149 

The Meeting of the Advisory Committee on Community Banking 

of the 

Federal Deposit Insurance Corporation 

Held in the Board Room 

Federal Deposit Insurance Corporation Building 

Washington, D.C. 

Open to Public Observation 

June 5, 2012 - 8:32 A.M. 

The meeting of the Federal Deposit Insurance Corporation ("FDIC") Advisory 

Committee on Community Banking ("Committee") was called to order by Martin J. Gruenberg, 

Acting Chairman, FDIC Board of Directors. 

The members of the Committee present at the meeting were: Robert F. Baronner, Jr., 

President and Chief Executive Officer ("CEO"), Bank of Charles Town, Charles Town, West 

Virginia; R. Daniel Blanton, President and CEO, Southeastern Bank Financial Corporation and 

Georgia Bank and Trust Company of Augusta, Augusta, Georgia; Charles G. Brown, III, 

Chairman and CEO, Insignia Bank, Sarasota, Florida; Deborah A. Cole, President and CEO, 

Citizens Savings Bank and Trust Company, Nashville, Tennessee; Carolyn "Betsy" Flynn, 

President and CEO, Community Financial Services Bank, Benton, Kentucky; Walter E. Grady, 

President and CEO, Seaway Bank and Trust Company, Chicago, Illinois; James H. Gray, 

Chairman, Beach Business Bank, Manhattan Beach, California; Jack E. Hopkins, President and 

CEO, CorTrust Bank, National Association, Sioux Falls, South Dakota; Ann Marie Mehlum, 

President and CEO, Summit Bank, Eugene, Oregon; Joseph G. Pierce, President and CEO, 

Farmers State Bank, Lagrange, Indiana; Rebecca Romero Rainey, Chairman and CEO, Centinel 

Bank, Taos, New Mexico; Dorothy A. Savarese, President and CEO, Cape Code Five Cents 

Savings Bank, Orleans, Massachusetts; Alan Thian, President and CEO, Royal Business Bank, 

Los Angeles, California; and Ignacio Urrabazo, Jr., President, Commerce Bank, Laredo, Texas. 

Matthew Williams, Chairman and President, Gothenburg State Bank and Trust Company, 

Gothenburg, Nebraska was absent from the meeting. 

Members of the FDIC Board of Directors present at the meeting were: Martin J. 

Gruenberg, Acting Chairman, Thomas M. Hoenig and Jeremiah 0. Norton. 

FDIC staff who attended the meeting included: Ruth R. Amberg, Steven 0. App, 

Stephen Beard, Richard A. Brown, William F. Cole, Kymberly K. Copa, Carolyn D. Curran, 

Christine M. Davis, Patricia B. Devoti, Dianne E. Dixon, Bret D. Edwards, Diane Ellis, Robert 

June 5, 2012 
150 

E. Feldman, George French, Marshall E. Gentry, Alice C. Goodman, Shannon N. Greco, Craig 

R. Jarvill, Sally Kearney, Ellen W. Lazar, Jill A. Lennox, Alan W. Levy, Marianne Lloyd, 

Christopher Lucas, Roberta K. McInerney, Robert W. Mooney, Charles Morris, Arthur J. 

Murton, Christopher J. Newbury, Thomas E. Nixon, Richard Osterman, Mark Pearce, Sylvia H. 

Plunkett, Claude A. Rollin, Barbara A. Ryan, Maureen E. Sweeney, Sandra L. Thompson, James 

C. Watkins, Cottrell L. Webster, John D. Weier, Mindy West and Katherine G. Wyatt. 

William A. Rowe, III, Deputy to the Director (Comptroller of the Currency) was also 

present at the meeting. 

Acting Chairman Gruenberg welcomed the Committee members and gave an overview 

of the day’s agenda, which included: an update on the FDIC’s Community Bank Initiatives; a 

discussion of capital and other supervisory issues; community bank compliance issues; the 

FDIC’s plan to review regulations for burden reduction; the impact of the use of shared loss 

agreements in resolving failed banks; and a roundtable discussion. He also noted the luncheon 

speaker would be Mary Miller, Undersecretary of the Treasury for Domestic Finance. 

