Banking Chair Calls for Audit of Bank Exam Practices

WASHINGTON — Amid a tide of complaints that examiners are being too tough on community banks, Senate Banking Committee Chairman Tim Johnson is seeking an audit of the exam practices at federal banking agencies.

Johnson, a South Dakota Democrat, requested the audit in a letter Friday to four agency watchdogs.

"Recently, I have heard numerous concerns from community banks and credit unions that the financial regulators' examiners are conducting examinations with unclear standards or with inconsistent application of agency policies and procedures," Johnson wrote in a letter to the inspectors general at the Treasury Department, the Federal Deposit Insurance Corp., the Federal Reserve Board and the National Credit Union Administration.

"Community banks and credit unions indicate that examination concerns create uncertainty in their business operations and hesitation to provide credit to their customers," the letter stated. "While the regulators must ensure the safety and soundness of financial institutions, I believe responsible lending to families and small business owners is one key to our economic recovery."

In addition to requesting an audit of the examination process for community banks and credit unions, the letter also asks for a report on the ability of banks to question exam results, either informally or through an appeals process, and on how frequently such efforts are successful.

Johnson's letter comes amid a fight over a bipartisan House bill that would loosen certain exam standards and establish a new, more independent appeals process for banks.

The banking agencies oppose the House bill, which is sponsored by Republican Rep. Shelley Moore Capito and Democratic Rep. Carolyn Maloney, and has the support of the American Bankers Association and the Independent Community Bankers of America.

Johnson is widely thought to be skeptical of the House bill, given the opposition of the FDIC and other banking agencies. Still, his letter was welcomed by supporters of the measure.

"The request seems more than reasonable," said James Ballentine, chief lobbyist for the American Bankers Association. "We certainly encourage this kind of review of the examination process at any point."

Joseph Barloon, a lawyer at Skadden Arps who represents a number of banks in examination and enforcement actions, said that banks should be able to appeal their exam findings to an entity that's independent of their regulator, as the House bill would allow.

"I do think it will be interesting to see what information the Senate gets in response to its request," Barloon said. "I don't believe the current appeals process is utilized very frequently. And I think that the data should bear that out."