Background
A bank appealed two
conclusions from concurrent Consumer Compliance, Community
Reinvestment Act, and Fair Lending examination. First, the bank
disagreed with the composite Consumer Compliance rating of "3" that
was assigned to the bank. Bank, management pointed out that, by
definition, 3-rated banks are a cause for supervisory concern,
require more than normal supervision, and may be cited for numerous
violations of law. In their opinion, none of these factors are
applicable to their banks. Second, bank management disagreed with a
conclusion in the report of examination that the bank and the
examiners identified "inconsistencies in underwriting" between
branches and lending officers. Bank management believes that
statement to be factually incorrect and not supported. From their
perspective, the statement means that the bank has not been
consistent in applying credit underwriting criteria to similarly
situated applicants. In other words, the report concludes that the
bank treats applicants differently, although not on a prohibited
basis. Bank management does not believe this to be the case.
Further, they believe that this issue materially affected the bank's
composite Consumer Compliance rating, because there were few
violations of law found during the examination, and the other items
of concern are easily addressed. Although any violation of law
concerns bank management, the five that were cited were generally
technical in nature and affected few customers.
Discussion
Composite
consumer compliance rating. The
Comptroller's Handbook-Consumer Compliance Examination describes the
Uniform Interagency Consumer Compliance Rating System. The rating
system reflects in a comprehensive and uniform fashion the bank's
compliance with consumer protection and civil rights statutes and
regulations. A Consumer Compliance rating of "3" is defined as
follow:
- Three: Generally, a bank in this
category is in a less than satisfactory compliance position. It is
a cause for supervision concern and requires more than normal
supervision to remedy deficiencies. Violations may be numerous. In
addition, previously identified practices resulting in violations
may remain uncorrected. Overcharges, if present, involve a few
consumers and are minimal in amount. There is no evidence of
discriminatory acts or practices. Although management may have the
ability to effectuate compliance, increased efforts are necessary.
The numerous violations discovered indicate that management has
not devoted sufficient time and attention to consumer compliance.
Operating procedures and controls have not proven effective and
require strengthening by, among other things, designating a
compliance officer and developing and implementing a comprehensive
and effective compliance program. By identifying such a bank
early, additional supervisory measures may be employed to
eliminate violations and prevent further deteriorations in the
bank's less than satisfactory compliance position.
In the larger banks, the OCC
consumer examinations are process - rather than transaction -
oriented. Examiners evaluate the bank's
compliance management systems. Limited transaction testing
supplements the system review. The agency often focuses on the most
significant statues, as well as those that have recently changed, to
determine if the bank can ensure compliance in an accurate and
timely manner. This examination approach focuses on the root cause
of systemic problems and allows for early recognition of problems.
If flaws exist in management's processes for ensuring compliance,
the examiner recommends the appropriate corrective action. Using
this approach, examiners may not find a large number of violations.
In this case, the examining team identified five violations, two of
which were reimbursable. These violations were included in the
examination report because they represented a pattern or practice.
Most of the violations occurred in the deposit area, an area that
had not been reviewed internally. Another important area, consumer
lending, had also not been reviewed by the bank. The examiners
concluded that each of the violations occurred, not because of
oversight by operating personnel, but because the bank had no method
of preventing the violations. The bank's program relies primarily on
its compliance audit schedule and review procedures. The examiners
concluded that insufficient resources had been provided for
completion of the audits. Only 25 percent of the annual audits
scheduled in a 10 month period had been completed.
The examiners concluded that
the bank's compliance management system lacked cohesiveness and
other important elements of an effective program. The examination
report recommended that management improve policies and practices to
monitor and control the bank's fair lending risk. The bank's
compliance audit program was considered weak because insufficient
resources had been dedicated to complete the audit schedule. The
examiners concluded that there was a lack of accountability for
compliance performance among branch presidents, department managers,
and branch compliance coordinators. The examiners noted that
management needs to correct the violations of law.
Alleged
inconsistencies in underwriting. Fair lending laws prohibit
discriminatory or disparate treatment of applicants/borrowers.
Responses received during an underwriter interview conducted by the
compliance officer indicated that there are several differences
among the mortgage lenders regarding underwriting criteria. For
example, for mortgage loans, the policy does not provide guidance on
what constitutes a sufficient credit history, under what
circumstances the bank would lend to a customer with a record of a
bankruptcy, or how far into the past derogatory information is
relevant. The examination report acknowledges that the
inconsistencies did not result in disparate treatment of the
applications/borrowers reviewed. However, the situation does
increase the potential for disparate treatment and noncompliance
with fair lending laws. The examination report recommended that
management develop guidelines for desirable and undesirable
underwriting criteria to be used on a companywide basis. It also
recommended procedures for documenting exceptions to policy.