Acting Chairman Gruenberg introduced Barbara Ryan, Chief of Staff, who moderated 

the day’s proceedings and introduced the first panel, "Update on the FDIC’s Community Bank 

Initiatives," and its panelists: John Weier, Advisor to the Acting Chairman, Sylvia Plunkett, 

Senior Deputy Director, Division of Depositor and Consumer Protection ("DCP"), James 

Watkins, Deputy Director, Division of Risk Management Supervision ("RMS") and Diane Ellis, 

Deputy Director, Division of Insurance and Research ("DIR"). 

Ms. Ellis reported that the FDIC continued work on the 14 community banking issues 

she outlined at the previous Committee meeting. She said that researchers had gathered and 

organized the data that is readily available and are currently analyzing it; staff would begin 

drafting working papers on different subjects during the summer. Ms. Ellis noted that, while the 

research continues to compare community banks to non-community banks, researchers were also 

performing life cycle analyses of the structure and performance of different groups of 

community banks to gain a more in-depth understanding of what characteristics and business 

models had been successful (and unsuccessful) during the past 25 years and the last two banking 

crises. For example, she said, they would explore how community banks that have been in 

existence for the past 25 years compare with the 11 percent that failed, and the 50 percent that 

merged or consolidated in the period; and further, among the merged or consolidated banks, how 

many did so because they were struggling or because they were successful. 

Mr. Watkins spoke about RMS’s and DCP’s internal reviews aimed at enhancing their 

examination processes. In RMS, working groups were reviewing over 3,300 suggestions 

provided by 700 examiners which had identified five fundamental areas for improvement. The 

first area related to pre-examination planning. Occasionally, he said, information was requested 

from banks which was not fully utilized and the FDIC would attempt to streamline these 

requests. A second area, Mr. Watkins said, was improving communications throughout the exam 

process. In some instances, for example, information requested from banks was used in the 

exam but examiners had not effectively communicated why it was needed. Mr. Watkins said a 

third area for which examiners had provided recommendations was the better use of technology 

June 5, 2012 
151 

that the FDIC has available. A fourth area, Mr. Watkins described, was the better use of 

outreach events and technical assistance by the FDIC to more fully explain complicated 

regulations or the calculations of certain ratios the FDIC uses. Finally, he said the postexamination process could be improved to ensure banks understand and are addressing the issues 

raised during examinations. 

Ms. Plunkett said DCP followed a process similar to RMS to get information from 

examiners and it was comparing that input with feedback the FDIC was receiving at the regional 

community banking roundtables; she noted that the issues identified by the two groups were 

quite consistent. Ms. Plunkett then addressed for DCP, the same five areas that Mr. Watkins had 

discussed for RMS. In the pre-examination process, she said DCP was also looking to ensure 

that examiners had adequate preparation time before going on site so that the entry discussion 

was meaningful and moved the examination forward faster. Regarding communications about 

compliance exams, especially where consultation with Washington and the FDIC Legal Division 

was required, she said it was important that examiners keep banks informed about where they are 

in the process. She said such ongoing communications occurred in some locations, but it was 

important to make this a uniform practice in all exams. Regarding the use of technology, Ms. 

Plunkett said some information currently requested from banks in the pre-exam planning process 

could be obtained through automated systems, thus reducing the impact on banks. 

Ms. Plunkett said the fourth area, outreach and technical assistance, was particularly 

important where regulations had changed and banks needed to know what was expected of them. 

She said the FDIC offers a series of bankers’ calls on new or "hot" topics (such as the one 

occurring that afternoon on third-party compliance management oversight). Ms. Plunkett also 

said the FDIC was working on technical assistance items to be shared with banks and it aimed to 

encourage continuous back-and-forth communications about regulatory expectations, so 

questions would not be raised only on a three-year exam cycle. Regarding the post-examination 

process, Ms. Plunkett recognized that many bankers felt it took too long to receive their 

examination results. She said prompt reports were also in the interest of consumers and the 

FDIC because they would allow quicker corrective actions and that DCP was looking for ways to 

improve timeliness. Finally, Ms. Plunkett said the FDIC was developing a regulatory calendar 

for its website where bankers could see what regulation changes were in the pipeline and their 

effective dates. 

