool in cracking down on fraudulent activities within the financial sector. 

The original provision of FIRREA regarding civil penalties for violating these ordinances was a civil fine of up to $1 million or up to $5 million total for continuing violations. 

With the FTC's recent adjustment for inflation for 2003, those fines have increased to more than $2.3 million per violation and more than $11 million for continuing violations. Civil fines can be much higher than these statutory amounts to cover monetary loss in certain instances.

What Are Some Recent Enforcement Actions Using FIRREA?

While FIRREA was enacted to bring generally higher regulations to the banking/finance industries, the government has found new ways to use FIRREA to penalize offenders in other areas. Two recent examples include:

  • The 2008 Mortgage Crisis: In the aftermath of the 2008 housing crisis, FIRREA played an instrumental role (typically in conjunction with the False Claims Act) in penalizing financial crimes precipitating the crisis. For instance, Goldman Sachs agreed to pay more than $5 billion in its sale of residential mortgage-backed securities. In comparison, Wells Fargo agreed to a $2.09 billion penalty for allegedly misrepresenting the quality of loans used in residential mortgage-backed securities.
  • PPP Fraud: In response to the COVID-19 pandemic, the government has begun utilizing FIRREA to enforce civil penalties on specific individuals who fraudulently obtained loans through the Paycheck Protection Program (PPP). Numerous settlements have already been announced in conjunction with this initiative.

If you are under investigation or indicted, contact our federal criminal defense lawyers to review the case details and legal options. We serve clients throughout the United States on federal matters. Eisner Gorin LLP is based in Los Angeles, California.

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About the Author

Dmitry Gorin

Dmitry Gorin is a licensed attorney, who has been involved in criminal trial work and pretrial litigation since 1994. Before becoming partner in Eisner Gorin LLP, Mr. Gorin was a Senior Deputy District Attorney in Los Angeles Courts for more than ten years. As a criminal tri...

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