Intra-Agency Appellate Process

Federal RegisterDec 28, 1994

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FEDERAL DEPOSIT INSURANCE CORPORATION

Intra-Agency Appellate Process

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed guidelines; request for comments.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) solicits

comments on proposed guidelines for the establishment of an independent

intra-agency appellate process to review material supervisory

determinations as required by the Riegle Community Development and

Regulatory Improvement Act of 1994. The guidelines are intended to

clarify the types of determinations that are eligible for review and to

establish the process by which appeals will be considered and decided.

Public comment is invited on all aspects of this proposal.

DATES: Written comments must be received on or before January 27, 1995.

ADDRESSES: Interested parties are invited to submit written comments to

Robert E. Feldman, Acting Executive Secretary, Federal Deposit

Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429.

Comments may be hand delivered to room F-400, 1776 F Street, N.W.,

Washington, D.C., on business days between 8:30 a.m. and 5:00 p.m. (FAX

number (202) 898-3838). Comments may be inspected at the FDIC's Reading

Room, room 7118, Federal Deposit Insurance Corporation, 550 17th

Street, N.W., Washington, D.C. 20429, between 9:00 a.m. and 4:30 p.m.

on business days.

FOR FURTHER INFORMATION CONTACT: William G. Hrindac, Examination

Specialist (202/898-6892), Division of Supervision; Ken A. Quincy,

Acting Assistant Director (202/898-6753), Division of Compliance and

Consumer Affairs; Gwen E. Factor, Counsel (202/898-8522), Legal

Division, Federal Deposit Insurance Corporation, 550 17th Street, N.W.,

Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Background

Section 309(a) of the Riegle Community Development and Regulatory

Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) (Act)

requires the FDIC (as well as the other Federal banking agencies and

the National Credit Union Administration Board) to establish an

independent intra-agency appellate process to review material

supervisory determinations. The process is to be established within 180

days after enactment of the Act (i.e., by March 22, 1995). Section

309(c) of the Act requires public notice and opportunity for comment on

proposed guidelines for the establishment of the independent appellate

process.

The Act defines the term ``independent appellate process'' to mean

a review by an agency official who does not directly or indirectly

report to the agency official who made the material supervisory

determination under review. In establishing the appeals process, the

FDIC must ensure that: (1) any appeal of a material supervisory

determination by an insured depository institution is heard and decided

expeditiously; and (2) appropriate safeguards exist for protecting the

appellant from retaliation by agency examiners.

The FDIC currently has in place procedures for requesting review of

supervisory determinations. These procedures are set forth in FIL-11-

92, dated February 7, 1992, and will be superseded by the Guidelines

for Appeals of Material Supervisory Determinations.

II. Proposal for Establishment of Appeals Process

A. Independent Appellate Process

The Act requires the FDIC to establish an independent appellate

process for the review of material supervisory determinations by an

agency official who does not directly or indirectly report to the

agency official who made the material supervisory determination under

review. To satisfy this requirement, the FDIC proposes to establish a

supervisory appeals review committee consisting of the Vice Chairman

and senior staff members of various divisions of the FDIC to consider

and decide appeals of material supervisory determinations.

B. Institutions Eligible to Appeal

The Act requires that the FDIC's appeals process be available to

review material supervisory determinations made at insured depository

institutions that it supervises. The FDIC understands this to mean that

its appeals process must be available to insured State nonmember banks

(except District banks) and insured branches of foreign banks and

proposes that the process be available as well to other insured

depository institutions with respect to which it makes material

supervisory determinations.

C. Material Supervisory Determinations

The Act requires the FDIC to establish an appeals process to review

material supervisory determinations. The term ``material supervisory

determinations'' is defined in the Act to include determinations

relating to: (1) examination ratings; (2) the adequacy of loan loss

reserve provisions; and (3) loan classifications on loans that are

significant to an institution. The Act specifically excludes from the

definition of ``material supervisory determinations'' a decision to

appoint a conservator or receiver for an insured depository institution

or to take prompt corrective action pursuant to section 38 of the

Federal Deposit Insurance Act, 12 U.S.C. 1831o.