Mr. Weier spoke about the FDIC Community Banking Initiative roundtables which had 

occurred in Dallas, Atlanta and Chicago (with three remaining), noting they generally involved 

FDIC leadership and 50 to 60 bankers, trade representatives and state supervisors. Each meeting 

consisted of two panel discussions with additional time for questions and answers. One panel, 

which focuses on financial and operational challenges, has raised issues such as soft loan 

demand, the high competition for making loans, interest rate risk, implementing new 

technologies in a safe and secure way, and, the possible extension of the Transaction Account 

Guarantee ("TAG") program. Mr. Weier described the second panel discussion in the roundtable 

meetings as focusing on regulatory interaction, which includes topics such as bankers’ concerns 

about the increasing complexity and cost of regulations, the need for technical assistance to 

comply with them, and the desire for examinations to take into account the bank’s size and 

complexity, and a preference for using experienced exam teams. Mr. Weier said bankers want 

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152 

assurance that the information they provide to examiners is used and that the bankers understand 

how it is used. In addition, he said the roundtables provide bankers with feedback forms they 

can use to raise additional issues. 

The Committee provided the FDIC leadership with feedback on a variety of subjects. 

The subjects included: the FDIC Community Banking Initiative; the examination process, 

including pre-examination information requests; FDIC communications in general and in 

specific situations; the development of banking best practices, their relationship to examination 

standards and banker responses to examination recommendations; the cost of regulatory 

compliance and how to measure it; weak loan demand and competition in banking; and the 

continuation of the TAG program. For ease of understanding, the Committee feedback is 

summarized by subject. 

Member Brown said the Community Banking Initiative roundtable meetings reassured 

bankers who attended them that the FDIC was "hearing" the problems bankers were 

experiencing on various issues, including the inefficient use of pre-examination information 

requests. Member Urrabazo said that the Committee and the roundtables had generated many 

good suggestions, but added it was important that tangible outcomes resulted. Specifically, he 

suggested the FDIC publish white papers or other analyses to summarize its findings and provide 

insight into the future of community banking, and for these to include action items and strategic 

timetables to implement the particular recommendations. Member Urrabazo further said the 

analyses and action items should be disseminated to the FDIC’s regional offices to ensure 

implementation. 

Member Savarese reported she had received positive feedback about the Community 

Banking Conference and roundtables. She said the attendance by the Acting Chairman and 

FDIC leadership to hear bankers’ concerns was important, but agreed that bankers often feel that 

there is a disconnect between what headquarters says and its translation in the field. Member 

Savarese said there was enthusiasm that the FDIC was taking the effort and risk to focus on the 

situation of community banks during this period of significant change in the economy, which 

could be viewed either as a crisis or a tremendous opportunity. Member Savarese observed the 

Community Banking Initiative needed to have short, intermediate and long-term goals as well as 

an overarching objective. She suggested various methods to help maintain the project’s 

momentum, including: allowing the project plan to evolve, maintaining project transparency, 

encouraging feedback from the regions, and showing that hearing and learning are occurring 

throughout the process. She agreed that action plans were key. Member Savarese complimented 

the FDIC for engaging as a partner with community banks and for providing a forum where ideas 

could be worked on collaboratively and experimentation encouraged. Mr. Weier later agreed 

with members about the importance of action plans and said that he would be sure to share them 

with the Committee. 

Member Brown spoke about the information banks provide examiners before an 

examination. He said the concept of providing information that could be reviewed before 

examiners were on site was good, but it was clear examiners were arriving without having 

thoroughly reviewed what had been sent. Member Brown recommended examiners be given 

more time to prepare before an exam or reduce the amount of information the bank is required to 

June 5, 2012 
153 

provide. Member Blanton said his bank had experienced similar issues and, in response, created 

a short write-up about the bank’s current status and its progress since the last examination. 

Member Pierce later said on-site examiners had requested documents or information the bank 

had already provided, thus requiring bank employees to duplicate work they had already done. 

Member Brown said bankers had told him that FDIC communications were generally 

improved and, although there was still some disconnect in communications from Washington 

and the regions, those differences were dramatically improved. Other members, however, 

reported instances of less successful communications. Member Pierce said he appreciated 

DCP’s offer of technical assistance in meeting compliance obligations because there had been 

occasions when the regional office had communicated that their job was to protect the consumer, 

not to assist banks in complying with the law. He noted such comments were inconsistent with 

the relationship his bank had enjoyed with FDIC examiners over time. Member Urrabazo related 

an experience of compliance examiners not conducting an exit meeting that would have revealed 

the examiners had reviewed outdated bank materials. When the examination report issued six 

weeks later and the examiners’ mistakes were pointed out to them, he said he was surprised they 

declined to revise their findings. Mr. Weier said he would follow up on the issue after the 

meeting. Member Thian said, although examiners were generally experienced and 

knowledgeable, he occasionally found some were too subjective and unresponsive to the bank’s 

explanation. He inquired about how the FDIC received and evaluated feedback about their 

examiners. Mr. Watkins said FDIC field office supervisors and other management officials 

welcome discussions with bankers about examiner performance and experiences during an 

examination. He also noted FDIC examiners must meet rigorous training standards and are 

evaluated on a full balance of their quantitative and qualitative skills as well as their ability to 

communicate effectively. 

