Regulatory exams are a way of life in the financial industry. Institutions, especially commercial banks, face examinations on a regular basis from both federal and state agencies. Examinations are generally divided into (2) categories: (a) compliance and (b) safety and soundness. Although frequency varies with the type of examination, the regulatory agency, and the size of the institution, for larger banks in particular there is usually some type of examination ongoing most of the time.
Talk to different bankers and one will likely get different thoughts on the examination process itself and the quality of the interaction with agency staff. With compliance reviews in particular, there tends to be a lot of variation in the perceived experience from the institution’s side. Consumer compliance regulations contain considerable subjectivity and ambiguity. This provides examiners with a significant level of discretion with respect to how they interpret and apply the regulations and guide their expectations. Thus, often the agency and the institution may have divergent perspectives.
There have been efforts on behalf of the various agencies to help bring consistency with regard to the application of consumer compliance regulation. As an example, the FFIEC publishes fair lending examination procedures that provide the process that examiners are to follow in conducting a fair lending review. This should serve as a guide to institutions with regard to self-evaluation but also as to what to expect in the fair lending exam process. In last year in particular, FDIC priorities have been to provide more certainty and transparency in their oversight processes and treatment of the institutions they regulate.
However, in these procedures themselves, examiner discretion during the review process is actually encouraged. Although examiner discretion and judgment is emphasized in different places in the document, one of the very first pages (iv) under general guidelines the procedures state:
These procedures are intended to be a basic and flexible framework to be used in the majority of fair lending examinations conducted by the FFIEC agencies. They are also intended to guide examiner judgment, not to supplant it. The procedures can be augmented by each agency as necessary to ensure their effective implementation.
The FDIC has provided a questionnaire to institutions post-exam to provide feedback with regard to the examination experience. Although provided after the review, some institutions may have reservations in responding to these and particularly if they were going to offer criticism.
A recent change in the survey process, however, may encourage more institutions to both respond and be more candid in their response. The FDIC has turned the survey process over to the Office of the Ombudsman.
The FDIC Ombudsman Office was established pursuant to Title III, Section 309(d) of the Riegle Community Development and Regulatory Improvement Act of 1994 (Riegle Act). In accordance with provisions set forth in the Riegle Act, the Ombudsman Office was created to act as a liaison between the agency and any affected person with respect to any problem such party may have in dealing with the agency and to assure that safeguards exist to encourage complainants to come forward and preserve confidentiality.
The FDIC noted in its Financial Institution Letter (FIL) release:
The Federal Deposit Insurance Corporation (FDIC) is notifying FDIC-supervised financial institutions (banks) that the Office of the Ombudsman — which is independent of the supervisory process, reports directly to the FDIC Chairman’s office, and is a confidential resource for banks — is now administering the Post-Examination Survey (Survey) process. This change further ensures confidentiality of Survey responses and is designed to promote additional candid feedback and to improve response rates. The change is also part of the FDIC’s efforts to enhance transparency, efficiency, and accountability.
The FDIC Office of the Ombudsman is independent of the supervisory process, reports directly to the FDIC Chairman’s office, and is a confidential resource for banks.
For readers interested in the activities of the Ombudsman, they recently released their annual report. In 2018, the Ombudsman Office handled 142 industry cases, many of which were able to be resolved by providing information and assistance (65%) for bank-specific questions or issues. The office also conducted outreach visits to nearly 500 external stakeholders, including banks, trade associations, and state banking authorities.
The agency also recently announced that they will be holding “Listening Sessions on Supervisory Appeals and Dispute Resolution Processes” for bankers and other interested parties beginning in the 4th quarter of 2019. The schedule for the listening sessions can be found here.
Along with the changes to the post-examination survey, these efforts are part of the FDIC’s “Trust through Transparency” initiative. More information, along with comments for the FDIC Chair concerning these efforts can be found here.