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Appeal of CAMEL Rating (First Quarter 1996)


A formal appeal was received from a bank, which disagreed with the composite CAMELS rating of "3" assigned to the bank during its most recent safety and soundness examination.

The bank became involved in a retail loan securitization program in 1993.  The securitization program began slowly with only one $35MM offering the first year.  During 1994, the securitization program grew to three offerings totaling approximately $100MM.  The growth continued, and in 1995, the bank sponsored six offerings totaling approximately 500MM.  During the bank's 1993 examination, concerns were expressed about the lack of policies and procedures to guide the bank's supervision of the securitization program.  During the 1994 examination, in addition to criticisms of the lack of policies and procedures, questions were raised concerning the proper accounting of the securitization program, which could have a major impact on the bank's reported earnings, capital, and liquidity.  The impact of these issues on the bank escalated during 1995, when the program grew rapidly.

An examination began in May 1995, including a review of the securitization program.  The report of examination (ROE) was mailed to the bank on August 30, 1995.  The bank was assigned a composite CAMELS rating of "2".  The ROE stated that because of continuing questions regarding the securitization program, that portion of the examination would be forwarded under separate cover.  The ROE also stated that the outcome of the portion of the examination covering the securitization program could affect the assessment of the overall condition of the bank.  This ROE briefly discussed some aspects of the loan securitization program including discrepancies in the accounting and management information systems (MIS) and lack of internal audit coverage.  The ROE acknowledged that the bank had forwarded records to explain the deviations in accounting and MIS reports, and stated that the examiners would follow up with senior bank management.

A second ROE, summarizing the results of the examination of the bank's securitization program, was forwarded to the bank on December 8, 1995 with a start date of June 5, 1995.  Significant weaknesses in the administration of the program were found, which the supervisory office believed significantly increased the risk profile of the bank.  The composite CAMELS rating of the bank was changed to a "3" in this ROE.


The ROE received by the bank in December 1995 highlighted significant weaknesses in the administration of the securitization program, including:

  • Weak board supervision.
  • Ineffective systems and controls,
  • Significant accounting discrepancies that could substantially reduce the bank's capital base,
  • Questionable accounting treatment of loan sales, which could also impact capital, and
  • Overall deficiencies in management's handling of loan sales to funding sources, which could potentially limit the volume of funds available to finance expansion of the program.

The ROE indicated that the above-referenced weaknesses spawned serious concerns about the bank's ability to maintain the program's current level of operating performance.  Management was requested to take immediate corrective action, with the board of directors closely supervising their progress.  The bank was requested to take the following actions:

  • Implement effective risk management systems,
  • Commission a comprehensive audit of the program by a qualified team and
  • Develop a comprehensive quality control unit.

Although the items listed above were cited as the major steps needed to correct operating weaknesses, numerous other supporting actions the board needed to take were detailed in the ROE.

In the appeal letter, management of the bank contended that the June examination:

  • Covered the same basic examination topics as the May examination with respect to the securitization program,
  • Failed to provide any conclusions to the technical accounting or legal questions raised in the May examination,
  • Covered matters that were nothing more than guidelines,
  • Misstated bank procedures or failed to recognize efforts undertaken by the bank and
  • Failed to identify specific shortcomings of the bank's program, and only set forth general guidelines for any bank engaged in a similar program.


The bank's program grew rapidly between the 1994 examination and the 1995 examination.  The bank had begun to institute controls and procedures in the program during the 1995 examination; however, these controls were not sufficient to fully manage the risk that the program posed to capital, earnings, and liquidity.

The bank obviously committed resources to the program after the examination (but before receiving further assurance of the program's proper administration through a comprehensive external audit, formal accounting opinions, and independent risk management processes).

Although the June 1995 ROE outlined several significant weaknesses in the administration of the bank's securitization program that increased the risk profile of the bank, the frustration the bank felt with the protracted timing of the 1995 examinations, particularly the delayed receipt of the ROEs was understandable.  In addition, management's dissatisfaction that many of the affirmative actions taken to enhance the program were not evaluated and acknowledged during the interim period is legitimate.

Executive bank management did not disagree with the importance of maintaining appropriate systems and controls to protect the bank's involvement in such a rapidly expanding program.  However, because of the rapid growth, sufficient controls had not been instituted at the time of the June 1995 examination.  During the ombudsman's visit to the bank, he recognized that many enhancements to the bank's systems and controls had been implemented since the June 1995 examination.  Because of the addition of these enhanced systems and controls, as well as other improvements in the program, the ombudsman recommended the immediate re-examination of the bank by the supervisory office.

The composite CAMELS 3 rating, assigned as a result of the June 1995 examination, was found to be an appropriate rating considering the risks inherent in the program at that time.  The additional efforts taken since the June 1995 examination, to enhance risk monitoring and control of the program, will be reflected in the next examination.

Material Subsequent Event:  The bank was recently re-examined by the supervisory office and the bank's composite CAMELS rating was upgraded to a composite CAMELS 2.