Member Savarese spoke about the development of "best practices" and their 

relationship to examination standards. She said the FDIC, as insurer and regulator, can helpfully 

alert banks to emerging trends it identifies and provide appropriate guidance. She said, however, 

FDIC best practices guidance is sometimes developed without enough transparency or industry 

input and is issued in a way that bank directors see it as a requirement rather than as a subject 

calling for discussion. Member Savarese also indicated it sometimes appears examinations are 

measured against a best practices standard rather than regulation or guidance. She said some 

fields, such as information technology, move so quickly it is important that banks are part of the 

development of best practices before guidance on a matter is issued. Member Gray observed 

examinations also include examiner suggestions, which his bank views as a positive learning 

opportunity. He noted, however, not every suggestion is appropriate for his institution and his 

bank writes a letter to the region covering each of the suggestions, including an explanation of 

why the bank was not implementing any of the suggestions. Member Gray said these letters 

prompt useful exchanges with the region. Member Urrabazo said his bank received best 

practices recommendations from examiners at its last examination and ultimately the bank and 

examiners "agreed to disagree." He added, however, his bank was afraid to disagree with its 

examiners and thought long and hard before writing the region to explain why its 

recommendation would not work for his bank. Member Urrabazo said banks should not be 

afraid of articulating their disagreement and examiners occasionally try to force best practices 

and guidance where it does not fit. 

June 5, 2012 
154 

At various times during the first panel, the Committee discussed the cost of regulatory 

compliance. Member Urrabazo suggested the FDIC should make an effort to understand the 

costs of compliance for community banks, although he recognized it would be a difficult 

analysis. He said he was concerned about the issue because his bank’s cost for compliance kept 

escalating while its revenues were going down, capital requirements were going up and investors 

were not attracted to his bank’s returns. Member Urrabazo indicated FDIC regional staff was 

focused on compliance, which his bank was maintaining, but failed to appreciate the increasing 

costs it imposed. Ms. Ellis agreed the issue was critically important and is on the FDIC’s 

research agenda but noted it was a challenging issue, in part, because banks account for the costs 

in different ways and there is not much data available to estimate the costs associated with 

regulatory burden. Mr. Watkins said most banks do not have cost accounting systems that would 

fully describe or easily segregate the cost of regulatory compliance. Member Urrabazo 

suggested changing the Call Report to oblige banks to understand their regulatory compliance 

costs. Member Savarese suggested the FDIC could drill deeply into some specific regulatory 

compliance costs and then extrapolate those detailed numbers for making public policy decisions 

and promulgating best practices. 

Member Grady observed another cost of regulatory compliance can be the loss of 

customers; he related an example of a customer feeling harassed by his bank’s efforts to comply 

with the Bank Secrecy Act and anti-money laundering regulations. He also noted, although his 

bank did not have a cost accounting system that could provide precise compliance cost numbers, 

he could report how many people worked on compliance matters. Member Pierce observed that 

it is comparatively easy to measure, for example, how much taxes cost on a particular piece of 

Other Real Estate Owned ("OREO"), but it was harder to track the cost of employee time spent 

on compliance because community bank employees perform such a variety of functions. He also 

said his bank had spent hundreds of hours preparing for its last compliance examination. 

Regarding helping banks efficiently achieve regulatory compliance, Member Blanton 

recommended that regulators, when drafting regulations, include examples of how a bank could 

comply with them. Member Blanton also noted that banks in his area were seeing weak loan 

demand and noted that regional banks were trying to take customers by offering a ten-year fixed 

rate loan product with which community banks found it hard to compete. Member Pierce later 

agreed with these observations and added that regional and large banks first competed on interest 

rates and then lowered underwriting standards, which he was now seeing occur. 

