Washington, D.C. (Nov. 22, 2022) — The FDIC has proposed changes to its new supervisory appeals structure aimed at increasing its independence, but the system still requires significant overhauls to preserve banks’ due process rights, BPI, the American Bankers Association, the American Association of Bank Directors, the Consumer Bankers Association, the Independent Community Bankers of America and the Mid-Size Bank Coalition of America said in a letter filed late yesterday.

What’s happening: After it reinstated the Supervision Appeals Review Committee (SARC), the FDIC recently proposed new changes:

• adding the FDIC Ombudsman to the SARC as a non-voting member;
• requiring the Ombudsman to monitor the supervision process following a bank’s submission of an appeal;
• requiring materials considered by the SARC to be shared with both parties to the appeal;
• allowing banks to request a stay of a material supervisory determination while an appeal is pending.

These modifications would make modest incremental improvements, but fall short of the meaningful reforms necessary to preserve due process for banks appealing supervisory decisions. Unfortunately, even with the proposed modifications, the process leaves ample room for biased insider decisions that violate the impartiality that should apply to supervisory appeals.

What we are saying: “By abandoning the OSA after only five months of operation, the FDIC has prematurely given up on a process that holds extraordinary promise of providing FDIC-supervised banks a fair and impartial forum for appeal,” the trades said in the letter. “While we appreciate the agency’s stated objective to enhance due process … on the whole, the FDIC’s most recent proposal sets forth a patchwork of changes that do not fundamentally alter the shortcomings of the appeals process.”

The background: The FDIC dismantled a newly formed Office of Supervisory Appeals (OSA), an impartial forum for reviewing banks’ appeals of major supervisory determinations, and replaced the OSA with its predecessor, the SARC. The low number of appeals filed with the agency over time reinforces the lack of trust in the SARC process and its impartiality. The SARC is comprised of FDIC Board members, or their designees, meaning its members often defer to FDIC staff’s initial review of the matter, leaving little room for dissent on supervisory decision-making.   

Why it matters: Bank examiners make complex judgments on important matters like loan quality and the capabilities of the board and management, and consequences to banks are severe when examiners get it wrong. The FDIC and the banking industry have a common interest in promoting trust and accountability in the appeals process.

Our recommendations: The FDIC should reinstate the Office of Supervisory Appeals to ensure the supervisory appeals process is independent, fair and credible. If the FDIC chooses to retain the SARC, however, it should:

• Set minimum qualifications for voting members;
• Enable banks to bring appeals directly to the SARC;
• Prohibit ex parte communications during an appeal and require those that inadvertently occur to be documented and shared with both the SARC and the appealing bank in a timely manner;
• Require that the SARC, rather than the Division Director, be the one to consider and grant the stay of the supervisory determination pending appeal, and adopt reasonable standards in evaluating requested stays of supervisory determinations.

About ICBA

The Independent Community Bankers of America® creates and promotes an environment where community banks flourish. ICBA is dedicated exclusively to representing the interests of the community banking industry and its membership through effective advocacy, best-in-class education, and high-quality products and services.

With nearly 50,000 locations nationwide, community banks constitute roughly 99 percent of all banks, employ nearly 700,000 Americans and are the only physical banking presence in one in three U.S. counties. Holding more than $5.8 trillion in assets, over $4.8 trillion in deposits, and more than $3.5 trillion in loans to consumers, small businesses and the agricultural community, community banks channel local deposits into the Main Streets and neighborhoods they serve, spurring job creation, fostering innovation and fueling their customers’ dreams in communities throughout America. For more information, visit ICBA’s website at www.icba.org.

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