Two months ago, in Doolin Security Savings Bank v. FDIC, the U.S. Court of Appeals for the Fourth Circuit upheld the decision of the FDIC to terminate the deposit insurance of a financially sound bank.

The FDIC's decision to impose capital punishment upon a safe and profitable banking institution by terminating its deposit insurance was abusive - a determined effort calculated to coerce the bank into submission.

Even more alarming, however, was the failure of the reviewing appellate court to penetrate the coercive tactics of the FDIC and expose the emptiness of the practices and procedures it used in inflicting such punishment.

Unless the Doolin decision is modified or overturned on appeal, all insured financial institutions stand to lose - and lose big.

What happened?

Doolin Security Savings Bank is a small, well-capitalized, and profitable savings association serving a rural community in West Virginia.

Its problems began in December 1992, when it was notified by the FDIC that it had been assigned an insurance risk classification of "1B" for purposes of determining the amount of the bank's insurance premium for the first six months of 1993.

The regulations and procedures adopted by the FDIC in assessing insurance premiums provide that each insured institution will be assigned one of nine risk classifications, and that such classifications will be based upon "supervisory evaluations provided by the institution's primary federal regulator."

Such supervisory evaluations are defined to include the findings, conclusions, and examiner options contained in bank examination reports. The FDIC may also consider "other information (such as state examination findings, if appropriate) as it determines to be relevant to the institution's financial condition and risk posed" to the insurance funds administered by the FDIC.

The rating assigned to Doolin was the second-best rating possible, and was said by the FDIC to be "based largely" upon the supervisory ratings and conclusions contained in an examination report of Doolin conducted in 1992 by the Office of Thrift Supervision.

Actually, the FDIC never explained the basis of the risk classification assigned to Doolin; it only provided a form letter that tracked the language of the FDIC regulation.

Doolin believed that the supervisory evaluations in the OTS examination report relied upon by the FDIC were erroneous. The thrift asserted that the proper risk classification was "1A," which was the highest rating possible. Doolin therefore paid the FDIC an insurance premium based upon a "1A" rating.

This same sequence of events occurred in connection with both semiannual insurance assessments for 1993, resulting in an underpayment of slightly more than $15,000.

The FDIC was not amused. It reacted with a vengeance, as though to teach an impudent child a severe lesson.

In September 1993, the FDIC informed Doolin that unless the disputed insurance premiums were paid, an action to terminate the bank's insured status would be initiated.

Such a decision was unprecedented. Never, since its creation by Congress more than 50 years ago, had the FDIC ever used or even threatened to use its power to terminate a bank's deposit insurance for the nonpayment (or underpayment) of an insurance premium.

In every prior instance involving a disputed premium payment, the FDIC used the remedy that Congress specifically fashioned for such purpose - filing (or threatening to file) an action in a local federal district court against the offending bank to recover the disputed premium.

Further, this was the only recorded instance in the history of the FDIC when a threat of termination of insurance was used against a financially sound and profitable bank.

The FDIC has never alleged that Doolin is financially distressed, or that it poses even a remote threat of loss to the insurance fund. In fact, the most recent examination report of Doolin prepared by the FDIC shows that its examiners assigned the highest possible composite rating to the bank.

The FDIC made good on its threat in November 1993, when it initiated termination of insurance proceedings against Doolin. Such action was predicated on a single charge, namely, an alleged violation of law based upon failure of the bank to pay the insurance premium assessed by the FDIC.

In January 1994, despite Doolin's objections and request for a full evidentiary hearing on the supervisory ratings and conclusions in the OTS examination report relied upon by the FDIC, the presiding administrative law judge awarded summary judgment to the agency. The decision was affirmed by the FDIC board of directors in June 1994.

The agency in effect awarded itself a summary judgment; there was never any trial or evidentiary hearing. In fact, the supervisory evaluations and conclusions in the OTS examination report were never made a part of the record in the Doolin case.

Doolin appealed the FDIC order to the fourth circuit court of appeals in July 1994. Two months ago, on May 18, the fourth circuit court affirmed the FDIC order to terminate Doolin's insurance.

This landmark decision will be used by FDIC and other bank regulatory agencies to carve out issues that would otherwise have to be decided by administrative law judges on the basis of testimony and other evidence presented at a hearing.

The Doolin opinion could eviscerate the due-process procedures that have heretofore been required by law in connection with the prosecution decision. The opinion will therefore have a far greater impact upon the banking community than merely confirming the power of the FDIC to terminate a bank's deposit insurance regardless of its financial condition.

The rationale of the decision will be used to totally insulate from meaningful independent review the findings and opinions of bank examiners contained in reports of examinations prepared by all of the bank regulatory agencies.

The court expressly condoned the FDIC practice of relying in setting an insurance risk classification on the findings and conclusions in a bank examination report. At the same time, the court denied the rated institution any opportunity to challenge the veracity of the examiners responsible or to otherwise challenge the objectivity of the methods used in preparing those views and putting them into the examination report.

In Doolin's care, therefore, the bank was effectively denied its day in court.

Because of the precedential value of the case opinion, its rationale is certain to be used in other types of regulatory enforcement actions.

The FDIC and other bank regulatory agencies will argue that in light of Doolin, the informal intra-agency administrative review and appeal procedures that have been established by the banking agencies for the review of examination reports provide an adequate substitute for due process.

They will also argue that in an enforcement action - such as a civil money penalty or a removal case - they can rely on the findings and conclusions in such reports without the targeted individual or bank having any opportunity to cross-examine the persons who were involved in preparing the report.

Carried to its logical conclusion, the informal administrative review and appeal process for examination reports condoned in Doolin would soon displace the hearing procedures that were mandated by Congress.

The final result would be that bank examiners would never have to submit to cross-examination in any type of enforcement proceeding, even if the agency relied on their examination reports in bringing such action. In fact, the examination reports would not have to be offered into evidence in support of such action. The targeted individuals or banks will have been shut out.

This is fundamentally unfair and cannot be good for this country's system of banking.

Banks cannot operate without deposit insurance, and a higher risk classification forces a bank to pay a higher premium. Therefore, the power to put a bank in a higher category is tantamount to the power to impose a monetary penalty.

And as a result of the Doolin decision, the FDIC can exercise this power without due process of law.

Mr. Woodrough was counsel for the FDIC's Atlanta region from 1973 to 1989. He is now with the law firm of Langford, Hill & Trybus in Tampa.

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