The Committee also discussed the possible extension of the TAG program at various 

times. Member Blanton said he now felt the program should be extended for another year so 

consumers would have no reason to question if their deposits were insured. He said an extension 

would benefit smaller and weaker banks. Member Brown said it would be helpful if the FDIC 

shared information about the cost to banks of extending the TAG program and he and Ms. Ellis 

discussed measuring the costs. Ms. Ellis said FDIC staff has determined the estimated losses 

associated with the TAG program, which insures non-interest bearing transaction accounts on an 

unlimited basis (compared to the limited insurance for other accounts), accounted for about three 

percent of the estimated total cost of bank failures. She noted this estimate is based upon the 

failure of smaller institutions, and the loss rate could differ significantly in the event of a failure 

of a larger institution since, on average, these deposits constitute a greater share of insured 

June 5, 2012 
155 

deposits in larger institutions. Ms. Ellis also noted the FDIC needed to meet the statutory goal of 

a 1.35 percent reserve ratio for the Deposit Insurance Fund ("DIF") by September 30, 2020. 

Current projections indicated the existing assessment rate schedule would achieve that goal, with 

or without a short-term extension of the TAG program. She added, however, that an extension 

might delay, by a quarter or two, when the FDIC could lower the insurance assessment schedule. 

Member Flynn said her bank was experiencing such strong loan demand from small businesses 

that it needed deposits to fund those loans but had to turn away substantial municipal deposits 

because it did not have available securities to pledge for those deposits. She said it was 

extremely important the TAG program be extended, for her bank and for the economic recovery 

generally. Members Mehlum and Cole also supported a TAG extension because it would 

remove an element of instability and help the community banking industry overall, especially 

smaller banks. 

Director Norton inquired how regulators should view the TAG program’s guarantee of 

bank liabilities for small banks, where the market has few opportunities to price the banks’ risk 

because their equity and debt is not traded. Member Mehlum responded that the question was 

correct but it could not be quantified; she said depositors perceive a risk in small institutions 

which they do not in the largest banks. Members Flynn and Blanton agreed there was a 

difference in the perceived security of deposits in small and very large banks. In response to a 

question from Director Norton about how many members’ banks had more loans than deposits, 

Member Hopkins responded that his bank’s loan-to-deposit ratio was about 110 percent before 

the recession, but was lower now. He added, during the crisis, big banks encouraged depositors 

to move their deposits to them because they were too big to fail, and depositors did so. Member 

Flynn agreed and added that big banks were not allowed to fail; she said, although the DoddFrank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was supposed 

to end that perception, she was skeptical it would occur. 

Ms. Ryan then invited George French, Deputy Director, RMS, to join Mr. Watkins in 

moderating the next panel, "Capital and Other Supervisory Issues." Mr. French began by noting 

the FDIC Board of Directors would soon consider four regulatory capital rules. Two of them, a 

market risk final rule and an advanced approaches proposed rule, would generally not affect 

community banks, he said. The third, the Basel III General Approaches Rule (a notice of 

proposed rulemaking), would affect community banks if the FDIC Board approved the staff 

recommendation. Mr. French said the proposed rule would implement the Basel III agreement in 

the U.S.; it would strengthen the definition of regulatory capital and increase the level of 

minimum capital requirements for the various risk-based capital ratios. He said the FDIC’s 

analysis indicated most community banks already meet the proposed requirements. The other 

proposed rule, the Standardized Approaches Rule, Mr. French continued, included a variety of 

proposed enhancements to the risk weighting of assets. He observed the documents were large 

and would challenge community banks to identify the parts which were relevant to them but said 

the FDIC was committed to assisting understanding. Acting Chairman Gruenberg noted both 

proposed rules had appendices community banks could use as a concise guide to complying with 

the rules. Member Gray indicated that such an appendix was the type of compliance guidance 

the Committee had discussed and requested. 

June 5, 2012 
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Mr. Watkins then compared capital levels maintained by community banks (using $1 

billion or less of assets as the threshold) and non-community banks. He said community banks 

consistently maintained higher levels of capital, noting, for example, at the end of the first 

quarter of 2012, they had a leverage capital ratio of nearly 10.25 percent while non-community 

banks had just over nine percent. Mr. Watkins also said about half of community banks had tried 

to raise capital in the last three years and many had been successful in doing so; he added that a 

significant part of the capital increase came from positive performance in retained earnings. He 

said the capital increase showed considerable support from existing shareholders and 

management. Mr. Watkins noted, however, that many community bankers indicated they were 

having difficulty sustaining strong earnings, especially in some areas of the country. In response 

to a question from Member Mehlum, Mr. Watkins said the capital level difference between 

community and non-community banks had historically been greater, but some of the large banks 

had recently raised capital. 

