Maintaining Control

Scenario: Directors of the $2 billion City Savings Bank are sitting through the exit interview from their most recent exam when the examiners announce they’ve uncovered fair lending violations involving four loans. Before the chairman or president can respond, an irritated long-time director admonishes the head examiner for nit-picking their otherwise clean bank portfolio and inappropriately alarming the board on such “minor violations.” The examiner proceeds to educate the irate director on the importance of board support of fair lending practices, but this only exacerbates the situation into a heated exchange. The chairman knows this outburst can bias the examiner’s analysis of the board’s ability to perform its duties and suggests the group take a short break. The chairman and several key board members recognize the need for intervention to ensure damage control.

“Fair lending statutes are the law of the land whether or not you agree with their stated purpose. Accordingly, it is not an option for the board to choose between compliance or noncompliance. It is important to understand that the initial arbiter of the bank’s compliance or noncompliance with fair lending laws is the banking regulator. While the regulator’s decision ultimately can be appealed, this is a costly and time-consuming undertaking that, at the very least, could alienate the bank’s primary regulator.

Regulators have a tremendous amount of discretion in dealing with a violation. They can choose among several levels of enforcement action ranging from mild to severe. It is for this reason that I would advise the board of directors to make peace with the examiner as quickly as possible, preferably before the regulator issues a written decision on the remedy for the violation. In this regard, once the meeting with the regulators is reconvened, the entire board should emphasize a commitment to both the letter and spirit of the fair lending laws and outline the actions it will take to prevent a recurrence of these violations. Such actions may include hiring a compliance officer, engaging a consultant, and retraining all employees on the requirements of fair lending laws.”

John J. Spidi, Esq.

Partner

Malizia, Spidi, Sloane, & Fisch, P.C.

Washington, D.C.

“Every day our examiners work with financial institutions to ensure equal opportunity in lending. Although few lenders believe that intentional discrimination is prevalent, we know that they all share a genuine concern about the more subtle or inadvertent forms of lending discrimination, which are also illegal. It is critical that the bank’s management, including its board of directors, understands the importance of fair lending laws.

In this scenario, the irate director doesn’t seem to grasp the importance of the fair lending laws to the bank. I would suggest that the examiner again attempt to emphasize their importance, stressing both the downside of violations, such as customer dissatisfaction, civil liability, and potentially very serious reputational risk, and the upside of timely corrective action, such as customer satisfaction and the mitigation of regulatory sanctions, including those of the Department of Justice.”

Steven D. Fritts

Associate Director

Division of Compliance and Consumer Affairs

Federal Deposit Insurance Corporation

Washington, D.C.

“Let’s assume that this scenario represents the ‘worst case,’ where the examiner has identified a pattern or practice of discrimination or discouragement on a prohibited basis under the Equal Credit Opportunity Act, necessitating referral to the U.S. Department of Justice (DOJ). The chairman’s suggestion to take a short break is most appropriate; as the irritated director and the examiner need to calm down.

If a fair lending situation trips the mandated statutory threshold, the matter must be referred to the Justice Department. The law provides no discretion where an agency has reason to believe there is a pattern or practice of discrimination or discouragement. Histrionics won’t change that.

The board is certainly encouraged to look at its fair lending compliance program and make necessary changes to it.”

Timothy R. Burniston

Director, Compliance Policy

Office of Thrift Supervision

Washington, D.C.

“The examiner is obligated to act on his findings at the bank, including the board members’ level of commitment and responsibility. This “Lone Ranger’ outburst is destructive. It does not represent the perspectives of fellow board members and places the entire board and bank under closer scrutiny. The chairman was wise in suggesting that a short break might be in order. This is the only opportunity for the chairman, president, and other directors to recapture control of this explosive situation.

It would be appropriate to immediately usher this irritated long-term director into private quarters. [Were this my bank,] I would encourage other directors to join our “sidebar” meeting in private. At such time, the chairman could explain the magnitude of error this director has instituted against himself, the board as a whole, and the entire financial institution.

With that explanation, I would expect a full and immediate apology from this director once the board was reconvened with the examiners. I would look for unanimous support of the examiner’s report with a complete commitment to review the issues the examiner revealed…

Finally, I would request that this director take a serious look at his contribution to the board and whether or not he should play a future role with it.”

Todd L. Johnson

Director

National Bank of Commerce

Superior, Wisc.

