Background
The bank's board of
directors appealed the downgrade to a 3 of its overall composite
rating and the component ratings for asset quality, management, and
consumer compliance.
Additionally, the board appealed the violations of law of the
legal lending limit.
The bank was placed under a formal agreement prior to filing
the appeal.
Discussion
The appeal
states that the report of examination (ROE) contains unfounded
allegations regarding the bank's relationship with a third-party
subprime mortgage vendor, which resulted in unsatisfactory
ratings in asset quality, management, and consumer compliance. Furthermore, the board
stated that the legal lending limit violations were based on the
manner in which the lending program operated as opposed to the
written agreements between the subprime mortgage vendor and the
bank.
According to
the appeal, even when considering the subprime nature of the
mortgage loan portfolio, the bank had not experienced losses as
a result of its relationship with the subprime mortgage vendor. Bank management stated that
the supervisory office was advised of the bank's interest in
purchasing participations from the subprime mortgage vendor and
raised no objections.
Management questioned the OCC's decision to pursue an
administrative action, including civil money penalties, after the
bank decided to wind down its participation with the subprime
mortgage vendor.
The appeal also stated that the component ratings that were
downgraded in this examination had been assigned satisfactory
ratings only four months prior. Finally, the appeal states that the
bank has not done anything wrong, much less illegal, predatory or
abusive, in its relationship with the subprime mortgage vendor.
The
supervisory office stated that bank management failed to provide
adequate oversight of its relationship with the subprime mortgage
vendor. The lack of
policies and procedures for the sub-prime mortgage portfolio, poor
loan administration and risk management practices coupled with the
predatory nature of the portfolio, exposed the bank to increased
reputation and financial risk.
Loan officers responsible for the subprime mortgage portfolio
lacked the knowledge necessary to identify violations of law and
regulation in the portfolio.
This indicated a lack of proper training over consumer laws
and regulations along with weak internal controls. Based on the weaknesses
noted in the areas of credit, risk management, and consumer
compliance, including the resulting violations of law, management
and board supervision were considered weak.
Conclusion
The ombudsman
conducted a review of the information submitted by the bank and
support documentation from the supervisory office. The review included meetings
with the bank's senior management and legal counsel, as well as with
members of the supervisory office.
Because the bank was operating under an
enforcement action, the ombudsman's review was limited to a
determination of reasonableness as defined in OCC Bulletin 2002-9,
"National Bank Appeals Process," (February 25, 2002). Essentially, the ombudsman
used a process similar to that of a federal appeals judge versus the
de-novo review process that is customarily employed on
non-enforcement-related appellate matters. Therefore, the review
focused on whether the ratings were reasonable as assigned based on
the condition of the bank at the time of the examination. Additionally, the violations
of law were deemed to be outside of the scope of the appeal.
The ombudsman
ruled that the conclusions reached by the supervisory office
regarding asset quality, management, and consumer compliance were
reasonable and well supported by the facts at the time of the
examination.
Additionally, the overall condition of the bank met the
criteria of a composite-3-rated bank as prescribed by the Uniform
Financial Institutions Rating System (UFIRS), (OCC Bulletin 97-1,
"Uniform Financial Institutions Rating System and Disclosure of
Component Ratings,"
January 3, 1997).
Appeal of the Composite
and Certain Component Ratings - (Third Quarter
2005)
Background
A bank,
operating under a formal agreement, appealed the composite and
component ratings for capital, asset quality, management, earnings,
and liquidity assigned at the most recent examination.
Discussion
The bank's board of directors appealed
the conclusions noted in the most recent safety and soundness
examination that resulted in the downgrade of the bank's composite
rating from 2 to 4.
According to the appeal, the primary cause of the criticisms
noted in the report of examination (ROE) can be traced to a
former senior loan officer and were not reflective of overall bank
supervision. The appeal
further states that the downgrades for capital, asset quality,
management, earnings, and liquidity were primarily based upon
the perception that classified assets were increasing, and this
increase would cause net losses and liquidity issues. Since the examination, the
board believes that management has improved asset quality problems,
created an adequate allowance for loan and lease losses,
collected a significant amount of classified assets, and
implemented proper policies and procedures in the lending
area. Consequently, the
perceived negative impact on capital, earnings, and liquidity did
not materialize.
Therefore, the board believes the composite, capital, asset
quality, management, and earnings ratings each merit a 3 and
liquidity should be rated 2.
The supervisory office response notes
that the appeal discusses actions taken by the board
post-examination but does not refute findings noted during the
examination. As such,
conclusions cited in the ROE are a valid representation of the
bank's condition at that time.
Asset quality was deemed unacceptable and credit risks were
high. The board had
failed to implement adequate procedures to prevent insider
abuse and to implement an effective risk management system. Earnings performance was
poor; loan losses and increased provision expenses led to net losses
for the year and the current quarter. These factors as well as an
increasing overall risk profile had an impact on capital
adequacy. The
diminishing level of secondary funding sources also affected
liquidity. The
supervisory office restated its position that the assigned composite
of 4 and component ratings of 4, 4, 4, 4, and 3 for capital, asset
quality, management, earnings, and liquidity, respectively, met
the criteria in the Uniform Financial Institutions Ratings System
(UFIRS).
Conclusion
The ombudsman
reviewed the bank's submission as well as information supplied by
the supervisory office.
Because the bank was operating under an enforcement action,
the ombudsman's review was limited to a determination of
reasonableness as defined in OCC Bulletin 2002-9, "National Bank
Appeals Process."
Essentially, the ombudsman used a process similar to that of
a federal appeals judge versus the de-novo review process that is
customarily employed on non-enforcement-related appellate
matters. Therefore, the
review focused on whether the ratings were reasonable as assigned
based on the condition of the bank at the time of the examination.
The ombudsman
opined that the conclusions reached by the supervisory office were
reasonable, well supported by the facts at the time of the
examination, and met the definition of a composite 4 bank as
prescribed by UFIRS.
The
ombudsman also found that the assigned component ratings for
capital, asset quality, management, earnings, and liquidity were
reasonable and accurately reflected the bank's condition at the time
of the
examination.