AFR Letter: Oppose HR 3461

Read our letter opposing HR 3461 here.


February 1, 2012

Dear Representative,

We are writing in opposition to HR 3461, the “Financial Institutions Examination Fairness and Reform Act”. This legislation would put significant statutory restraints and restrictions on the judgment of bank examiners. It would damage the ability of regulatory agencies to provide protection for insured deposits in the nation’s banking system. It would disrupt the ability to provide regulatory oversight across the financial system, from community banks up to the nation’s largest banks.

We have a number of serious concerns with the proposal.

First, bank examiners would be greatly restricted in requiring banks to set aside capital against the danger that a commercial loan will go into default cases where the borrower had not actually stopped payment on the loan. Unlike residential mortgages, commercial real estate loans are often structured to require periodic balloon payments, which are much larger than the payments made in other years. Borrowers must generally roll over their loan to make the balloon payment. This means that the current payments may not be a good guide as to whether a commercial real estate borrower will be able to pay in the future. This is especially true when projects are deeply underwater compared to current market values, as is frequently the case today. This legislation would restrict bank examiners from exercising independent judgment regarding when such a future default is likely. This would prevent bank examiners from requiring prudent action to protect the stability of institutions, and of the financial system. We should not make it easier for banks with government-insured deposits to take risky gambles where the bank receives any upside but taxpayers would end up paying for the downside losses if the loan went bad.

Second, the legislation would increase the bureaucratic delays and complexity in the formal appeals process with regard to supervisory decisions, making it more difficult for regulators to perform their mandated functions of ensuring compliance with the law. First, it would significantly expand the number of items in a bank examiners report that a financial institution could appeal. Section 3(b) would change the law in a way that appears to make absolutely any finding or recommendation brought to the attention of the bank management eligible to be contested in a formal appeals process. Since there can be literally hundreds of such matters in a typical bank examiner report, this could lead to an enormous number of time-consuming appeals before any report was acted on.

Even more important, the legislation adds an entirely new administrative law process on to the existing agency appeals processes for bank examiner decisions. Section 4 of the legislation creates a new ‘Office of the Examination Ombudsman’ in the U.S. Treasury. Regulated banks could appeal any regulatory determination to this new office, from which it would be sent to an administrative law judge, and then back to the Ombudsman for a final decision.  This new appeals process is in addition to formal appeals processes and ombudsmen already present at the prudential banking agencies. The FDIC, OCC, and Federal Reserve already have a statutory requirement to have an ombudsman and an intra-agency formal review and appeals process. In addition, banks may bring a court challenge to any formal regulatory enforcement action. By layering an entirely new formal appeals process on top of this existing process, this legislation would multiply red tape and delays in supervisory decisions. Combined with the expansion in the number of items that could be appealed, the effect would be to greatly strengthen the hand of financial institutions wishing to evade compliance.

Taken together, the changes in this legislation would harm the capacity of bank supervisors to provide oversight to banking institutions in areas ranging from basic prudential oversight of sound banking practices for taxpayer-insured deposits to compliance with consumer laws. The changes here would undermine the supervisory process and affect every bank regulatory agency, potentially including the new Consumer Financial Protection Bureau. Furthermore, these changes are unnecessary. Banking agencies are already required to provide ample opportunity for internal appeals, and the court system is available to banks who wish to challenge regulatory enforcement actions.

The record from the past few decades – both the extremely costly Savings and Loan crisis of the 1980s and the disastrous financial crisis of 2008 — could not be clearer. Excessive deference to the financial industry by the regulators has been a major enabler of the reckless, irresponsible, and sometimes fraudulent actions that did so much damage to our economy and exposed taxpayers to tremendous losses. This legislation would tilt the playing field further in the direction of excessive deference to industry interests and tie the hands of regulators attempting to protect the public interest. It should be rejected.


Americans for Financial Reform