�౦��Ϸ����

AAC-2004-03 (July 23, 2004)

Background

By letter dated April 8, 2004, the [Bank] (“the Bank”), submitted an appeal to the �౦��Ϸ����’s Assessment Appeals Committee (“Committee”). The Bank is appealing the March 15, 2004, determination by the �౦��Ϸ����’s Division of Insurance and Research (“DIR”) denying the Bank’s request for review of its supervisory subgroup (“SS”) assignment for the three semiannual assessment periods beginning January 1, 2002, July 1, 2002, and January 1, 2003.

The Bank was assigned an SS of “1C” for each of the three semiannual periods in question and sought an upgrade to “1A.” In its request for review, the Bank contended that two “biased and harmful” �౦��Ϸ���� examinations (the January 8, 2001, examination and the November 26, 2001, examination) had inaccurately reflected the Bank’s true condition for these semiannual periods. In support, the Bank noted it had successfully appealed a third examination (the January 6, 2003, examination 1) to the �౦��Ϸ����’s Division of Supervision and Consumer Protection (“DSC”) using the established �౦��Ϸ���� process for appealing supervisory determinations.2 As a result of that appeal, the Bank’s CAMELS composite rating for the January 6, 2003, examination was upgraded from “3” to “2,” which resulted in an upgrade from “1B” to “1A” in the Bank’s assessment risk classification for the July 2003, semiannual period. The Bank contends that the upgrade demonstrates that the �౦��Ϸ���� had, since early 2001, treated the Bank unjustly, and that the January 8, 2001, and November 26, 2001, examinations, which assigned composite ratings of “4,” inaccurately reflected the Bank’s true condition. The Bank, however, never appealed those two examinations through the supervisory appeals process.

In its March 15, 2004, letter, DIR denied the Bank’s request for review on the grounds that the request was filed late. To be timely, a request for review of the risk classification for each of the three semiannual periods at issue should have been submitted within 90 days of the date of the assessment risk notification for each period. 12 C.F.R. § 327.4(d). DIR found that the Bank’s January 13, 2004, letter was submitted well beyond the time limit set in the regulation.

As an informational courtesy to the Bank, DIR informed the Bank that its request for review would have been denied even if it had not been filed late. DIR explained that the Bank’s SS ratings of “C” for the January 2002, July 2002, and January 2003, assessment periods had been properly assigned based, in part, on the two prior examinations (January 8, 2001, and November 26, 2001), which were never appealed. The outcome of the appeal of the Bank’s January 6, 2003 examination, DIR noted, did not change the findings regarding the serious nature of the Bank’s condition reflected in those two previous examinations. DIR also noted that the Bank itself, in its appeal, referred to the diligent, and ultimately successful, efforts it had made since the January 8, 2001, examination to improve its condition. DIR also informed the Bank that under Financial Institution Letter (FIL)-90-2003, and the prior FIL-30-2000, a request for review of assessment risk classification is not a means to dispute examination findings.

The Bank presents two arguments in its appeal letter and incorporates by reference the arguments made in its initial request for review addressed to DIR. The failure to appeal the January 8, 2001, and November 26, 2001, examinations is excusable, the Bank asserts, because such an appeal “would have been futile with likely resulting retribution.” In addition, according to the Bank, DIR’s denial of its request for review may be consistent with the treatment accorded other institutions, but that fact is “irrelevant” and “immaterial” because the process as applied to the Bank has been unfair.

Analysis

The Bank’s request for review of its risk classifications for the January 2002, July 2002, and January 2003, semiannual periods was submitted late. Section 327.4(d) of the �౦��Ϸ����’s Rules and Regulations, provides that a request for review must be submitted within 90 days of the date of the assessment risk classification notice for each semiannual period. The notice for the January 2002 semiannual period was dated December 14, 2001; the notice for the July 2002 semiannual period was dated June 14, 2002; and the notice for the January 2003 semiannual period was dated December 13, 2002. The Bank’s January 13, 2004 request for review for those three semiannual periods was, respectively, 22 months, 16 months, and 10 months late.

