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Appeal of Noncompliance with Two Articles in a Formal Agreement - (First Quarter 2002)

Background

A bank appealed the OCC's conclusions contained in the Report of Examination (ROE) regarding the bank's compli­ance with two articles in their formal agreement.  Specifi­cally, bank management disagreed with the OCC's noncompliance determination with articles focusing on loan administration and criticized assets.

The appeal was based on the following:

  • Loan administration
    • The article required the board to, within 60 days, de­velop and implement a written program to improve the bank's loan administration.  A copy of the program was to be forwarded to the assistant deputy comptroller (ADC), along with a copy of the revised job descrip­tions and policies and procedures.  The article also re­quired the board to ensure that the bank had pro­cesses, personnel, and control systems to ensure implementation of and adherence to the program de­veloped pursuant to this article.
    • The report of examination (ROE) noted noncompliance with this article because of a number of relationships with credit and collateral documentation exceptions, while noting that the framework had been established to improve the administration of the portfolio.  The ROE further stated that achieving full compliance with this article is negatively affected by the continuation of the newly hired management's education of the existing customers and review of the existing relationships.
    • The bank appealed the conclusion on the level of com­pliance with this article because the bank was doing all that was required. The assistant deputy comptroller had been forwarded a copy of all adopted policies and procedures. Moreover, the bank has put in place and is implementing the systems to ensure compliance with these policies and procedures.

    Criticized assets

    • The article required the bank to take immediate and continuing action to protects its interest in those as-sets criticized in the ROE, in any subsequent ROE, by internal or external loan review, or in any list provided to management by the bank examiners during any examination. Within 60 days the board was to adopt, implement, and thereafter ensure bank adherence to a written program to eliminate the basis of criticism of assets noted in the ROE, in any subsequent ROE, or by any internal or external loan review, or in any list provided by the bank's examiners during any exami­nation as ''doubtful,'' ''substandard,'' or ''special men­tion.''  A copy of the adopted program for all criticized assets equal to or exceeding $100,000 was to be forwarded to the ADC. The article also required the board to ensure that the bank has processes, per­sonnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this article. Other requirements included a quarterly review of the criticized assets, a submission to the ADC of these quarterly reviews, and the establishment of a committee to review loan activity involving these credits.
    • The ROE noted noncompliance with this article be-cause the supervisory office, while recognizing the bank's efforts and results thus far, could not assess the bank's adherence to the criticized assets initiatives.
    • The bank also appealed the conclusion on the compli­ance level of this article because the bank board had adopted and implemented plans to eliminate the basis of criticism for each of its problem loans. The appeal submission also stated that the board realized that compliance with this article would be judged on an ongoing basis.

    Discussion

    OCC's Policy and Procedures Manual (PPM) 5310-3 (REV), ''Bank Supervision Operations-Enforcement Ac­tion Policy,'' provides internal OCC guidance for assess­ing compliance with enforcement actions.  The PPM states that a rating of compliance can only be achieved on a particular article if the bank has adopted, implemented, and adhered to all of the corrective actions set forth in the article; the corrective actions are effective in addressing the bank's problems; and OCC examiners have verified through the examination process that this has been ac­complished.  It also states that a bank should not be con­sidered in compliance with an article in an enforcement document simply because they have made progress or a good faith effort toward complying with the article.

    The PPM further states that articles for which a bank has not achieved compliance include those articles where the bank has adopted and begun the implementation of all of the corrective actions required by the article, but sufficient time has not passed to verify that the actions have been fully implemented, are being adhered to, and are effective in addressing the bank's problems.  In these situations, there is nothing additional for management and the board to do other than fully implement, adheres to, and assesses the effectiveness of the corrective actions.

    Conclusion

    Both articles in the bank's formal agreement contain the following paragraph that requires not only the implemen­tation of, but also the adherence to, the developed pro-gram under each of the corresponding articles:

    The Board shall ensure that the Bank has processes, personnel, and control systems to ensure implementa­tion of and adherence to the program developed pur­suant to this Article.

    Bank management had taken appropriate action to imple­ment the policies and procedures to comply with these two articles.  However, at the time of examination, given the relatively short time since implementation, the supervi­sory office could not assess the bank's adherence to the loan administration and criticized assets initiatives.  Therefore, it was concluded that the supervisory office's as­sessment of noncompliance with articles, at the time of the examination, was appropriate and consistent with OCC's ''Enforcement Action Policy.''