1. Examination Ratings

The FDIC construes the reference to ``examination ratings'' to

mean:

(a) CAMEL ratings under the Uniform Financial Institutions Rating

System;

(b) EDP ratings under the Uniform Interagency Rating System for

Data Processing Operations;

System;

(d) CRA ratings under the Revised Uniform Interagency Community

Reinvestment Act Assessment Rating System;

(e) consumer compliance ratings under the Uniform Interagency

Consumer Compliance Rating System;

(f) registered transfer agent examination ratings;

(g) government securities dealer examination ratings; and

(h) municipal securities dealer examination ratings.

2. Adequacy of Loan Loss Reserve Provisions

The Act defines material supervisory determinations to include

determinations relating to the adequacy of loan loss reserve

provisions.

3. Loan Classifications

The Act also defines material supervisory determinations to include

determinations relating to loan classifications on loans that are

significant to an institution. The FDIC believes that classifications

of other assets that are significant to an institution also should be

eligible for appeal. The FDIC proposes that a classified loan or other

asset may be regarded as significant to an institution if the amount of

the loan or asset, individually or together with other classified loans

or assets, equals or exceeds 10% of the institution's capital or 1% of

its total assets. Specific comment is requested on whether some other

basis for the determination of the significance of a classified loan or

other asset to an institution would be more appropriate.

4. Determinations Not Eligible for Appeal

As provided in the Act, the term ``material supervisory

determinations'' does not include a decision to appoint a conservator

or receiver for an insured depository institution or to take prompt

corrective action pursuant to section 38 of the Federal Deposit

Insurance Act, 12 U.S.C. 1831o. The FDIC believes that the term

``material supervisory determinations'' also should not include: (a)

determinations for which other appeals procedures exist (such as

determinations relating to deposit insurance assessment risk

classifications); (b) decisions to initiate formal enforcement actions

under section 8 of the Federal Deposit Insurance Act, 12 U.S.C. 1818

(including assessment of civil money penalties); (c) decisions to

initiate informal enforcement actions (such as memoranda of

understanding); (d) determinations relating to a violation of a statute

or regulation; and (e) any other determinations not specified in the

Act as being eligible for appeal.

D. Authority to Initiate Appeal

The FDIC believes that an institution should not be permitted to

initiate an appeal of a material supervisory determination unless its

board of directors has considered the merits of the appeal and

authorized that it be filed. This requirement is intended to assure

that an institution's board of directors not only has knowledge of a

possible appeal but also has had an opportunity to consider its merits.

The FDIC believes that such involvement by the board of directors in

the decision to initiate an appeal is consistent with its

responsibility to oversee the institution's management and may

discourage insignificant or unnecessary appeals.

E. Effect on Supervisory or Enforcement Actions

Section 309(g) of the Act provides that ``[n]othing in . . .

section [309] shall affect the authority of an appropriate Federal

banking agency or the National Credit Administration Board to take

enforcement or supervisory action.'' To reiterate this mandate as well

as to discourage any possible abuse of the appeals process, the FDIC

believes that use of the appeals process by any institution should not

affect, delay, or impede any formal or informal supervisory or

enforcement action in progress or affect the FDIC's authority to take

any supervisory or enforcement action against that institution.

F. Effect on Applications or Requests for Approval

Any application or request for approval made to the FDIC by an

institution that has appealed a material supervisory determination

which relates to or could affect the approval of the application or

request will not be considered until a final decision concerning the

appeal is made unless otherwise requested by the institution.

G. Scope of Review

The FDIC believes that the appropriate scope of review of any

material supervisory determination should be limited to the facts and

circumstances as they existed prior to or at the time the material

supervisory determination was made and that consideration should not be

given to any facts or circumstances that occur or corrective action

taken after the determination was made.

H. Review Procedures

An institution may appeal any material supervisory determination

but it first should make a good faith effort to resolve the dispute

concerning the determination with the on-site examiner and/or the

appropriate Regional Office. The on-site examiner and the Regional

Office are expected to promptly respond to any concerns raised by an

institution regarding a material supervisory determination.

