To the Editor:
Recently a federal court of appeals ruled that when Doolin Security Savings Bank refused to pay its full insurance premium to the Federal Deposit Insurance Corp., the FDIC acted reasonably in canceling the West Virginia institution's deposit insurance coverage.
A July 7 commentary in the American Banker by Stephens B. Woodrough attacked the opinion, repeating many of the arguments that the U.S. Court of Appeals for the Fourth Circuit expressly rejected.
The article also omitted some critical facts and misstated others. In fact, the FDIC's action was not only consistent with common, commercial insurance practices (you pay your insurance premium or lose your insurance), but it was expressly authorized by Congress.
In a unanimous, three-judge decision, the fourth circuit held that Doolin failed to challenge its risk-based assessment classification - which set the amount of its insurance premium - through all available administrative and judicial remedies.
Instead, the institution unlawfully engaged in self-help by withholding a portion of the premium. When Doolin sought review of the decision by all active fourth circuit judges, not one of them agreed with the institution's arguments that the case should be heard again.
The July 7 article states that all insured financial institutions "stand to lose," with speculations apparently intended to frighten bankers into concluding that their institutions are threatened by the decision.
There is, however, no threat here. As required by law, all depository institutions must pay their insurance premiums. If they feel that a premium is inappropriate, there are judicial remedies to challenge the amount paid. If they prevail, FDIC regulations provide that the disputed amount will be refunded with interest.
While the article characterizes the FDIC's action as "unprecedented," it fails to take into consideration the fact that this was the first time an insured depository institution refused to pay its premium in full under the new risk-based assessment system.
In court Doolin argued that the FDIC was required to sue the institution to recover the full premium, relying on a 1983 case that was factually and legally different from Doolin's situation and that was decided before the more recent depository institution crisis.
The fourth circuit resoundingly rejected Doolin's arguments, holding that termination was expressly authorized by statute and that requiring the FDIC to sue to recover full premiums would further threaten the Savings Association Insurance Fund.
The article also misstates the due-process implications of the decision. It leaves the mistaken impression that Doolin never had an opportunity for an appropriate hearing to challenge the factual basis for its risk-based classification. In fact, the classification was largely based on Doolin's examination rating by the Office of Thrift Supervision, the institution's primary regulator, and Doolin itself declined to utilize the full administrative or judicial review available to challenge that rating. Doolin was informed that if it successfully pursued its remedies before the OTS, the FDIC would then reconsider Doolin's risk-based classification.
Likewise, Doolin was advised that a failure to pay its full premium could result in the termination of its deposit insurance. The article's failure to note these facts is as curious as Doolin's failure to seek proper review of its disputed OTS rating.
The review process for Doolin's premium, similarly available to all institutions, was painstakingly examined by the court and held to be consistent with constitutional due-process requirements.
The decision was not an expansion of the law, as the article asserts, but followed prior cases. The decision also did not limit any administrative remedies by the Constitution.
Finally, what the article fails to recognize is that the fourth circuit's decision makes good business sense. The FDIC has the responsibility to operate the insurance funds in a prudent manner so that the funds will be there to protect all insured account holders and institutions.
To encourage a "fight first, pay later" practice with regard to premiums would threaten the financial well-being of the insurance funds we have all worked so hard to protect. The thrift fund is still in a precarious financial condition. We do not believe that it is in the best interest of the banking industry or the public to permit any practice that could have the effect of putting that fund in jeopardy.
Alan Whitney
Director, corporate communications Federal Deposit Insurance Corp. Washington