Member Brown expressed concern that higher capital requirements would make it 

difficult for community banks to produce an adequate return on equity ("ROE") which, he said 

was important to their ability to "survive, thrive and raise capital." He strongly encouraged the 

FDIC to consider ROE as well as return on assets ("ROA") in its decision making. Member 

Brown recognized capital was an important aspect of banks surviving in a crisis, but said that the 

community bank capital ratios Mr. Watkins discussed indicated an unacceptable return for 

shareholders and, over time, they would move their investments away from community banks. 

In response to Director Norton’s inquiry about what specific type of ROE he was speaking about, 

Member Brown indicated that it was whatever ROE that draws investors to community banks. 

Mr. French said, not disputing the point about ROE, it was surprising how many community 

banks had been able to raise capital during the crisis and that quite a few had been able to raise 

capital externally or from their holding company. He also agreed with Member Blanton’s 

observation that most of the capital was raised by members of banks’ boards of directors or 

existing shareholders. Member Gray added that the dilutive effect of a capital raise on existing 

shareholders was a significant concern in community banks and made it difficult to raise capital. 

Member Blanton said his bank’s shareholders appeared to be different than those 

described by Member Brown; they came from a banking family that is part of their community 

and expected a reasonable return, not the maximum return a regional bank might offer. He 

added he viewed this position -- not having to compete with the best yield an alternative 

investment might make -- as a community banking strength. Member Brown agreed publicly 

traded banks may have different perspectives than one that has a small number of shareholders in 

a single community, but said it was important for the overall industry to understand the 

relationship to ROE because, ultimately, investors expected a return on their investment. 

Director Hoenig asked the Committee what they judged to be the "right" amount of 

capital, noting the judgment has to be made and there is no formula. He observed, without 

deposit insurance, capital requirements would probably be dramatically higher, as they were 

historically, and that deposit insurance serves, in a sense, as a substitute for capital. Director 

Hoenig noted he had to be concerned about the deposit insurance fund while Member Brown had 

to be concerned with investors, thus creating different perspectives. He said he understood the 

issue of ROE, but said risk-adjusted return on equity was really the issue. Member Brown said 

June 5, 2012 
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ROE is important to both the FDIC and community bankers because it reflects the future of the 

industry. He said investors see community banks that failed and may conclude community 

banks are a relatively high-risk, illiquid investment, ultimately resulting in bank boards being 

hyper-focused on ROE. Member Brown recommended the FDIC monitor ROEs and consider 

the effect of proposed capital requirements on community banks’ ROEs. He said his bank had 

considered raising capital but, when they considered the dilutive effect of it, chose to "flatline" 

the bank or to shrink banks in some cases. Member Urrabazo indicated more investors were 

focused on return and were relatively unconcerned about risk; he added most of his bank’s 

capital growth was from retained earnings. Mr. French agreed that how banks raise capital is an 

important issue but emphasized, for the most part, the FDIC did not expect the proposed rules 

would require community banks to raise capital externally. 

In response to Director Hoenig’s question regarding what are the correct capital 

requirements, Member Mehium said the FDIC now had a great deal of data from failed banks 

and suggested the information be analyzed to determine how much capital they had needed. 

Member Hopkins observed some failed banks had 25 percent capital levels and a high level of 

capital could not protect a bank against bad management or bad concentrations. 

Mr. Watkins said the new issue of the FDIC’s Supervisory Insights journal would 

contain articles that touched on issues raised previously in Committee meetings, including an 

article on improving communications throughout examinations, and an article clarifying troubled 

debt restructurings ("TDR") which also provides illustrative examples. 

Member Cole asked if the FDIC would consider its written communications about exam 

results. She noted the FDIC’s letters can be more focused on deficiencies and violations than the 

examination itself and cause confusion for the bank’s board. Mr. Watkins said the FDIC was 

aware of inconsistencies between closeout meetings with examiners and subsequent written 

reports. He said it was an issue the FDIC had struggled with and guidance had been issued to 

examiners and discussed in conference calls and other venues. Member Savarese complimented 

efforts in the FDIC’s northeast region to employ an experienced individual to provide coaching 

for examiners on effective communications. 