The FDIC wishes to express that codification of its appeals process

is not intended to affect its longstanding practice of affording

institutions opportunities to express their views and concerns

throughout the examination process. Institutions are encouraged to

discuss examination findings, loan loss reserve provisions and

classifications on loans and other assets during on-site examinations

as well as express any concerns to senior staff of the appropriate

Regional Office if a matter has not been resolved by the on-site

examiner. The FDIC continues to believe that an institution is best

served by raising questions or objections concerning an examination

when they arise through these informal processes rather than after the

close of an examination and the filing of an appeal.

If an institution is unable to resolve the dispute with the on-site

examiner or the Regional Office, it may appeal the determination to the

Washington Office. All appeals to the Washington Office must be

initiated within 60 days following the institution's receipt of a

report of examination containing a material supervisory determination

or other written communication of a material supervisory determination.

To initiate an appeal, the institution must submit, in writing, to the

Director of the Division of Supervision, if the institution was unable

to resolve the dispute with a Division of Supervision on-site examiner

or Regional Office, or to the Director of the Division of Compliance

and Consumer Affairs, if the institution was unable to resolve the

dispute with a Division of Compliance and Consumer Affairs on-site

examiner or Regional Office, a request for review. The request for

review should include: (a) a detailed description of the issues in

dispute, the surrounding circumstances, the institution's position

regarding the dispute and any arguments to support that position, and

the good faith effort to resolve the dispute with the on-site examiner

and the Regional Office and the results of that effort; and (b) a

statement that the institution's board of directors has considered the

merits of the appeal and authorized that it be filed.

The appropriate Division Director may, in his or her discretion,

promptly resolve the appeal in favor of the institution or, if he or

she cannot resolve the appeal in favor of the institution, will refer

the appeal to the Supervision Appeals Review Committee, together with

the institution's request for review and any other relevant information

concerning the dispute. The Supervision Appeals Review Committee (which

is proposed to be comprised of the Vice Chairman, the Director of the

Division of Supervision, the Director of the Division of Compliance and

Consumer Affairs, the Ombudsman, and the General Counsel, or their

designees) will review the appeal for consistency with the policies,

practices and mission of the FDIC, including those of the Division of

Supervision or the Division of Compliance and Consumer Affairs, as

appropriate, and the overall reasonableness of and support offered for

the respective positions advanced, and notify the institution, in

writing, of its decision concerning the disputed material supervisory

determination within 60 days of receipt by the appropriate Division

Director of the institution's request for review. The notice of

decision must contain at a minimum an explanation of the factual basis

as well as the reason(s) for the decision and a statement that the

decision constitutes the final supervisory decision of the FDIC.

If sufficient information is not provided to enable the Supervision

Appeals Review Committee to make a decision concerning the disputed

material supervisory determination, the 60-day period within which the

Committee must notify the institution of its decision will be extended

upon agreement of the institution for such additional time as it takes

the institution to provide the information requested by the Committee.

If the institution fails to provide the requested information, the

Committee may but will not be required to consider and decide the

appeal.

The decision of the Supervision Appeals Review Committee will

constitute the final supervisory decision of the FDIC and will not be

eligible for further appeal pursuant to the FDIC's appeals process

unless new information is submitted. In such case, the Committee may,

in its discretion, reconsider the decision concerning the disputed

material supervisory determination if good cause is shown why such new

information is material to the dispute.

The proposed composition of the Supervision Appeals Review

Committee includes the Vice Chairman as a voting member and chair of

the Committee. As a member of the FDIC Board of Directors, the Vice

Chairman may participate in the consideration and disposition of

enforcement proceedings before the Board of Directors which, on

occasion, may involve matters considered by the Supervision Appeals

Review Committee. While the FDIC believes that the proposed composition

of the Committee should lend credibility, fairness and balance to the

appeals process, it recognizes that the Vice Chairman's participation

in an appeal of certain material supervisory determinations could give

the Vice Chairman access to information which may not be part of the

administrative record of a factually related enforcement proceeding.