Conclusion
The Ombudsman concluded that
composite Consumer Compliance rating "3" appropriately described
this bank's performance as of the examination date. The definition
for a composite "2" rating states that the bank is "in a generally
strong compliance position. The Ombudsman does not believe this to
be the case for this bank. Although management had the ability to
ensure compliance, increased efforts are needed. Operating
procedures and controls have not proven effective and require
strengthening by, among other things, implementing a comprehensive
compliance program. The deficiencies in the bank's control system
are a cause for supervisory concern and require more than normal
supervision to remedy deficiencies. The ombudsman agrees with the
bank that the differences in philosophies or opinions noted in the
examinations report are not differences in underwriting. A more
precise statement would be that the review identified a lack of
policy guidance and documentation standards to prevent any
inconsistence in underwriting. Therefore, he concluded that the
language in the report of examination should be revised. The
examination report will be edited to indicate that some differences
in philosophies remain between the branches. It will state that,
despite a lack of formal policy guidelines, no differences in
treatment or underwriting were found during the review.
APPEAL OF CONCLUSION IN
REPORT OF EXAMINATION (First Quarter 1997)
Background
A bank appealed a number of
conclusions contained in its most recent examination report. The
bank is rated composite 2, but remains a designated trouble
institution with a long history of enforcement - related activities.
Several issues in the bank's appeal did not meet the criteria of an
"appealable matter" because they dealt with enforcement-related
matters. The five exclusion from the OCC 's appeal arena are
delineated in OCC Bulletin 96-18, National Bank Appeals Process,
dated February 23, 1996. The bank formally appealed the following
examination conclusions:
- Supervision and administration by the
board and management is less than satisfactory.
- Consumer compliance is less than
satisfactory.
- Compliance with the formal agreement is
not yet satisfactory.
- An individual loan should be placed on
nonaccrual.
- Compliance with the legal lending limit
is ineffective.
Discussion
Management/Board Supervision. Bank
management states that the bank's progression from a potentially
serious situation in 1992 to consecutive composite "2" rating
indicates that management has done its job well. The examiners based
their conclusion upon the bank's ineffective compliance management
system, unsafe and unsound banking practices, and inadequate
leadership and supervision by the board and the president (who
resigned after the examination).
Consumer
Compliance
The appeal states that bank
management was startled to learn of the less than satisfactory
composite consumer compliance rating. They allege that the exit
meeting with management and the presentation to the board of
directors were inconsistent in both temperament and results. The
examination report listed 18 violations of nine consumer laws or
regulation. Six of those were repeated from prior examination
report. The examiners considered the internal audit program
ineffective in identifying violations of law and regulation and
concluded that training has not been effective to ensure compliance.
Also, the bank's compliance policies and procedures were
outdated.
Compliance
with the formal agreements. Bank management states that minutia
and a desperate effort to keep the bank under the influence of the
disciplinary action is obviously prompting this conclusion and OCC's
harassment of the bank. The examination report stated that the bank
was in noncompliance with two articles of the formal agreements and
in partial compliance with five others. The examiners cited 19
articles as being in full or substantial compliance, up from 13 at
the previous examination. The examiners concluded that the following
articles were in partial or noncompliance.
- Loan review system: partial compliance.
Bank management notes that the
examination report rated their loan documentation system, problem
loan identification, and risk rating system as adequate. Risk
rating differences were minimal and the report commended the bank
for reducing documentation exceptions to 16 percent from 28
percent at the previous examination. The examiners cited this
article as being in partial compliance because the board has not
received a written report summarizing all aspects of the loan
review, including scope, coverage, and the summary of the
findings. They say the scope of the review was inadequate to make
conclusions regarding the complete portfolio. Also, they point out
that the review failed to identify violations of law and policy
exceptions.
- Consumer compliance program:
noncompliance. Bank management acknowledges that there were
deficiencies in their compliance program but they disagree that
the entire consumer compliance management system is less than
satisfactory. The examiners sited this article as being in
noncompliance because the bank's written consumer compliance
program did not ensure that the bank operated in compliance with
all applicable consumer protection laws, rules, and regulations.
The compliance policy was out dated, audit coverage needed to be
expanded to address fair lending matters, and compliance training
was inadequate.
- Compliance with the legal lending limit:
noncompliance. See discussion of appeal issue below.
