The battle between community banks and their examiners is about to heat up again on Capitol Hill.
The banking industry is strongly supporting a bipartisan bill that would let banks appeal examination findings to an outside arbiter, and set new guidelines for examiners regarding commercial loans.
Regulators are likely to oppose the bill, known as the Financial Institutions Examination Fairness and Reform Act, unless significant changes are made. But lawmakers say the legislation is necessary because of banker complaints that examiners are being too tough—effectively curbing lending into the economy.
"I think [the worry] crosses party lines, it crosses regional concerns," says Rep. Shelley Moore Capito, a co-sponsor of the bill and chairman of the House financial institutions subcommittee. She is supported by Rep. Carolyn Maloney, the subcommittee's lead Democrat, who made a similar argument during a recent hearing on the issue. "All of us have heard from financial institutions in our districts that examiners—especially in this difficult economic time—have been unrealistic in their demands for them to build capital reserves in very short periods of time," says Maloney.
In November, Capito and Maloney teamed up to defeat separate legislation sponsored by Rep. Bill Posey, R-Fla., that would have prevented examiners from classifying a loan as nonaccrual if it met certain standards. That bill drew opposition from both the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, which argued that it would have weakened regulatory accounting standards. But there remains concern among both Republicans and some Democrats that overzealous and inconsistent examiners are hindering bank lending. "I think it crosses party lines, it crosses regional concerns," Capito says.
The bill she supports aims to give banks more time to address problematic commercial loans. For example, examiners would be barred from assigning non-accrual status to a commercial loan solely because the loan's collateral has deteriorated in value. Regulators view this kind of measure as forbearance, potentially allowing problems to multiply instead of forcing a bank to take earlier action.
The bill also would establish an ombudsman's office at the Federal Financial Institutions Examination Council, the interagency group that establishes uniform standards for exams. Banks could appeal examination findings to the new ombudsman's office, with the hope of getting a more sympathetic hearing outside of the agency that conducted the exam. An additional appeal to an administrative law judge would also be possible.
This process would be in addition to an existing appeals process, under which banks can appeal findings to an ombudsman within the agency that conducted the exam. Under the proposal, banks would have a choice on their appeals route. Regulators are likely to oppose this provision, because it effectively allows FFIEC staff to override an examiner's ruling. Industry representatives, however, argue it's needed because the existing appeal process is flawed.
Jason Kratovil, vice president of congressional relations at the Independent Community Bankers of America, said appeals are rarely worth the effort and only invite retribution from regulators.
Floyd Stoner, executive vice president for congressional relations and public policy at the American Bankers Association, said he doubts the new appeals process would be used frequently. "In fact, we would hope that it wouldn't be," he said. "We believe that its existence would help ensure that the actual appeals would not be needed."
