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Appeal of Consumer Compliance Rating (First Quarter 1997)


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.


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.


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)


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.


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.


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.