Letter to Fed re: Exam Appeal Process Revisions

Ms. Ann E. Misback

Secretary

Board of Governors of the Federal Reserve
System 20th Street and Constitution Avenue,
NW Washington, DC 20551

Dear Ms. Misback:

The American Bankers Association (ABA) appreciates the opportunity to comment on the Federal Reserve’s proposed amendments to its Guidelines for Appeals of Material Supervisory Determinations (Amended Guidelines) and its Policy Statement Regarding the Ombudsman. We understand that the Amended Guidelines are intended to expedite the appeals process to reduce the levels of appeal, establish consistent standards of review, and provide transparency to the appeals process by making final appeal decisions public. Similarly, the proposed changes to the Policy Statement Regarding the Ombudsman are intended to clarify and formalize certain practices in place while emphasizing the Ombudsman’s availability to resolve certain concerns before they become formal appeals.

Overall, these amendments are a welcome step towards greater standardization and transparency in the appeals process, and we encourage the Federal Reserve to continue this important work. ABA understands that many exam issues are resolvable through less formal action than an appeal, but we believe that the ability to initiate an appeal that will be fairly considered is a critical part of a balanced supervisory regime, an essential check on examiner excesses. These proposed amendments are helpful and directionally important. Notwithstanding that, we believe that more may have to be done to make the appeals process one that financial institutions trust and have confidence using. One review of the Federal Reserve’s exam appeals process revealed that from 2001 to 2012, only 25 appeals were received by the Federal Reserve System, and only two of these appeals reversed the findings of the bank examiners. This lack of confidence in the appeals process is a problem that needs to be addressed.

Recent bipartisan legislation passed in the House of Representatives offers reasonable and balanced ideas to build a more independent exam review process. ABA would encourage the Federal Reserve to use its existing statutory powers to incorporate elements of this legislation wherever possible to further enhance its existing exam appeals process.

In response to the Amended Guidelines, we offer some specific suggestions for consideration.

Add Matters Requiring Attention to the List of Items Eligible for Appeal

This is not a new issue. In 1994, the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) were required by the Riegle Community Development and Regulatory Improvement Act (Riegle Act) to establish an independent intra-agency appeals process for material supervisory determinations. The agencies crafted guidelines outlining their exam appeal processes shortly after the Riegle Act was enacted.

In recent years, both the OCC and FDIC have revised their guidelines, and both have opted to clarify that matters requiring attention (MRAs) are appealable. In 2013, the OCC’s revised exam appeal guidelines made it clear that a bank could appeal “material supervisory determinations such as matters requiring attention, compliance with enforcement actions, or other conclusions in the report of examination.”

In 2017, the FDIC, following a notorious public example of examiner excess that failed redress under its appeals program, also proposed to revise its exam appeal guidelines. ABA sought a change to the proposed guidelines to ensure that “matters requiring board attention” would be listed as a material supervisory determination eligible for appeal. In publishing its final guidelines, the FDIC included this change.

In its Guideline Amendments, the FRB has not added MRAs or matters requiring immediate attention (MRIAs) to its list of material supervisory determinations that are appealable. ABA recommends that it does so to maintain consistency among the agencies and to ensure that banks know they have an avenue of redress for erroneously issued MRAs or MRIAs.

Establish a Clear “De Novo” Review for the Initial Review Panel

The Guideline Amendments propose to set forth a consistent standard of review across the Federal Reserve System. This is a welcome change, as different Federal Reserve Banks have previously set their own standards of review. Even more concerning, certain Federal Reserve Banks permit their appeals panel to set forth whatever standard of review they would like to govern an individual appeal. Such inconsistencies in the standard of review across the Federal Reserve System, and even within certain Reserve Banks, increase the risk that banks appealing a similar erroneous exam finding in different parts of the country will receive different treatment in their appeal.

For this reason, ABA supports the Board’s decision to set forth a consistent standard of review for appeals across the Federal Reserve System. However, ABA would ask that the Board provide some clarity as to the Initial Review Panel’s proposed standard of review (Proposed Standard) expressed in the Amended Guidelines.

The Proposed Standard for the Initial Review Panel is that, “[t]he panel must consider whether the Reserve Bank’s material supervisory determination is consistent with the Board’s policies, consistent with applicable laws and regulations, and supported by the record. In doing so, the panel shall make its own supervisory determination and shall not defer to the judgment of the Reserve Bank staff that made the material supervisory determination…”

The Proposed Standard has attributes of a de novo review in saying that it shall make its own supervisory determination and shall not defer to the judgment of the Reserve Bank staff. This seems reinforced by the ability of the Initial Review Panel to use its discretion to conduct additional fact-finding. However, the Board never calls the Proposed Standard a de novo review standard. This Proposed Standard sits in contrast to the more forthright standard of review currently in place at the Federal Reserve Bank of New York, which states that, “[t]he Review Panel will use a ‘de novo’ standard of review in reaching its decision.”

