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National Bank Appeals Process: Appeal of Noncompliance with Two Articles in a Formal Agreement - (First Quarter 2002)
Background
A bank
appealed the OCC's conclusions contained in the Report of
Examination (ROE) regarding the bank's compliance with two
articles in their formal agreement. Specifically, bank
management disagreed with the OCC's noncompliance determination with
articles focusing on loan administration and criticized assets.
The appeal was based on the following:
- The article
required the board to, within 60 days, develop and implement a
written program to improve the bank's loan administration. A copy of the program was to
be forwarded to the assistant deputy comptroller (ADC), along with a
copy of the revised job descriptions and policies and
procedures. The article
also required the board to ensure that the bank had
processes, personnel, and control systems to ensure
implementation of and adherence to the program developed
pursuant to this article.
- The report of
examination (ROE) noted noncompliance with this article because of a
number of relationships with credit and collateral documentation
exceptions, while noting that the framework had been established to
improve the administration of the portfolio. The ROE further stated that
achieving full compliance with this article is negatively affected
by the continuation of the newly hired management's education of the
existing customers and review of the existing
relationships.
- The bank
appealed the conclusion on the level of compliance with this
article because the bank was doing all that was required. The
assistant deputy comptroller had been forwarded a copy of all
adopted policies and procedures. Moreover, the bank has put in place
and is implementing the systems to ensure compliance with these
policies and procedures.
Criticized
assets
- The
article required the bank to take immediate and continuing action to
protects its interest in those as-sets
criticized in the ROE, in any subsequent ROE, by internal or
external loan review, or in any list provided to management by the
bank examiners during any examination. Within 60 days the board was
to adopt, implement, and thereafter ensure bank adherence to a
written program to eliminate the basis of criticism of assets noted
in the ROE, in any subsequent ROE, or by any internal or external
loan review, or in any list provided by the bank's examiners during
any examination as ''doubtful,'' ''substandard,'' or ''special
mention.'' A copy
of the adopted program for all criticized assets equal to or
exceeding $100,000 was to be forwarded to the ADC. The article also
required the board to ensure that the bank has processes,
personnel, and control systems to ensure implementation of and
adherence to the program developed pursuant to this article. Other
requirements included a quarterly review of the criticized assets, a
submission to the ADC of these quarterly reviews, and the
establishment of a committee to review loan activity involving these
credits.
- The
ROE noted noncompliance with this article be-cause the supervisory
office, while recognizing the bank's efforts and results thus far,
could not assess the bank's adherence to the criticized assets
initiatives.
- The
bank also appealed the conclusion on the compliance level of
this article because the bank board had adopted and implemented
plans to eliminate the basis of criticism for each of its problem
loans. The appeal submission also stated that the board realized
that compliance with this article would be judged on an ongoing
basis.
Discussion
OCC's Policy
and Procedures Manual (PPM) 5310-3 (REV), ''Bank Supervision
Operations-Enforcement Action Policy,'' provides internal OCC
guidance for assessing compliance with enforcement
actions. The PPM states
that a rating of compliance can only be achieved on a particular
article if the bank has adopted, implemented, and adhered to all of
the corrective actions set forth in the article; the corrective
actions are effective in addressing the bank's problems; and OCC
examiners have verified through the examination process that this
has been accomplished.
It also states that a bank should not be considered in
compliance with an article in an enforcement document simply because
they have made progress or a good faith effort toward complying with
the article.
The PPM
further states that articles for which a bank has not achieved
compliance include those articles where the bank has adopted and
begun the implementation of all of the corrective actions required
by the article, but sufficient time has not passed to verify that
the actions have been fully implemented, are being adhered to, and
are effective in addressing the bank's problems. In these situations, there
is nothing additional for management and the board to do other than
fully implement, adheres to, and assesses the effectiveness of the
corrective actions.
Conclusion
Both articles
in the bank's formal agreement contain the following paragraph that
requires not only the implementation of, but also the adherence
to, the developed pro-gram under each of the corresponding articles:
The Board
shall ensure that the Bank has processes, personnel, and control
systems to ensure implementation of and adherence to the
program developed pursuant to this Article.
Bank
management had taken appropriate action to implement the
policies and procedures to comply with these two articles. However, at the time of
examination, given the relatively short time since implementation,
the supervisory office could not assess the bank's adherence
to the loan administration and criticized assets
initiatives. Therefore,
it was concluded that the supervisory office's assessment of
noncompliance with articles, at the time of the examination, was
appropriate and consistent with OCC's ''Enforcement Action
Policy.''
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