Federal Deposit
Insurance Corporation

 
I. Management’s Discussion and Analysis
 

Supervision

Supervision and consumer protection are the cornerstones of the FDIC’s efforts to ensure the stability of and public confidence in the nation’s financial system. As of year-end, the Corporation supervised 5,348 FDIC-insured state-chartered commercial banks that are not members of the Federal Reserve System (referred to as “state nonmember banks”). Through safety and soundness and consumer compliance examinations of these FDIC-supervised institutions, the FDIC assesses their management practices and policies as well as their compliance with applicable laws and regulations. The FDIC also educates bankers and consumers on matters of interest to bank customers, and addresses consumers’ questions and concerns.

Safety and Soundness Examinations
During 2002, the FDIC conducted 2,534 statutorily required safety and soundness examinations. An on-site safety and soundness examination was not conducted for four institutions because specific circumstances regarding the institutions indicated an exception should be made.

A total of 1,806 examinations were conducted in 2002 by state authorities under the alternating examination program, and an additional 78 examinations were conducted with FDIC’s assistance. Thirty-six institutions were due for an examination by state authorities, and five institutions had mergers pending at year-end. The remaining 31 institutions have examinations scheduled during the first and second quarters of 2003.

The number of FDIC-supervised institutions identified as “problem” institutions with a composite “4” or “5” CAMELS rating increased from 67 at year-end 2001 to 84 at year-end 2002. During 2002, 48 institutions were removed from problem status due to composite rating upgrades, mergers, consolidations, or sales, and 63 institutions were added to the problem bank list. The FDIC is required to conduct follow-up examinations of all designated problem institutions within 12 months of their last examination. As of December 31, 2002, all follow-up examinations for problem institutions had been performed on schedule.

Streamlining Examinations for Financially Sound Institutions
While directing increased resources to large and high-risk institutions and to the international front, the FDIC also implemented measures to improve efficiency by maximizing the use of risk-focused examination procedures at small well-managed banks in sound financial condition.

Specifically, in May 2002, the FDIC implemented a new program to streamline safety and soundness examinations of certain financially sound banks. The program, known as "MERIT" – for "maximum efficiency, risk-focused, institution-targeted examinations" – streamlines examinations for FDIC-supervised institutions with a supervisory rating of "1" or "2," that have $250 million or less in total assets and that are well-managed, and meet other program criteria while maintaining the quality and integrity of the examination. By year-end, the program had achieved more than a 20 percent reduction in examination hours for all eligible "1" and "2" rated FDIC-supervised institutions with under $250 million in assets.

Reducing Regulatory Burden
The FDIC also continued efforts to explore options for reducing regulatory burden on the financial services industry. Based on input from the banking industry and the public, an interdivisional working group developed and began implementing short- and long-term strategies to reduce regulatory burden. These strategies include seeking accelerated compliance with the regulation review requirements pursuant to the Economic Growth Recovery and Paperwork Reduction Act, improving communication of FDIC regulations and policies to financial institutions, and creating a new FDIC Regulatory Burden Web page to solicit industry input, and communicate initiatives in this area.

Minority Depository Institutions
The FDIC has historically taken steps to preserve and encourage minority ownership of insured financial institutions. On April 9, 2002, the FDIC Board adopted a new policy statement related to minority depository institutions. The new policy statement reflects changes in certain regulations and expands the FDIC’s Minority Depository Institutions Program. Enhancements to the program include increased communication with minority depository institutions, better coordination with trade associations that represent minority depository institutions, better defined roles for a national program coordinator and regional coordinators, and more opportunities for institutions to request technical assistance.

Compliance Examination Program
The FDIC takes seriously its statutory responsibilities to enforce consumer protection laws and regulations. It administers a compliance examinationprogram to help ensure that consumers are able to make informed choices about credit transactions and deposit accounts and to help ensure equal access to the credit markets. The FDIC’s compliance examination program covers nearly 20 different federal statutes and regulations ranging from traditional disclosure laws (such as the Truth in Lending Act) to fair lending statutes (such as the Equal Credit Opportunity and Fair Housing Acts) to the Community Reinvestment Act (CRA), which encourages insured depository institutions to help meet community credit needs. The FDIC has also added the privacy and insurance consumer protection provisions of the Gramm-Leach-Bliley Act of 1999 to its compliance examination program.