The tension between a de novo review and a lower standard of review is evident in the Federal Reserve Bank of Minneapolis’ current appeal standard (Minneapolis Standard). The Minneapolis Standard is that, “[t]he standard for review will be whether the Reserve Bank’s findings and conclusions were based on sufficient evidence and were consistent with Federal Reserve System policy. A completely new (de novo) review will not be undertaken.” The Minneapolis Standard seems written to underscore that “findings and conclusions based on sufficient evidence that are consistent with Federal Reserve System policy” is a very different standard than de novo.

Comparing these different Reserve Bank standards makes it difficult to discern the exact scope of the Proposed Standard. The first sentence of the Proposed Standard could be read to limit the scope of the Initial Review Panel to nothing more than the considerations listed. In some ways, the first sentence of the Proposed Standard parallels the Minneapolis Standard, albeit with different language. However, the second sentence of the Proposed Standard, combined with the Initial Review Panel’s discretion to conduct fact-finding, points toward a broad and enabling standard of review.

The Amended Guidelines seem intent on offering appealing institutions a clearer, more consistent, and more robust standard of review than the past. To that end, ABA asks that the Board remove any ambiguity by setting forth a clear and unequivocal de novo standard of review for the Initial Review Panel, applicable throughout the system.

Protect Confidentiality When Publishing Appeal Decisions

In the overview section of the Federal Register notice for these Amended Guidelines, the FRB states that, “[i]n order to maximize transparency, the decision of the final review panel will be made public.” In the Amended Guidelines, this is found in newly proposed Section (B)(18), which states that, “[a] copy of the [final review] decisions will be published as soon as practicable, and the published decision will be redacted to avoid disclosure of exempt information. In cases in which redaction is deemed insufficient to prevent improper disclosure, the published decision may be presented in summary form.”

We appreciate the FRB’s recognition of the need to balance the need for greater transparency in the examination appeals process with the need to ensure that financial institutions that avail themselves of the exam appeals process receive confidentiality. ABA asks that the FRB take great care in its review of appealed decisions to ensure that summaries and published decisions cannot be used to identify individual institutions that have appealed. ABA further asks that such publication program include a dedicated webpage listing these summaries, making it easy for the public to find them.

Further Empower Your Ombudsman

ABA has long advocated for empowering the Federal Reserve’s Ombudsman in order to strengthen the exam appeals process. ABA offered specifics on ways to enhance that role in a letter dated January 30, 2008, which is enclosed for your convenience. In that letter, we reflect ABA’s view that the power of the Ombudsman to overrule examiner decisions is a missing key attribute to a better appeals process. We note that the Amended Guidelines are explicit in rejecting this approach, saying that “the Ombudsman will not have any substantive involvement in or act as a decision-maker with respect to the appeal.” ABA believes that the Board should reconsider this view and empower the Ombudsman to be a decision-maker in the examination appeals process. There are few steps that the Board could take that would add as much credibility to its appeals program.

While the Amended Guidelines do expand upon the Ombudsman’s role in retaliation claims, the Amended Guidelines ultimately prevent the Ombudsman from making recommendations regarding disciplinary action for supervisors found to have retaliated. The Amended Guidelines clearly emphasize that examiner staff retaliation against supervised institutions for filing an appeal is unacceptable. However, the Amended Guidelines also make it clear that the Ombudsman has no power to exclude examiners that have retaliated from being a part of future examinations of that appealing institution. Instead, the Amended Guidelines leave that decision to the division director.

ABA recommends that the FRB empower its Ombudsman to make a decision as to whether an examiner should be excluded from future examinations on the grounds that the examiner has retaliated against that institution in the past, in consultation with the division director.

Thank you for the opportunity to comment on the Amended Guidelines. We believe that these are positive steps in the right direction. Though we believe more must be done to make this process one that banks are confident will merit using, we are grateful for the Board’s attention to this issue. Should you have any questions, please do not hesitate to contact the undersigned at [email protected] or (202) 663-5253.

Sincerely,
Shaun Kern

Senior Counsel

Office of Regulatory Policy

Enclosure: ABA letter to FRB Governor Randall Kroszner regarding the FRB’s examination appeals process. (January 30, 2008).