“Like many thoughts that cross our minds, a good number should never clear our throats. It isn’t that we don’t ever feel or think the same thing that this director verbalized, but assailing a regulator of the banking industry isn’t the way to win friends or influence people. Alienating a regulator probably isn’t the way to motivate him or her to work with the bank in finding a way to succeed. Regulators take their jobs very seriously for good reason: They’ve been entrusted with the tremendous responsibility of assuring the safety and soundness of our nation’s banking institutions. Respecting them as individualsu00e2u20ac”as well as for the significant role they play in working with the banku00e2u20ac”is critical to the bank’s long-term welfare.

To ameliorate the damage caused, I’d explain to the director the importance of a positive, productive relationship with the regulator and respectfully request that he apologize for the outburst. And once the ruffled feathers have been successfully smoothed, I’d recommend a Dale Carnegie course for the offending director A.S.A.P.”

Greg Thurman

Director

Premier Bank of Brentwood

Brentwood, Tenn.

“Clearly, a break in the action is needed. I suggest that several of the outside board members, especially those who are close to the irate long-term director, huddle with him in another room. And while they need to emphasize their support and empathy for his position, they also must stress to him that he is engaged in a no-win battle and is actually harming the bank’s credibility in the eyes of a powerful federal regulator. Suggest to the irate director that he hold this peace when the meeting reconvenes and let other board members speak.

Meetings with examiners should be carefully planned. ‘Loose cannon’ directors should be coached to be quiet or limit their comments to very generic supportive ones. We also recommend that if one or two articulate outside board members have positive reinforcing disagreement with examiners then the bank’s case should be stated professionally and followed up with written documentation as to why the board disagrees with an examiner’s position. However, these challenges should be limited to serious situations and not personality conflicts or disagreements over minor issues.”

George Freibert

Chairman

Professional Bank Services

Louisville, Ky.

“The chairman of the board must immediately regain control of the meeting.

After the examiner is temporarily excused, the chairperson should politely admonish the individual director for overzealously representing a position that may or may not be the mood of the board. Hopefully, the chairperson would reinforce the examiner’s view on the importance of complying with fair lending practices. If the individual director refused to back down, the chairperson should call for a vote of the board supporting either the chairperson’s position or the individual director’s opinion. The chairperson should also call for a motion to formally apologize to the examiner stating that the official opinion of the board is to strongly support full compliance of fair lending practices.

Last, but not least, the chairperson should request that no one director expresses a contrary management position to the examiner without prior full discussion and approval of the board. Ideally, this situation should not happen in a well-run board meeting.”

F. Geoffrey Toonder, M.D.

Director

East Penn Bank

Emmaus, Pa.

“The volatile situation between the examiner and the long-term director could have been avoided if the exit interview had been conducted with the CEO (as is standard practice) before taking the problem to the board. In addition, the CEO has the obligation to present the results of an examination to the audit committee, and the chairman of the audit committee generally presents the findings of the examination and the bank’s response to the full board.

This procedure should be explained to the long-term director during the short break, and the CEO and chairman should redirect the exit interview to either the audit committee or participate in the interview themselves.

A little up-front planning could have avoided the confrontation and risking the future ire of the examiners.”

A. Wayne Saunders, CPA

Director

Bank of Lancaster

Kilmarnock, Va.

“The chairman has good reason to be concerned. You might have sympathy for the director’s position, but a confrontational exchange with an examiner will not be productive. The examiner is required to report all violations of laws and regulations to the board. Further, the ramifications that the bank and its board could suffer, if the regulators feel that the directors do not take their compliance responsibilities seriously, are significant. The break is a good idea. The chairman and the directors who understand the seriousness of this issue need to take the irate director aside. They should explain to him that the consequences for non-compliance could be extreme. They also need to help him understand that there are procedures set up by the regulatory agencies to handle disagreements between the bank and the examining team. Finally, an apology should be extended to the examiner along with a commitment by management to provide additional training to the board on compliance issues. The chairman should then ensure that the training takes place on a timely basis. Files should be maintained to show the content of the training to reflect that all directors participated.

It is important to remember that the violations were found in a sampling of the loan portfolio. If this sampling were extrapolated out, the number of violations could be more significant. The examiners are not trying to penalize the bank for singular mistakes but are looking for patterns of non-compliance.

Finally, it has been my experience that a bank that works openly and cooperatively with examiners has fewer problems. If you set up good procedures, document your efforts, and cooperate with the examining team, your exams will be less confrontational. Once mutual trust and respect have been established, the examination process can be mutually beneficial to the bank and the regulatory agencies.”

J. Stephen Hamilton

President and CEO

State Bank of LaCrosse

LaCrosse, Wisc.