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Deposit Insurance Assessment Appeals: Guidelines & Decisions

AAC-2003-03 (September 29, 2003)

Background
By letters dated May 7, 2003, forwarded to the Federal Deposit Insurance Corporation’s (“FDIC”) Division of Insurance and Research (“DIR”), [Bank] (the “Bank”), requested an adjustment of payments made by the Bank for the January 1, 2003 semiannual assessment period. DIR denied these requests on June 10, 2003. On July 9, 2003, the Bank filed an appeal with the FDIC’s Assessment Appeals Committee (“Committee”) challenging DIR’s decision.

In its submissions, the Bank bases its request on the FDIC’s rules and regulations, specifically, 12 C.F.R. § 327.3(g) and § 327.3(h)(1)(i) and (iii). The Bank emphasizes that it does not seek review of its assessment risk classification, but rather seeks review of its March 14, 2003 invoice. The Bank contends that the March invoice is flawed because it did not take into account the results of a February 2, 2003 examination that resulted in a “CAMELS” composite rating improvement to “3.” The Bank had been assigned a “1C” risk classification for the January 1, 2003 semiannual period, the result of a CAMELS composite rating of “4” assigned at an April 15, 2002 examination. For the January 1, 2003 semiannual period, the Bank was assessed at the “1C” rate. The Bank argues that this was in error because its
de facto status at the time was “1B.”

Analysis
The Committee finds that the Bank’s arguments are not supported by the applicable regulations. Assessment payments are computed based on a product of the “assessment rate” and the “assessment base.” See 12 C.F.R. § 327.3. The assessment base includes specified deposits of the institution.
See 12 C.F.R. § 327.5. Under See 12 C.F.R. § 327.4, the annual assessment rate for an insured depository institution is determined by assignment of a risk classification prior to the beginning of the assessment period. Notice of the risk classification applicable to a particular semiannual period is provided to an institution with the first quarterly invoice provided for that period. The risk classification is composed of a capital group and a supervisory subgroup (“SS”) category.

SS assignments are made in accordance with the FDIC’s regulations, specifically, 12 C.F.R. § 327.4(a)(2). That section requires the FDIC to consider supervisory evaluations provided by an institution’s primary federal regulator and other relevant information in making these assignments. Under guidelines set out in Financial Institution Letter (“FIL”) No. 30-2000, the FDIC assigns an SS to each institution for each semiannual assessment period based on a variety of factors, including FDIC review of the last examination finalized and transmitted to the institution by the primary federal regulator on or before the cut-off date. Under the FIL, the cut-off date for the January 1 assessment period is the preceding September 30.

To ensure greater fairness in applying cut-off dates, and to allow consideration of unusual circumstances, the FDIC continues to look at the information referred to in FIL-30-2000 for a period of about six weeks after the cut-off date, in what is known as the reconcilement period. Institutions whose risk profile might have changed since their last examination can be upgraded or downgraded, as more recent examination information may reflect, during the reconcilement period. Based upon certain factors, institutions may be flagged for review during the reconcilement period, although flagging is not a prerequisite for changing an institution’s rating during that period.

Thus, under the guidelines set out in the FIL, the FDIC looks to see whether examination results were transmitted in writing to the institution prior to the cut-off date, unless an institution is reviewed during the reconcilement period or there is evidence of a change that is confirmed by an ongoing examination during that period.

The Bank was assigned an SS of “C” for the January 1, 2003 semiannual assessment period based on the results of an April 15, 2002 FDIC examination which assigned a CAMELS composite rating of “4.” That examination was transmitted to the Bank in August of 2002 and was the last examination transmitted prior to the September 30, 2002 cut-off date. The Bank was flagged for review during the October 11 – November 15, 2002 reconcilement period, and the FDIC confirmed that the Bank’s condition warranted an SS of “C.” The Joint FDIC and State examination that subsequently upgraded the Bank to a “3” was not begun until February of 2003, well after the supervisory cut-off date and after the reconcilement period. Accordingly, the Bank was correctly assessed at the “1C” rate for the January 1, 2003 semiannual period.

