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For several years, AABD has advocated for an independent Ombudsman office in FFIEC with decision-making powers and the authority to investigate appeals of examination findings and other material supervisory decisions thoroughly, including through administrative fact-finding hearings.

Legislation has been introduced in each Congress since at least 2012 to create an Office of Independent Examination Review in the FFIEC, but none has advanced beyond hearings.

The current version of the Ombudsman legislation advancing through the Senate Banking Committee, however, will not help banks.

The examination process is, in part, subjective and judgmental, and subject to human error and even misfeasance or malfeasance.  Examiners make judgments on, among other things, whether and how to classify loans, whether the Bank’s ALLL is adequate, whether to classify a performing loan as nonaccrual, and whether the Bank’s capital is adequate to protect the bank from undue risk.

Bank examination results can have a devastating impact on banks and their boards/management without the benefit of the checks and balances needed to assure that the results are correct.

During the last recession, examination results triggered over 500 bank failures and over 1,500 formal enforcement actions.  In about 35% of the bank failures, the FDIC sued bank directors.  The FDIC relied in part on findings in the Reports of Examination to decide whether to sue.

Adverse examination reports can also trigger enforcement actions against banks and their directors and officers, including CMPs against individual directors.

That’s why it is so important for banks to have a reasonable chance of correcting the record at the time it is being made.

Other consequences of adverse examination report findings include the flawed banking agency Inspector General reports that follow material bank failures.  Invariably, they accept as gospel the findings of reports of examination that took place shortly before the bank failed blaming management and the board for the poor financial condition of the bank.  See AABD’s Material Loss Review Report and responses from the FDIC IG, the Treasury IG , and the Fed. IG.

Current laws are not enough.  In 1994, a banking law was enacted that created Ombudsmen offices as part of an “independent intra-agency process…to review material supervisory determinations” in each of the federal banking agencies.  But a recent study found that the agency Ombudsmen offices are infrequently used by banks.  That is because bankers fear retribution and believe that the odds of overturning an examination finding are long.

The study (an article to be published in the Washington University Law Review this year entitled “When Bank Examiners Get It Wrong: Financial Institutions Appeals of Material Supervisory Determinations” by Julie Andersen Hill, Associate Professor of Law at the University of Alabama School of Law)  found that although a 2011 survey found more than 30% of banks reported they were dissatisfied with their most recent examination results, the number of appeals to the federal banking agencies is small.

The study concluded as follows:

The story is that of a dysfunctional and seldom used system.  They [the federal banking agencies] do not agree on which examiner determinations are appealable or on the applicable standard of review.  Even considering the state of the regulators’ appeals policies, the rate of appeals is astonishingly low.  Thousands of financial institutions have been examined every year since regulators adopted their appeals processes in 1995.  Yet the OCC Ombudsman has issued only 157 decisions, the Federal Reserve…25, the FDIC’s Supervision Appeals Review Committee…only 63, and the NCUA’s…6…”  When institutions do appeal, they seldom win.”

We hear from bankers and bank directors frequently about disagreements with material conclusions of examination reports.  We also hear from many of them that an appeal would be futile or risky.

While it is not correct, in our view, that an appeal would always be futile, risky or ill-advised, the perception is real and it will likely continue so long as the Ombudsmen are based within the examining agency and  the appealing bank cannot be assured of having access to a rigorous fact finding process within the administrative hearing procedures.

The current Senate Banking Committee bill (S. 1484), which has been placed on a calendar to be considered on the floor of the Senate,  establishes an Office of Independent Examination Review in FFIEC to receive and investigate complaints from banks concerning examinations, examination practices, and examination reports.  But it does not empower that Office or its Director to make binding decisions or conduct independent fact finding through an administrative hearing.

In contrast, S. 774, introduced by Sen. Moran with 16 co-sponsors, would also create the Office of Independent Examination Review, it would also grant the Director authority to “adjudicate any supervisory appeal.”  However, this bill appears to be making no headway at the Senate Banking Committee.

S. 774 would also permit the appealing bank to request an administrative hearing before an Administrative Law Judge, who would be vested with fact finding powers and the authority to issue a proposed decision to the Director for the Director’s final decision. An bank can also appeal the Director’s decision to a federal court.

H.R. 1941, introduced on April 22, 2015 by Rep. Westmoreland with 29 co-sponsors, has substantially the same provisions as S. 774 relating to the creation and powers of the FFIEC’s Office of Independent Examination Review.

Effective legislation requires, at a minimum, the following elements:

  • An Ombudsman independent of the agency that has made the examination findings and other decisions affecting the bank;
  • An Ombudsman empowered to fully access the facts, including the use of subpoenas and administrative hearings;
  • An Ombudsman authorized to issue binding decision on the agency and appealing bank;
  • An Ombudsman who may accept appeals and make binding decisions on not just examination findings but also other decisions that may adversely impact a bank (but not enforcement decisions);
  • The right of a bank to obtain all of the information and documents relied on by the examining agency in making its findings and reaching its decisions;
  • An Ombudsman authorized to identify and prevent retribution against appealing banks;
  • A standard of review that would assure that the Ombudsman would not allow deference to the opinions or findings of the examiner or examining agency, but would conduct a de novo review of the issues and facts;
  • The appealing bank would have the right to review and comment on the submission by the examining agency in response to the Bank’s appeal;
  • The appealing bank would have the right to appeal the decision of the independent Ombudsman to a higher independent authority such as a court of law.

AABD has spoken to the offices of the Ombudsmen of each federal banking agency.  They each seem determined to accomplish the duties of their position to the best of their abilities and authority.  However, they are perceived by many in the banking industry as ineffective independent authorities to review material supervisory decisions.

In addition, although the Ombudsmen are responsible for identifying and stopping retribution, many members of bank management and board remain unconvinced.

It is our belief that the banking agency Ombudsman process is severely underutilized and will remain so unless legislation is forthcoming to create an independent Ombudsman at FFIEC with appropriate powers.