Fed proposes streamlining adverse determination appeals process, formalizing ombudsman policy

“Improving and expediting” the process for appealing an adverse material supervisory determination – particularly for institutions that are in troubled condition – by reducing the appeal levels from three to two is included under proposed new guidelines from the Federal Reserve submitted to the Federal Register Monday for publication.

The proposal would be subject to a 60-day comment period upon publication.

In addition to reducing the appeal levels by one, the Fed said, the proposal would “enhance independent review” of the matters at hand by providing that Federal Reserve System and Board experts not affiliated with affected Reserve Banks can review the matters at both appeals levels.

“The Board’s current appeals process was designed with three levels of appeal in an attempt to ensure objectivity in the appeals process. However, experience has shown that objectivity can be ensured with a more streamlined and efficient process,” the Fed said in its filings.

Current guidelines provide that any institution supervised by the Federal Reserve may file a written appeal of any material supervisory determination. Appeals are then decided within a specified time frame by a review panel selected by the local Federal Reserve Bank (working with Federal Reserve Board staff), comprised of persons, the Fed said, who are not employed by the Reserve Bank and who “have not participated in, or reported to the persons who made the material supervisory determination under review.”

An institution is granted the further right to appeal an adverse decision by the review panel to the Reserve Bank president and ultimately to a member of the Federal Reserve Board. The existing guidelines also have safeguards to protect institutions that file appeals from examiner retaliation, the Fed said.

The proposal also addresses a timing conflict between the prompt corrective action (“PCA”) framework under section 38 of the Federal Deposit Insurance Act and the Fed Board’s existing appeals process. The revised process under the proposal, the Fed said, would accelerate appeals that relate to or cause an institution to become critically undercapitalized under the PCA framework. The aim is to “better assure that a review of an adverse material supervisory determination occurs within the PCA time frame of 90 days,” the Fed said.

The Fed stated that, aside from the proposed changes, situations may arise that would prevent an appeal from being completed before PCA requires a receivership to be imposed. “In these situations, the existence of an outstanding appeal would not prevent the Board from meeting its statutorily mandated obligation under PCA to appoint a receiver, in which case an appeal will become moot.”

The revised process, the Fed stated, also establishes specific standards of review to be applied in the two levels of appeal. The panel that reviews the initial appeal must approach the determination being appealed as if no determination had previously been made, the proposal states.

“The initial review panel will consider a record that includes any relevant materials submitted by the appealing institution and Federal Reserve staff,” the Fed’s filings state. “Under this standard, the panel will have the discretion to rely on examination workpapers and other materials developed by Federal Reserve staff during an examination.”

However, if the appealing institution continues to have concerns regarding the material supervisory determination following the initial review panel’s decision, the appealing institution may request a subsequent final review conducted by a review panel comprised primarily of Board staff.

“The final review panel will consider whether the decision of the initial review panel is reasonable and supported by a preponderance of the evidence in the record, but will not seek to augment the record with new information. In order to maximize transparency, the decision of the final review panel will be made public,” the Fed stated.

In conjunction with the proposed changes for the appeals levels and the PCA timing, the Fed said it is also seeking comments about its ombudsman policy. Now, the ombudsman receives first complaints about the supervisory process, the Fed said, which may include an appeal request.

“The proposed revisions would formalize this practice and allow the Ombudsman to attend hearings or deliberations relating to the appeal as an observer, if requested by the institution or Federal Reserve personnel,” the Fed proposal states. “In addition, the proposed revisions specify that the Ombudsman’s role is to be the decision-maker with respect to claims of retaliation.”

Proposed guidelines: Internal Appeals Process for Material Supervisory Determinations and Policy Statement Regarding the Ombudsman for the Federal Reserve System