- Call report accuracy: partial compliance:
Bank management points out that their field manager stated that
their call reports were "substantially accurate" during the 1995
examination exit meeting. They wonder what has changed. The
examiners based their partial compliance conclusion on the fact
that the bank has not adopted effective policies and procedures to
ensure call report accuracy. Although the errors were nonmaterial,
numerous call report errors were identified in the 1996
examination. Further, the bank did not maintain updated call
report instructions and no clear audit trail existed.
- Violations of law and banking issuances:
partial compliance. Bank management stated that, in spite of OCC's
comments, they have made a concerted effort to comply with banking
laws and regulations. The examiners cited partial compliance with
this article because the bank had not developed effective
procedures to prevent violations of law, as evidenced by the
violations cited during the examination. Examples included 12 USC
84, 12 CFR 34, 12 USC 371c-1, and numerous consumer-related
regulations.
Accrual
status of individual loan. Bank management agrees with the
substandard risk rating but believes the loan is well secured and in
process of collection, and therefore should not be placed on non
accrual.
Compliance
with legal lending. The board acknowledges the three violations
identified at the most recent examination but claims they were
unintentional. Management was not aware of the March 1995 revision
to the statute involving the calculation of the lending limit on
call report dates and the new limitations on the exclusion of
subordinated debt in the capital calculation. While acknowledging
their responsibility to keep informed of legal and regulatory
requirements, bank management is puzzled that no one from the OCC
mentioned the legal lending limit revision during the May 1995 exit
meeting. They questioned whether the OCC's intentions are to
criticize bank management at every opportunity or to assist the bank
with recommendations for improvement. The examiners cited legal
lending limit violations in the 1988, 1993, 1994, and 1996 reports
of examination.
Conclusion
Management/Board Supervision. The ombudsman
believes the restoration of the bank's financial condition reflects
the positive influence of management and the board of directors. The
ombudsman also acknowledges that the report of examination
overemphasizes some technical issues and, through repetition,
overstates the severity of certain issues. He recognizes that many
of the technical issues identified in the examination report result
from one underlying problem, i.e., the bank's failure to incorporate
changes in legal and regulatory requirements in the bank's
operational, audit, and training process. The ombudsman believes
bank management should be able to address this problem in the normal
course of business. Nonetheless, the bank's significant compliance
deficiencies are inconsistent with satisfactory supervision and
administration of the bank. Further, the lack of a president, and no
concrete plans to fill that position, negatively impacts management
depth and succession. Management and board performance must be
enhanced to ensure that these issues are satisfactory resolved.
Consumer
Compliance. The ombudsman concurs with the examination report
conclusion that consumer compliance is less than satisfactory. At
the time of the examination, the bank's operating procedures and
controls had not proven effective and required strengthening. The
numerous violations indicate that management had not devoted
sufficient time and attention to consumer compliance.
Compliance
with the formal agreements. The ombudsman determined that the
bank is in compliance with 19 of the 23 articles requiring action by
the bank and which are subject to this appeal. The ombudsman found
the bank to be in partial compliance with three articles and in
noncompliance with one. His conclusions were at variance with either
the bank or the examiners in the following instances:
- Loan Review System: Compliance. The
ombudsman agrees with the examiners that the bank's loan review
system should be expanded to include relationships that did not
have any new loans or renewal activity within the past year. He
also acknowledges that the bank had not complied with all the
written documents requirements of this article. However, he
concluded that the bank had complied in substance with the
article, consistent with its asset and staff size.
- Consumer Compliance Program: Partial
Compliance. Although bank management had established the basic
elements of a compliance and audit program, the nature and number
of violations indicate the program needs enhancement.
- Legal Lending Limit: Noncompliance. See
discussion of appeal issue below.
- Call Report Accuracy: Partial Compliance.
The ombudsman concurred with the examiners that the bank had not
taken the necessary steps to ensure call report accuracy. At the
time of the examination, the bank did not have a current copy of
the call report instructions and had not established a clear audit
trail.
- Violations of Law and Banking Issuances:
Partial Compliance. Based on the volume and nature of
noncompliance cited at the most recent examination, the ombudsman
agreed with the examiners that management had to establish
effective procedures to ensure regulatory compliance.
Accrual
status of individual loan. During the ombudsman's visit to the
bank, management indicated that the senior lending officer recently
placed the individual loan in question on non accrual. The civil and
bankruptcy courts had taken much longer than management had
anticipated. As a result, the bank's collateral position was slowly
deteriorating with the passage of time. Bank management does not
anticipate any loss of principal or interest on this borrower.
Compliance
with the legal lending limit. The ombudsman concurred with the
examiners that the compliance with the legal lending limit had been
less than satisfactory. The most recent violations indicate that the
bank had not established effective procedures to ensure compliance
with this statute.