On March 1, 2011, the Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter (FIL) encouraging financial institutions to provide feedback on examinations, Reports of Examination, and other supervisory processes. The FIL encourages financial institutions that disagree with examination findings to address those concerns through communication with the examiner, field office management, or the appropriate regional office staff. The FIL also reminds institutions that division-level informal reviews are also available and, if informal efforts to resolve disagreements are not successful, institutions may pursue a formal supervisory appeal.
The FIL acknowledges the challenging banking environment during the past several years, but also recognizes that most banks are well-capitalized, profitable, and have effectively served the needs of their communities during this time period. The FIL discloses that the FDIC has recently received criticism that its examination findings have been overly harsh. The FIL reminds institutions that they can voice their concerns about an examination or other supervisory determination through both informal and formal channels. Interestingly, the FIL states that, during the first six months of 2011, the FDIC’s Division of Risk Management Supervision and Division of Depositor and Consumer Protection will conduct discussions with FDIC staff about a balanced approach to supervision. The goal of these discussions is to reiterate that the FDIC strives to be fair and objective in its dealings with institutions that it regulates.
The FIL discusses the informal and formal ways in which an institution can discuss examination findings, assigned ratings, or other supervisory determinations reached by the FDIC. Informally, the FDIC often finds that the most effective method for understanding the FDIC’s conclusions is through discussions with the examiner-in-charge or the appropriate field or regional office. The FDIC also provides institutions with a formal appeals process to address disagreements over material supervisory determinations. The FDIC has issued Guidelines that outline the procedural structure of the formal appeals process.
Material supervisory determinations can include:
- CAMELS ratings under the Uniform Financial Institutions Rating System
- IT ratings under the Uniform Interagency Rating System for Data Processing Operations
- trust ratings under the Uniform Interagency Trust Rating System
- CRA ratings under the Revised Uniform Interagency Community Reinvestment Act Assessment Rating System
- consumer compliance ratings under the Uniform Interagency Consumer Compliance Rating System
- registered transfer agent examination ratings
- government securities dealer examination ratings
- municipal securities dealer examination ratings
- determinations relating to the adequacy of loan loss reserve provisions
- classifications of loans and other assets in dispute the amount of which, individually or in the aggregate, exceeds 10 percent of an institution’s total capital
- determinations relating to violations of a statute or regulation, unless specifically excluded as the determination is the basis for a formal enforcement action or referral that may affect the capital, earnings or operations of an institution, or otherwise affect supervisory oversight accorded an institution
- Truth in Lending (Regulation Z) restitution
- filings made pursuant to 12 CFR 303.11(f), for which a Request for Reconsideration has been granted, other than denials of a change in bank control, change in senior executive officer or board of directors, or denial of an application pursuant to section 19 of the FDI Act (which are contained in 12 CFR 308, subparts D, L and M, respectively), if the filing was originally denied by the director, deputy director or associate director of the Division of Supervision and Consumer Protection, and
- any other supervisory determination (unless otherwise not eligible for appeal or specifically excluded as the determination is the basis for a formal enforcement action or referral) that may affect the capital, earnings, operations, or prompt corrective actions, or otherwise affect the supervisory oversight accorded an institution.
Material supervisory determinations do not include:
- decisions to appoint a conservator or receiver for an insured depository institution
- decisions to take prompt corrective action pursuant to Section 38 of the FDI Act
- determinations for which other appeals procedures exist (such as determinations of deposit insurance assessment risk classifications and payment calculations)
- formal enforcement-related actions and decisions, and
- decisions to initiate informal enforcement actions (such as a memorandum of understanding).
Pepper Point: This FIL could be viewed as good news for FDIC-regulated institutions that feel recent examinations have been unduly harsh. It is especially welcome news for FDIC-regulated institutions that have examinations scheduled in the near future. By preaching a “balanced approach to supervision” during the first six months of 2011, FDIC-regulated institutions that have upcoming examinations may interpret this pronouncement as a sign that examiners will take all efforts necessary to ensure a fair and balanced review of the institution.
Pepper Point: A financial institution should consider all of the costs and benefits of voicing concerns over examination findings or other supervisory determinations either informally or formally. The FIL specifically states that FDIC policy prohibits any retaliation, abuse, or retribution against an institution that appeals a material supervisory determination, so the threat of retaliation should not prevent an institution from appealing decisions that it feels are incorrect. However, when deciding whether to discuss examination findings through informal channels or appeal such findings through a formal process, an institution should consider the effort that such an appeal will require and determine whether that effort is worth a possible change to a decision by the FDIC.