Although such a situation is unlikely to occur, if it does occur it may

be prudent for the Vice Chairman to recuse himself from participation

in the related enforcement proceeding. Accordingly, specific comment is

requested on whether the Vice Chairman should be included on the

Committee and, if the Vice Chairman is not included on the Committee,

how the Committee otherwise might be structured.

I. Limitation on Use of Agency Ombudsman

Section 309(d) of the Act requires the FDIC to appoint an agency

ombudsman to act as a liaison with respect to any problem that any

person may have in dealing with the FDIC resulting from its regulatory

activities. The FDIC understands that the role of the agency ombudsman

is to consider issues of a general corporate nature that affect any

person resulting from its regulatory activities whereas the role of the

appeals process is to consider only those matters of a supervisory

nature that materially affect insured depository institutions. The FDIC

believes that, in order to preserve the integrity of the appeals

process, the merits of any material supervisory determination for which

an appeal has been initiated or a final decision made will not be

eligible for consideration by the agency ombudsman. The FDIC does not

intend, however, to prohibit the agency ombudsman from considering any

other problems that an institution may have in dealing with the FDIC in

connection with its appeals process, including consideration of the

overall fairness or efficiency of the process.

J. Prohibition on Examiner Retaliation

The FDIC believes that any retaliation, abuse, or retribution by an

agency examiner against an institution that appeals a material

supervisory determination constitutes unprofessional conduct and should

subject the examiner to appropriate disciplinary or remedial action by

the appropriate Division Director. Such disciplinary or remedial action

may include oral or written warning or admonishment, reprimand, or

suspension, or change in assigned duties or disqualification from a

particular assignment or a particular matter, including prohibition

from participating in any examination of the institution that was the

subject of the retaliation, abuse, or retribution.

For the reasons set out in the Preamble, the Board of Directors

proposes to adopt the Guidelines for Review of Material Supervisory

Determinations as set forth below.

Guidelines for Appeals of Material Supervisory Determinations

A. Introduction

Section 309(a) of the Riegle Community Development and Regulatory

Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) (Act)

requires the Federal Deposit Insurance Corporation (FDIC) to establish

an independent intra-agency appellate process to review material

supervisory determinations made at insured depository institutions that

it supervises. The FDIC has adopted these Guidelines for Appeals of

Material Supervisory Determinations (Guidelines) in accordance with the

Act. The Guidelines describe the types of determinations that are

eligible for review and the process by which appeals will be considered

and decided.

B. Independent Appellate Process

The procedures set forth in these Guidelines establish an appeals

process for the review of material supervisory determinations by a

supervisory appeals review committee consisting of the Vice Chairman

and senior staff members of various divisions of the FDIC who do not

directly or indirectly report to the staff member who made the material

supervisory determination in dispute.

C. Institutions Eligible to Appeal

These Guidelines apply not only to the insured depository

institutions that the FDIC supervises (i.e., insured State nonmember

banks (except District banks) and insured branches of foreign banks)

but also to other insured depository institutions with respect to which

the FDIC makes material supervisory determinations.

D. Material Supervisory Determinations

1. Determinations Eligible for Appeal

An institution may appeal any material supervisory determination

pursuant to the procedures set forth in these Guidelines. Material

supervisory determinations mean:

(a) CAMEL ratings under the Uniform Financial Institutions Rating

System;

(b) EDP ratings under the Uniform Interagency Rating System for

Data Processing Operations;

System;

(d) CRA ratings under the Revised Uniform Interagency Community

Reinvestment Act Assessment Rating System;

(e) Consumer compliance ratings under the Uniform Interagency

Consumer Compliance Rating System;

(f) Registered transfer agent examination ratings;

(g) Government securities dealer examination ratings;

(h) Municipal securities dealer examination ratings;

(i) Determinations relating to the adequacy of loan loss reserve

provisions; and

(j) Classifications on loans and other assets the amount of which,

individually or together with other classified loans or assets, equals

or exceeds 10% of an institution's capital or 1% of its total assets.