SS assignments are made in accordance with the �౦��Ϸ����’s regulations, specifically, 12 C.F.R. § 327.4(a)(2). That section requires the �౦��Ϸ���� to consider supervisory evaluations provided by an institution’s primary federal regulator and other relevant information in making these assignments. As set forth in FIL-90-2003,3 the �౦��Ϸ���� assigns an SS to each institution for each semiannual assessment period based, in part, on consideration of the last examination finalized and transmitted to the institution by the primary federal regulator on or before the cut-off date. Under the FIL, the cut-off dates for assessment periods beginning January 1 and July 1 are the preceding September 30 and March 31, respectively.

The �౦��Ϸ���� considers other pertinent information during the reconcilement period, which is a period of approximately six weeks following the cut-off date. Institutions whose risk profile might have changed since their last examination can be subject to SS upgrades or downgrades, as more recent examination information may reflect, during the reconcilement period.

The Committee can discern no flaw in the assignment of the Bank’s SS ratings for the three semiannual periods at issue. The SS of “C” assigned to the Bank for the January 2002 assessment period was based, in part, on the January 8, 2001, examination, which assigned a composite rating of “4” and was the last composite rating finalized prior to the September 30, 2001, cut-off date. The report for that examination was transmitted to the Bank on June 26, 2001. The SS assignment of “C” was reviewed during the reconcilement period that began in October 2001. That review concluded that there was no significant documented change in the Bank’s condition since the January 8, 2001, examination and confirmed the SS assignment of “C.”

The SS of “C” assigned for the July 2002 assessment period was based, in part, on the findings of the November 26, 2001, examination, which assigned a composite rating of “4.” The findings from that examination were transmitted to the Bank in April of 2002. The SS assignment of “C” was reviewed during the reconcilement period that concluded in May of 2002, and the SS of “C” was confirmed.

The SS of “C” assigned for the January 2003 assessment period was also based, in part, on the November 26, 2001, examination, which was the last composite rating finalized prior to the September 30, 2002, cut-off date. The SS assignment of “C” was reviewed during the reconcilement period that began in October 2002. That review concluded that there was no significant documented change in the Bank’s condition since the November 26, 2001 examination and confirmed the SS assignment of “C.”

The Bank did not appeal the findings of the January 8, 2001, examination. The composite rating associated with that examination has not changed. Nor did the Bank appeal the findings of the November 26, 2001, examination, and the composite rating associated with that examination has not changed.

Because the Bank’s SS assignments were appropriately made and the underlying examinations have not changed, the Bank’s request for review would have been denied even if it had been submitted on time.

The Bank, however, does not directly address the late filing of its request for review. Instead, the Bank contends that its failure to appeal the January 8, 2001, and November 26, 2001, examinations is excusable because appeal of those examinations would have been “futile at best” with likely retribution. This argument is rejected for a number of reasons.

As stated in both FIL-90-2003 and its predecessor FIL-30-2000, a request for review of assessment risk classification is not a means to dispute examination findings. The appropriate forum for review of supervisory determinations is as set forth in the Guidelines for Appeals of Material Supervisory Determinations (FIL-28-1995), with final review by the Supervision Appeals Review Committee (“SARC”). The Bank had 60 days following receipt of the January 8, 2001, and the November 26, 2001, examinations, respectively, in which to file such a challenge through the SARC process. The Bank chose not to file.4

Administrative remedies made available by agencies (such as the �౦��Ϸ����’s processes for appealing supervisory determinations) generally cannot be bypassed by parties who have claims or grievances against the agency. Rather, the administrative process must be “exhausted” to allow the agency to exercise its discretion and apply its expertise, to allow for development of a record, to avoid circumvention of procedures, and to give the agency an opportunity to correct errors.5 Indeed, the Bank acknowledges the exhaustion requirement in its appeal letter.6

Courts may recognize an exception to this exhaustion requirement if pursuing the administrative remedy would be “futile” because of the certainty of an adverse decision.7 The Bank, however, offers no valid reason why appeal of the underlying examinations would have been futile. Although subsequent to the events at issue in this case, when the Bank appealed the January 6, 2003, examination findings through the �౦��Ϸ����’s supervisory process, DSC upgraded the composite rating from “3” to “2” in the Bank’s favor, thus illustrating that the review process may be beneficial and should not be discounted as “futile.”

