H.R. 3461 – Compliance Guru

24 Apr 2013

Hot Topics Tom Hinkel 0 comment

The Financial Institutions Examination Fairness and Reform Act – Redux

This new bill (H.R. 1553) introduced on April 15th is actually a word-for-word duplicate of H.R. 3461 which I wrote about here. The previous bill died in committee, but H.R. 1553 has a few more sponsors. Now, I know what you are thinking…that there is no such thing as “good” regulation. But bear with me, because this bill actually is good for the industry, banks and credit unions alike.

The full text of the bill is here, and I encourage everyone to read it and consider throwing your support behind it, but in summary it…

…requires that examiners issue their final examination reports in a timely manner, no later than 60 days following the exit interview. This is important for FI’s because all examination findings must be reported to the Board, and assigned to responsible parties for remediation. I have heard stories of institutions waiting 6+ months for a final report, and this just isn’t fair. Since most institutions are on a 12 month examination cycle, this only leaves a few months for remediation in order to avoid repeat findings.
…requires that the examiner make available all factual information relied upon by the examiner in support of their findings. This levels the playing field, allowing institutions to see exactly why findings occurred and better prepare you to push back if you think the finding is incorrect.
…changes the treatment of commercial loans. Currently, if the value of the underlying collateral declines, the loan may be forced into non-accrual status regardless of the repayment capacity of the borrower. The bill would prevent that from happening. It would also prevent a new appraisal on a performing loan unless new funds were involved. It stands to reason that if non-accrual status is tied to non-performing status, it should result in higher asset quality assessments, resulting in fairer reserve requirements, fewer enforcement actions, and fewer CAMELS score downgrades.
…requires a standard definition of “non-accrual” along with consistent reporting requirements. The less institutions are subject to examiner interpretation, the more predictable the examination experience will be. Lack of consistency resulting in unpredictable results is the single biggest complaint of the examination process. I don’t know of a single institutions that wants to “get away” with anything during an exam, they only want to know what to expect.
…establishes an “examination ombudsman” in the office of the FFIEC, independent of any regulatory agency. In addition to being a more impartial forum for presentation of grievances regarding the examination process, they would also be responsible for assuring that all examinations adhere to the same standards of consistency. In the survey conducted with my previous post on this topic, 60% of respondents said that they would be more likely to appeal an exam finding if the appeal process was with the FFIEC as opposed to the regulator that conducted the exam.
…would prohibit retaliation against the FI for exercising their rights under the appeals process, and delay any further agency action until the appeals process was complete.

Of course it’s a long road from a bill to a law, but I think you would agree that all these things are good for the industry. At the very least, any regulation that gives bankers more control and less uncertainty is a welcome change from recent events! You can track it here. A companion Senate bill was also just introduced, S. 727. Track it here.

12 Nov 2012

From the Field Tom Hinkel 0 comment

The Financial Institutions Examination Fairness and Reform Act (and why you should care)

Although it’s currently stuck in committee, financial institutions should be aware of this bill and track it closely in the next congressional session. There are actually 2 bills, a House (H.R. 3461) and a Senate (S. 2160) version, both containing similar provisions. The House bill has 192 sponsors and the Senate version has 14 sponsors, and both bills have supporters from both political parties. Here is a summary of the bill, and why you might want to support it as well:

What it does:

Amends the Federal Financial Institutions Examination Council (FFIEC) Act of 1978 to require a federal financial institutions regulatory agency to make a final examination report to a financial institution within 60 days of the later of:

	(1) the exit interview for an examination of the institution, or
	(2) the provision of additional information by the institution relating to the examination.

Sets a deadline for the exit interview if a financial institution is not subject to a resident examiner program.

Sets forth examination standards for financial institutions.

Prohibits federal financial institutions regulatory agencies from requiring a well capitalized financial institution to raise additional capital in lieu of an action prohibited by the examination standards.

Establishes in the Federal Financial Institutions Examination Council an Office of Examination Ombudsman. Grants a financial institution the right to appeal a material supervisory determination contained in a final report of examination.

Requires the Ombudsman to determine the merits of the appeal on the record, after an opportunity for a hearing before an independent administrative law judge.

Declares the decision by the Ombudsman on an appeal to:

	(1) be the final agency action, and
	(2) bind the agency whose supervisory determination was the subject of the appeal and the financial institution making the appeal.

Amends the Riegle Community Development and Regulatory Improvement Act of 1994 to require:

	(1) the Consumer Financial Protection Bureau (CFPB) to establish an independent intra-agency appellate process in connection with the regulatory appeals process; and
	(2) appropriate safeguards to protect an insured depository institution or insured credit union from retaliation by the CFPB, the National Credit Union Administration (NCUA) Board, or any other federal banking agency for exercising its rights.

Why you should care:

In addition to the provisions for more expeditious exit interviews and final reports, the Bills provide for certain changes to “examination standards”. The standards pertain primarily to the non-accrual treatment of commercial loans and their effect on capital, and they also redefine “Material Supervisory Determination” as “any matter requiring attention by the institution’s management or board of directors”. These are all generally good things for financial institutions, but I think the most significant provisions (and the ones with the biggest positive impact) are the provisions that establish the Office of Examination Ombudsman within the FFIEC.

The current appeal process for contested examination findings was recently re-addressed by the FDIC here (and I reacted to it here). In summary, if you currently have a disagreement with the FDIC about any “material supervisory determination”, which includes anything that affects CAMELS ratings and IT ratings (the full list is here, search for “D. Determinations Subject to Appeal”) you must stay within the FDIC for resolution. And this includes the current Office of the Ombudsman, which is also a part of the FDIC.

The agency makes it clear that they believe the appeals process is “independent of the examination function and free of retribution or other retaliation”, but whether it is or isn’t, the fact that the process never leaves the FDIC deters many financial institutions from pursuing the appeals process in the first place. I believe moving the process to the FFIEC at least improves the perception of independence and objectivity, which may encourage more institutions to be more inclined to challenge examination findings. What are your thoughts?

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Again, I encourage you to learn about these bills for yourself and take a position. To support the Senate bill, go HERE. To support the House bill, go HERE. And feel free to share this post. If enough people support it perhaps we’ll see some progress in the next congressional session!

05 Apr 2012

From the Field Tom Hinkel 0 comment

5 “random” facts

Fact 1 – According to the U.S. Bureau of Labor Statistics, the increasing complexity of financial regulations will spur employment growth of financial examiners. In fact it is expected to experience the third largest growth of all career paths through 2018:
Fact 2 – According to Rep. Shelly Moore Capito (R-W.Va.), author of H.R. 3461, “The Dodd-Frank Act has added so many new regulations to financial institutions, it has helped boost a 31% projected growth in job opportunities for Compliance Officers.”

Fact 3 – Speaking of H.R. 3461…It is also called the Financial Institution Examination Fairness and Reform Act, and aims to provide “more transparent, timely and fair examinations” by reducing the disconnect between exam results and their regulating agencies. It now has 154 co-sponsors.

Fact 4 – A related bill (S. 2160) has just been introduced in the Senate.

Fact 5 – The provision in both bills that is getting the greatest push-back from regulators is the one that grants a financial institution the right to appeal an examination finding to an ombudsman at the FFIEC, not the regulator that made the finding.

I’ll let you connect the dots of these “random” facts.