2. Determinations Not Eligible for Appeal

Material supervisory determinations do not include: (a) decisions

to appoint a conservator or receiver for an insured depository

institution; (b) decisions to take prompt corrective action pursuant to

section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 1831o; (c)

determinations for which other appeals procedures exist (such as

determinations relating to deposit insurance assessment risk

classifications); (d) decisions to initiate formal enforcement actions

under section 8 of the Federal Deposit Insurance Act, 12 U.S.C. 1818

(including assessment of civil money penalties); (e) decisions to

initiate informal enforcement actions (such as memoranda of

understanding); (f) determinations relating to a violation of a statute

or regulation; and (g) any other determinations not specified in the

Act or these Guidelines as being eligible for appeal.

E. Authority to Initiate Appeals

An institution may not initiate an appeal of a material supervisory

determination pursuant to the procedures set forth in these Guidelines

unless its board of directors has considered the merits of the appeal

and authorized that it be filed.

F. Effect on Supervisory or Enforcement Actions

The use of the procedures set forth in these Guidelines by any

institution will not affect, delay, or impede any formal or informal

supervisory or enforcement action in progress or affect the FDIC's

authority to take any supervisory or enforcement action against that

institution.

G. Effect on Applications or Requests for Approval

Any application or request for approval made to the FDIC by an

institution that has appealed a material supervisory determination

which relates to or could affect the approval of the application or

request will not be considered until a final decision concerning the

appeal is made unless otherwise requested by the institution.

H. Scope of Review

The scope of review of any material supervisory determination

pursuant to the procedures set forth in these Guidelines is limited to

the facts and circumstances as they existed prior to or at the time the

material supervisory determination was made and no consideration will

be given to any facts or circumstances that occur or corrective action

taken after the determination was made.

I. Review Procedures

An institution may appeal any material supervisory determination

but it first should make a good faith effort to resolve the dispute

concerning the determination with the on-site examiner and/or the

appropriate Regional Office. The on-site examiner and the Regional

Office are expected to promptly respond to any concerns raised by an

institution regarding a material supervisory determination. If an

institution is unable to resolve the dispute with the on-site examiner

or the Regional Office, it may appeal the determination to the

Washington Office.

All appeals to the Washington Office must be initiated within 60

days following the institution's receipt of a report of examination

containing a material supervisory determination or other written

communication of a material supervisory determination. To initiate an

appeal, the institution must submit, in writing, to the Director of the

Division of Supervision, if the institution was unable to resolve the

dispute with a Division of Supervision on-site examiner or Regional

Office, or to the Director of the Division of Compliance and Consumer

Affairs, if the institution was unable to resolve the dispute with a

Division of Compliance and Consumer Affairs on-site examiner or

Regional Office, a request for review. The request for review should

include: (a) a detailed description of the issues in dispute, the

surrounding circumstances, the institution's position regarding the

dispute and any arguments to support that position, and the good faith

effort to resolve the dispute with the on-site examiner and the

Regional Office and the results of that effort; and (b) a statement

that the institution's board of directors has considered the merits of

the appeal and authorized that it be filed.

The appropriate Division Director may, in his or her discretion,

promptly resolve the appeal in favor of the institution or, if he or

she cannot resolve the appeal in favor of the institution, will refer

the appeal to the Supervision Appeals Review Committee, together with

the institution's request for review and any other relevant information

concerning the dispute. The Supervision Appeals Review Committee (which

is comprised of the Vice Chairman, the Director of the Division of

Supervision, the Director of the Division of Compliance and Consumer

Affairs, the Ombudsman, and the General Counsel, or their designees)

will review the appeal for consistency with the policies, practices and

mission of the FDIC, including those of the Division of Supervision or

the Division of Compliance and Consumer Affairs, as appropriate, and

the overall reasonableness of and the support offered for the

respective positions advanced, and notify the institution, in writing,

of its decision concerning the disputed material supervisory