The Bank, however, points to this upgrade as evidence that the January 8, 2001, and November 26, 2001, examinations were “biased and damaging” and inaccurately reflected its true condition. DSC’s composite rating upgrade, however, was based in significant part on corrective actions taken to improve the overall condition of the Bank, the Bank’s asset quality, and previously criticized risk management policies and practices. As the Bank itself acknowledged in its appeal of the January 6, 2003, examination, and as mentioned above, the upgrade shows that, from the Bank’s perspective, “Management has worked diligently since the 2000 examination to improve risk management systems and processes. These efforts have been successful in affecting improvement in Asset Quality, Capital, Earnings, Sensitivity, and Liquidity.” The upgrade granted by DSC as to the January 6, 2003, examination does not in any way discount the poor condition of the Bank as noted in the previous examinations.

In short, the Committee finds no basis for the Bank’s argument that its failure to appeal the January 8, 2001, and November 26, 2001, examinations is excusable because such appeals would have been futile.

Finally, the Bank contends that DIR’s denial of its request for review constitutes unfair treatment and asserts that similar treatment of other institutions in similar circumstances is “immaterial.” The Bank is evidently referring to the following statement in DIR’s March 15, 2004, denial letter: “Be assured that the basis for denial of the Bank’s request is consistent with the treatment of similarly situated institutions.”

In so stating, DIR correctly informed the Bank that it was being treated no differently from any other institution in the same circumstance. Other institutions have in fact made claims similar to the Bank’s and had their requests denied. The assessment appeals process was established in order to promote consistency in the treatment of institutions. Moveover, in its denial letter, DIR extended to the Bank the courtesy of explaining why the Bank would not have prevailed even had its request been filed on time. The Bank’s contention that it has been treated unfairly is unsupported.

Conclusion

The Committee has carefully considered all of the written submissions made in this matter. The Bank’s request for review was submitted late and, for that reason, the Bank’s appeal is denied. The Committee has also taken this opportunity to explain for the benefit of the Bank that the Bank’s request would have been denied even if the request had been filed on time.

As part of its appeal, the Bank asked that it be permitted to appear before the Committee for the purposes of providing oral arguments. The Committee concluded, however, that oral presentation of this appeal would not be helpful and therefore denies the request.

Pursuant to authority delegated by the �౦��Ϸ���� Board of Directors to the Committee, this decision is considered the �౦��Ϸ����’s final agency action on this matter.

By direction of the Assessment Appeals Committee of the �౦��Ϸ���� dated July 23, 2004.

• 1

  The Bank refers to the three examinations, respectively, as the 2000 examination, the 2001 examination, and the 2002 examination.

• 2

  Material supervisory determinations made by agency examiners and regional supervisory officials may be appealed under the process set forth in FIL-28-1995 (Guidelines for Appeals of Material Supervisory Determinations).  Institutions have 60 days following receipt of written notice of a material supervisory determination to file a request for review with DSC in Washington, D.C.  After DSC considers the matter, the Supervision Appeals Review Committee renders the �౦��Ϸ����’s final supervisory determination.

• 3

  These factors remain, in substance, unchanged from the earlier FIL-30-2000.

• 4

  The appeals process for supervisory determinations provides for review at both the Regional and Washington Office levels, as well as with the SARC.  Assistance is also available from the Ombudsman’s Office to ensure the overall fairness, efficiency and effectiveness of the process.  Once the matter has been appealed or a final decision made, the merits are not eligible for consideration by the Ombudsman except in his or her capacity as a member of the SARC.

• 5

  See Urban v. Jefferson County School Dist. R-1, 89 F.3d 720, 724 (10th Cir. 1996).

• 6

  “The Bank anticipates that this [appeal] will constitute an exhaustion of its administrative remedies so it can then take further action against �౦��Ϸ���� if appropriate.”

• 7

  See Randolph-Sheppard Vendors of America v. Weinberger, 795 F.2d 90, 105-07 (D.C. Cir.1986).