The Bank, however, contends that its appeal should not be characterized as a request for assessment risk classification review. Instead, it urges the FDIC to evaluate its request in light of 12 C.F.R. § 327.3, not 327.4. The Bank invokes section 327.3(g) to assert that a revised assessment computation is required. Section 327.3(g) permits payment adjustments in succeeding quarters once a risk classification or assessment computation has been revised. Section 327.3(g) and these adjustments do not address the process for identifying and correcting errors in the first instance, however. Instead, other regulatory provisions provide the processes for identifying and correcting errors, namely section 327.4(d) for revising risk classifications, and section 327.3(h) for revising assessment computations. Each of these provisions is governed by time limits and each is exclusive. By contrast, section 327.3(g) deals with “the manner in which assessments are adjusted once an error has been identified and corrected.” 59 Fed. Reg. 67153, 67157 (Dec. 29, 1994) (emphasis added). The section provides a rolling correction process in which necessary adjustments in the assessment amount are made on a quarterly basis. Id. Accordingly, since section 327.3(g) does not govern the process of determining whether an error has been made, it does not provide a basis for the relief the bank seeks.

The Bank also relies on 12 C.F.R. § 327.3(h). Section 327.3(h), however, applies to requests for revision of quarterly assessment payment computations, in which institutions may challenge the computation of assessments as reflected on an invoice. Section 327.3(h)(2) expressly excludes requests for review of an institution’s assessment risk classification under paragraph (h). Section 327.3(h)(1)(i), invoked by the Bank, applies to disputes regarding assessment base computations; section 327.3(h)(1)(iii), also invoked by the Bank, applies to disputes where the institution believes that the invoice does not fully or accurately reflect the adjustments provided in section 327.3(g). Since the Bank is not entitled to any adjustment in section 327.3(g), and since no issue regarding assessment base calculation is raised, paragraph (h) provides no basis for the result the Bank seeks.

Despite the Bank’s position that it is not requesting a change in its risk classification, such a change would be required to permit the payment adjustment sought. The timeframe for submitting a request for review of risk classification – set forth at 12 C.F.R. § 327.4(d) – expired on March 14, 2003, almost two months prior to the Bank’s May 7, 2003 letters.

Conclusion
In summary, the regulatory provisions cited by the Bank – 12 C.F.R. § 327.3(g), (h)(1)(i) and (iii) – do not provide a basis for the relief sought by the Bank. The Bank’s risk classification for the January 1, 2003 semiannual assessment period was assigned in accordance with section 327.4 and corresponding guidelines. The FDIC did not have evidence that an upgrade in the Bank’s condition was appropriate anytime prior to the September 30, 2002 cut-off date or the end of the reconcilement period. The first formal regulatory action recognizing the Bank’s improved condition did not occur until March of 2003 when the joint FDIC and State examination was completed. By then, both the September 30, 2002 cut-off date and reconcilement period had passed. Indeed, the semiannual period for which the risk assessments were assigned was already in its third month.

To grant the Bank the relief it requests would require, in effect, an extension of the cut-off date and reconcilement period to March of 2003. If the Committee did so, it would depart from years of established and consistent FDIC practice and would so weaken the cut-off date as to render it barely discernible and largely ineffective.

As a final note, the cut-off date provides certainty for the industry as well as the FDIC. It also sometimes results in a benefit for institutions that are downgraded after the cut-off date as, for example, happened to the Bank in the second semiannual period of 2002.

Before deciding the appeal, the Committee considered the Bank’s request to make an oral presentation before the Committee in of support its appeal. The Committee concluded that an oral presentation would not be helpful and therefore denied the Bank’s request.

Accordingly, for the reasons set forth above, the Bank’s appeal is denied.

By direction of the Assessment Appeals Committee, dated September 29, 2003.
 

 


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