Since at least the early 1990s, each of the federal banking agencies has maintained procedures which enable institutions to process limited internal appeals of “material” agency determinations related to certain examination and other agency findings. The process is intended to provide the institution access to a secondary, independent internal agency review without adversely impacting the relationship of the banker with it’s primary federal regulator, short of going to court.

The OCC’s “Office of the Ombudsman,” the FDIC’s “Supervisory Appeals Review Committee,” the Federal Reserve’s “Ombudsman,” and the OTS’s “Ombudsman” each provide an avenue for institutions to seek review and reconsideration of certain material determinations by their appropriate primary federal agency, subject to certain limitations.

The procedures are intended to enable institutions to go “upstream” with certain issues without concern regarding agency retaliation or other regulatory relations concerns for the institution or the bankers. People are people, however, and any such action brings with it the always-present risk that arises from the natural tendency of individuals (bankers and regulators alike) to not particularly like being “second-guessed” or potentially overridden in their judgment decisions.

The process does not apply to all aspects of the agency oversight process, and in particular it does not apply to agency decisions to initiate formal or informal enforcement proceedings and other decisions that are subject to judicial review. There are, however, separate legal and regulatory forums to contest those activities outside of this process that generally entail state and federal court proceedings.

It provides a formal avenue for internal agency “second looks” at examiner decisions; one last chance for bankers to seek reconsideration by someone at the agency not dealing directly with the bank to hopefully eliminate (or at least mitigate) the chance that the original determination was incorrect or less than objective. Given the subjectivity of certain findings related to loan classifications and reserve adequacy, the appeal process provides at least another review by agency officials who are not directly involved with the institution.

Assuming that the system works as intended, just what kind of agency determinations are subject to this process and how does it work?

Background

The Riegle Community Development and Regulatory Improvement Act of 1994 (the “Riegle Act”) directed each of the federal banking agencies to establish an independent intra-agency appeal process to review material supervisory determinations. The term “independent appellate process” is defined to mean review by an agency official who does not directly or indirectly report to the agency official who made the material supervisory determination under review.

Each of the federal agencies has had guidelines in place since at least 1994 to carry out the directives of the Riegle Act.

What kind of “agency determinations” can I appeal?

The intra-agency appeals process provides an opportunity for internal agency review of “material supervisory determinations”. The Riegle Act defines “material supervisory determinations” to include determinations relating to (1) CAMELS ratings, (2) ALLL adequacy, and (3) classifications on loans that are significant to an institution. Other appealable matters may include (again depending on the agency), trust ratings, EDP ratings, CRA ratings, consumer compliance ratings, violations of law, and a variety of other ROE-related findings. Specific guidelines as to what each federal agency considers “material supervisory determinations” subject to review have been adopted by each agency, and vary as between agencies.

Agency actions not subject to appeal include such things as decisions to appoint a conservator or receiver, “prompt corrective action” decisions under FDICIA, initiation of informal and formal enforcement actions and decisions related thereto.

The Riegle Act also requires that “the appeals process not impair, in any way, the agencies’ litigation or enforcement authority.” Pending amendments to the FDIC’s appeal guidelines would specifically eliminate the ability of an FDIC-supervised institution to file an appeal with respect to determination of the facts and circumstances underlying formal enforcement-related actions or decisions, including the initiation of a formal investigation. The FDIC indicates that this clarification would provide parity for the FDIC with other federal agency procedures as discussed below.

Formal and informal enforcement actions, formal investigations, notice of charges, imposition of civil money penalties, cease-and-desist actions, removal actions, and similar agency enforcement-related actions are generally not subject to the agency appeal process. In those instances, the primary appeal process for institutions and bankers is through appropriate judicial venues such as federal court for the district in which the institution is located or in the District of Columbia.

Therefore, what can become particularly problematic for institutions in taking advantage of the internal appeal process is that many (if not most) of the determinations which form the basis for PCA actions and formal/informal enforcement actions are the very determinations which are (or should be) subject to the internal agency review process. As a result, it may be too late for appeals once the enforcement process is commenced.

That being said, access to the appeals process, and timing, can be critical to institutions facing potential enforcement proceedings.

Are all agency procedures and considerations the same?

While the agencies attempt to establish parity between their Riegle Act appellate procedures, they in fact differ somewhat in both substance and in procedure. Each, however, in some form disallow agency appeals of determinations which underlie agency formal and informal enforcement actions.

In order to properly secure the ability of the institution to process the agency appeal, care must be taken to assure adherence to the Riegle Act appeals guidelines as adopted by the agency in question.

Notice that the agency is pursuing formal enforcement actions can serve to terminate the ability of the institution to seek internal agency appeals and render the facts and circumstances that form the basis for the enforcement action unappealable. However, it is unclear from OCC materials that the OCC takes that position with regard to all underlying facts and circumstances that may form the basis for an enforcement action.

In other words, once the agency decides to initiate formal enforcement proceedings the ability of the institution to internally appeal the underlying facts and circumstances (such as adequacy of the ALLL, loan classifications, and ratings) within the agency may well terminate.

Most state banking agencies do not presently have a formal appeal process for agency determinations.

Does my appeal become public?

Decisions issued through the internal intra-agency processes are published, however identifying information is redacted. The decisions are also able to be used as precedent, much like court decisions in American common law. Issues may arise, however, as institutions and the media may be able to identify institutions subject to the published decisions based on the facts irrespective of the elimination of the particular institution name.

Other disclosure issues may arise in the context of shareholder and related disclosures, depending on the particular circumstances of the institution.

What about examiner or agency retaliation?

Well, here’s the real-life tough part. Psychology 101.

Retaliation, abuse and retribution by agency personnel is strictly prohibited, and can result in disciplinary and remedial action by the agency. However, people are people and, as a practical matter, institutions should take the potential for strained agency and examiner relations into account in their decision to seek review. Additionally, examiners talk to examiners, even across agency lines. It’s a fact of life. Agency personnel are professionals and the process is structured to avoid such issues as much as possible. Again as a practical matter, institutions should be relatively certain as to the validity of their position before electing to proceed. 

The Bottom Line

The “bottom line” is that the intra-agency process, while limited, is there for institutions to take advantage of after weighing the validity of their position and exhausting other avenues of approach with on-site examiners and supervisors. While the details vary between the agencies, the general thrust is the same. Once agency concerns and determinations reach the level of bringing formal or informal enforcement actions, the internal agency avenue of appeal of the underlying facts may be lost. With formal and informal enforcement actions on the rise for the foreseeable future, concerns may exist regarding the propriety of examination findings and agency determinations. With this in mind, institutions may want to carefully consider taking advantage of the internal agency review process before the door closes.