Compliance examinations are conducted on an established schedule by specially trained personnel. The interval between compliance examinations is typically two to three years for banks with strong compliance records. Banks with weak compliance performance are typically examined on an annual or shorter cycle. The FDIC uses the full extent of its enforcement authority, as appropriate, to address instances of noncompliance. Further, the FDIC meets its statutory responsibilities under the Equal Credit Opportunity Act to refer patterns or practices of credit discrimination to the Department of Justice. The FDIC conducted 1,820 compliance and CRA examinations in 2002, compared to 2,180 in 2001. Ten FDIC-supervised institutions due for an examination in 2002 were deferred, nine due to mergers or charter changes, and one to allow coordination with a scheduled safety and soundness examination. Nine institutions were assigned a composite "4" rating for compliance as of year-end 2002. None were assigned a composite "5" rating. Eight of the nine "4" rated institutions have entered into a Memorandum of Understanding (MOU) with the FDIC to correct compliance issues, and the ninth is currently reviewing a draft MOU, which is expected to be finalized in early 2003. (For more details, see the FDIC Examinations table.)

Financial Literacy
One of the FDIC’s most important consumer protection goals is to promote financial education to those outside of the financial mainstream. The "Money Smart" program, unveiled in 2001, is primarily designed to help adults with little or no banking experience develop positive relationships with insured depository institutions. By year-end 2002, the FDIC had supplied more than 32,000 copies of the Money Smart training curriculum to various groups. Approximately 40 percent of the requests for Money Smart were from financial institutions and credit unions. The remainder were largely from educational service organizations, such as community colleges and adult education centers; community organizations; state and local government agencies; employment service organizations; and faith-based groups.

Over 1,000 representatives of community organizations, government agencies and financial institutions have attended orientation sessions on Money Smart held across the country. The Money Smart program also includes multi-partner agreements in which low and moderate-income adults can receive a variety of government services, and those outside of the financial mainstream are provided financial education with Money Smart as the principal curriculum.

As of year-end 2002, the FDIC had entered into partnership agreements with the Neighborhood Reinvestment Corporation, U.S. Department of Housing and Urban Development, U.S. Department of Labor, U.S. Small Business Administration, Association of Military Banks of America, Independent Community Bankers of America, Internal Revenue Service, Office of the White House Initiative on Asian American Pacific Islanders, and over 300 other national and regional organizations. A Spanish version of the Money Smart curriculum was rolled out in mid-2002, and a Chinese version will be available in early 2003. The FDIC is pleased with the positive feedback from the Money Smart curriculum and will continue to improve and expand this important program.

Consumer Complaints and Inquiries
The FDIC investigates and responds to complaints and inquiries from consumers, financial institutions and other parties about consumer protection and fair lending laws, as well as deposit insurance matters. In 2002, the FDIC received 8,368 complaints, of which 3,987 were against statechartered nonmember banks. Nearly 54 percent of the state nonmember bank complaints concerned credit card accounts. The most frequent complaints involved billing disputes and account errors, loan denials, credit card fees and service charges, and collection practices. In July 2002, the FDIC established a centralized Consumer Response Center (CRC) that is responsible for investigating all types of consumer complaints about FDIC-supervised institutions and for answering consumer inquiries about consumer protection laws and banking practices. The establishment of the CRC will facilitate timely responses to complaints and inquiries.

In addition, the FDIC received over 7,000 written inquiries and 8,000 telephone inquiries from consumers and bankers about FDIC insurance and consumer protection issues.

The largest percentage of inquiries related to whether specific financial institutions were insured by the FDIC and deposit insurance coverage. Other common inquiries were requests for copies of FDIC consumer publications, questions about banking practices and consumer rights under federal consumer protection laws, and how to obtain a personal credit report.

The FDIC has established a Central Call Center (1-877-275-3342) as its primary telephone point of contact for questions on deposit insurance from the banking community and the public.

To reach out to consumers needing assistance on matters arising from failed financial institutions, the FDIC also operates a Customer Service Center with staff dedicated primarily to handling records research and collateral releases. The records research staff responded to over 4,000 inquiries in 2002. This group researches the historical records of failed financial institutions to answer customer questions about deposit accounts, loan transaction histories, tax suits for delinquent real estate taxes and other issues. The collateral release staff researches and determines ownership of collateral securing loans from failed financial institutions in order to provide a release of lien, assignment or reconveyance to the borrower. This staff completed nearly 15,000 collateral release requests in 2002.