Dear Mr. Sheesley:
We, the undersigned banking trade associations , appreciate the FDIC soliciting further public comment on amendments to its Guidelines of Material Supervisory Determinations (“Guidelines”). In response to the initial feedback collected after the FDIC Board voted to reconstitute the Supervision Review Appeals Committee (“SARC”), the FDIC is proposing to amend its Guidelines of Material Supervisory Determinations (“Guidelines”) to (1) add the Ombudsman to the SARC as a non-voting member; (2) require the Ombudsman to monitor the supervision process following an institution’s submission of an appeal; (3) require materials considered by the SARC to be shared with both parties to the appeal; and (4) allow IDIs to request a stay of a material supervisory determination while an appeal is pending.
Unfortunately, notwithstanding the FDIC’s proposed modifications, many of the fundamental concerns we previously articulated remain. Once again, the Associations strongly recommend that the FDIC reinstate the Office of Supervisory Appeals (“OSA”) as the best way to achieve the FDIC’s stated goals for a more independent, fair and credible material supervisory determination appeals process. 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. Should the FDIC choose to retain the SARC, however, this letter identifies several opportunities for improvement that can help the FDIC better meet its objectives. These include:
- Setting minimum qualifications for voting members of the SARC who are not FDIC Board members and providing them the resources to conduct a de novo review;
- Providing banks the option to bring appeals directly to the SARC and bypass the first level of review by the appropriate FDIC Division Director.
We also offer recommendations in response to the most recent proposed modifications to the
Guidelines relating to: (i) ex parte communications; (ii) stays of supervisory actions pending an appeal; and (iii) accountability and independence of the SARC. More specifically, our recommendations include:
- Prohibiting ex parte communications during an appeal;
- Providing for any ex parte communications that inadvertently occur to be memorialized in writing and made available to both the SARC and the appealing bank on a timely basis;
- Providing for the SARC – rather than the FDIC Division Director – to consider IDI requests for stays of material supervisory determinations pending appeal at the SARC; and
- Adopting reasonable standards that the decision-maker must apply in evaluating requested stays of material supervisory determinations.
While we appreciate the agency’s stated objective to enhance due process – and support certain aspects of the proposal such as a new requirement to share SARC information with both parties as a necessary safeguard to protect against one-sided information sharing – on the whole, the FDIC’s most recent proposal sets forth only a patchwork of changes that do not fundamentally alter the shortcomings of the appeals process. For example, while we support the expanded role of the FDIC Ombudsman in the supervisory appeals process as a non-voting member, the participation of the FDIC Ombudsman on the SARC does not meaningfully redress imbalances inherent in current and proposed review approaches.
Accordingly, even with the proposed modifications to the SARC, the FDIC’s appeals process will not meet the expectations Congress had when it adopted Section 309(a) of the Riegle Community Development and Regulatory Improvement Act in 1994. Based on experience and past precedent, banks believe there is little likelihood of success in appealing a material supervisory determination and that the risk of retribution from within the agency (whether real or just perceived) too often outweighs any benefit of pursuing an appeal.
Examiners are often asked to make complex and subjective judgments on matters such as loan quality and the capabilities of management and the board. They cannot be expected to always get it right and, if they are wrong, the consequences to banks can be severe.
The FDIC and the industry have a common interest in getting examination results right and having banks trust the appeals process.
I. If the FDIC Determines Not to Resurrect the OSA, the FDIC Should at a Minimum Introduce
Further Reforms Relating to the Minimum Qualifications of SARC Members and the Basic
Structure of the Appeals Process
As a voice independent of supervision, the Ombudsman can potentially play a useful role on the SARC, even without a vote. Nonetheless, a new non-voting representative does not address inherent imbalances in the appeals process. At a minimum, further reforms are required relating to the minimum qualifications of SARC members and the basic structure of the appeals process. Under both the current and proposed approaches, two-thirds of the voting members of the SARC are delegees – deputies or “special assistants” – of FDIC Directors. The other voting member is an FDIC Director. This composition is inherently part of the FDIC leadership structure and provides appellants little confidence the most senior executives of the agency (or their designees) will disagree with agency approaches or decisions of the people they lead.
a. Minimum Qualifications for Voting Members of the SARC
Any finalized Guidelines should specify the criteria for minimum qualifications to serve as a voting member of the SARC when an individual is designated by an FDIC Director. Specifying minimum qualifications for these members of the SARC would promote greater credibility and trust in the process. We recommend that the FDIC develop and maintain a list of qualified candidates outside the FDIC to serve on the SARC, including current state supervisors (from states and regions outside of where the appeal originated) and retired examiners, and the Guidelines should be revised to allow FDIC Directors to appoint individuals from this list to serve on the SARC.
b. Option to Bypass FDIC Division Director Level Review and Instead Appeal Directly to the SARC
The FDIC should revise the Guidelines to expressly permit banks to bypass initial review by Division Directors and instead file an appeal directly with the SARC – i.e., similar to the supervisory appeals process currently used by the OCC (which allows an appeal directly with the OCC Ombudsman). Moreover, we recommend that the final Guidelines expressly prohibit SARC members from relying on the opinions and conclusions of the applicable Division Directors, including their findings of facts. Instead, the Guidelines should state clearly that the SARC will conduct a de novo review and the FDIC should ensure that the SARC is appropriately staffed, and has the resources necessary, to perform a de novo review.
The current and proposed appeals process – with two levels of appellate review – is inherently biased towards the supervisory office and Division Directors and cumbersome for appellants to navigate. Over time, the number of appeals filed with the agency have been few and far between – reflecting the reality that many banks do not believe the process affords any reasonable chance of success on appeal. At the very least, this tiny number of appeals (even recognizing that many exams do not provide criticism or a legitimate basis upon which to mount an appeal) suggest that the appeals process is not regarded by the industry as meaningful. The data alone argues for more fundamental revisions than the Guidelines proposed. In all likelihood, FDIC Board members and/or their designees on the SARC will almost always defer to and rely upon a Division Director’s initial review of the matter under either the current or proposed Guidelines.
This deference is particularly troublesome because Division Directors are themselves conflicted with the examination teams they directly supervise. By the nature of the position (i.e., as a mentor and supervisor for examiners) a Division Director is almost certainly inclined to support his or her staff against a challenge to their decision-making. Moreover, in complex or contentious matters, they are often deeply involved, directly or indirectly, in managing and advising the bank’s examiners on material supervisory determinations even before an appeal is filed.
II. The Burden of Proof in Appeals Proceedings Should not be Placed on the Appealing IDI
According to the proposed Guidelines, the burden of proof as to all matters at issue in the appeal rests with the IDI. The FDIC should not place the burden of proof on appealing banks. Such a requirement is not required by statute and is unnecessarily prescriptive because the SARC process is not governed by the Administrative Procedures Act or other formal judicial review procedures. Moreover, as proposed, because appealing banks carry the burden of proof, the SARC reinforces the disproportionate influence of the Division Directors by allowing the SARC to defer to these Directors’ opinions. In effect, the Guidelines continue to reinforce a structure under which an appeal cannot succeed unless the appellate decision-maker rules that the people they supervise are not merely wrong, but clearly wrong. This standard both reduces sharply the prospects of success on appeal and increases the fear of retribution because of the “clearly wrong” argument that the appealing banks must make.
To read the full comment letter, click here, or click on the download button below.
 The American Association of Bank Directors, the American Bankers Association, the Bank Policy Institute, the Consumer Bankers Association, the Independent Community Bankers of America, and the Mid-size Bank Coalition of America (collectively, “the Associations”).
 FDIC, FIL-46-2022, Proposed Amendments to Guidelines for Appeals of Material Supervisory Determinations (Oct.18, 2022) available at: https://www.fdic.gov/news/financial-institution-letters/2022/fil22046.html.
 FDIC, Sunshine Act Meeting, (June 2, 2022) available at: https://www.fdic.gov/news/boardmatters/2022/2022-05-17-notice.html.
 See gen. comment letter submitted by AABD, ABA, BPI, CBA, ICBA, and MBCA to the FDIC on June 21, 2022 regarding “Guidelines for Appeals of Material Supervisory Determinations” available at: https://www. consumerbankers.com/cba-issues/comment-letters/joint-comment-letter-fdic-re-supervisory-appeals
 For example, a less than satisfactory CAMELS rating now is self-enforcing, with dramatic and automatic consequences for the bank and its parent holding company (e.g., loss of ‘financial holding company’ status).
 Between January 2007 and January 2021, only 51 appeals were filed to the SARC out of 113,448 exams. FDIC, Statement by FDIC Chairman Jelena McWilliams on Changes to Supervisory Appeals Process (January 19, 2021), available at: https://www.fdic.gov/news/speeches/2021/spjan1921.html.
 Since FDIC members of the SARC often have an ongoing relationship with the examination staff involved in the appeal, it may be difficult for the SARC to opine upon material supervisory matters with necessary objectivity and impartiality.