The Committee stood in recess at 10:16 a.m. and reconvened at 10:32 a.m. that same day. 

Ms. Ryan then introduced the moderators for the third panel, "Compliance Issues," Mark 

Pearce, Director, DCP, Sylvia Plunkett, and Jonathan Miller, Deputy Director, DCP. Mr. Pearce 

said, in addition to the RMS and DCP examination process review Mr. Watkins and Ms. Plunkett 

had discussed earlier, DCP was also undertaking a parallel review of its compliance examination 

and supervisory program to ensure it effectively identified, addressed and prevented risks of 

consumer harm. He explained, in light of significant changes in consumer protection laws in the 

last five years, DCP was now supervising more detailed and complex consumer regulations than 

ever before and it was not practicable for the FDIC to merely add these new regulations on top of 

the existing compliance examination procedures. Thus, Mr. Pearce said, DCP had assembled a 

working group comprised of field, regional and headquarters staff that, starting from first 

principles, was considering what is meant by consumer harm - including economic loss and 

noneconomic losses such as the discouragement of certain sets of applicants. The working group 

June 5, 2012 
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is cataloguing the risks to consumers addressed in the 40-plus regulations that the FDIC enforces, 

he said, with the aim of creating a set of recommendations and action items to help focus 

compliance examinations. The goal is to focus examinations on consumer harm, and the intent and 

spirit of the laws, not merely technical compliance, he said, while simultaneously taking into 

consideration differences in bank size, complexity, location, and business model. Mr. Pearce said 

DCP wanted the process to be open and transparent and was a reason he was discussing it with the 

Committee today. 

Member Mehlum praised the effort, noting community bankers are outraged by blatant 

consumer harm but are concerned the regulations are impacting banks even if they do not make 

consumer loans or have issues involving consumer fairness or harm. Members Cole and Urrabazo 

also supported the project but noted the requirements of some laws themselves can have harmful 

consumer impacts by raising costs to consumers or causing banks to decline to make loans due to 

compliance concerns. Member Savarese later said the FDIC has a role in coordinating various 

regulations that involve several agencies and suggested those cross-jurisdictional regulations 

should also be examined for their costs and benefits. She also observed that some regulations, 

such as the Home Mortgage Disclosure Act ("l-IMDA"), have burdensome collection methods 

needing interagency review, and regulations have to be reassessed on a continuous basis. 

Member Rainey supported reviewing regulations for consumer risks but felt regulator 

communications and transparency were also important elements. She said, for example, bankers 

were concerned about fair lending referrals to the Department of Justice ("DOJ") and, absent 

feedback from the FDIC about what it is specifically looking at in such cases, banks become 

paranoid about violations and may stop making some loans to avoid violations. Member Rainey 

suggested the FDIC could provide banks with feedback on what its examiners are finding and how 

the FDIC is responding so that banks can ensure their programs are in-line with expectations. 

Member Brown later agreed that community banks were very concerned about fair lending 

compliance. He said some banks avoided risk-based pricing of their loans because it was 

perceived as a safe way to avoid a fair lending violation even though, he said, it did not make 

economic sense to not use risk-based pricing. Other banks, he said, documented their loans using 

various matrices of factors (such as loan-to-value, debt-to-income and credit scores) but there was 

a concern using such matrices increased the probability of a violation being found. Member 

Brown said many banks use a third approach of making every loan decision on a case-by-case 

basis, which also had a high risk of being found to be a violation. He observed that bankers’ fears 

of violating the law made their decision-making inefficient and negatively impacted earnings; he 

recommended the FDIC provide more guidance on fair lending enforcement. 

Member Brown inquired about consultations between the FDIC and the Consumer 

Financial Protection Bureau ("CFPB"). Mr. Miller said the CFPB consults with the FDIC about 

rulemakings as required by law, but also informally consults on a variety of topics. Mr. Miller said 

the FDIC is eager for the CFPB to understand the unique characteristics of small banks as it drafts 

new consumer regulations. Member Brown said he was happy that the law required the CFPB to 

have hearings related to their rulemakings and he had recently participated in a CFPB rulemaking 

consultation. On one hand, he said, he was pleased the CFPB was considering various exceptions 

and exemptions to rules in development. On the other hand, Member Brown was concerned that 

the CFPB was considering various pricing and product mandates which he said would cause 

June 5, 2012 
159 

consumer harm by interfering with the operation of the market. He was also concerned that the 

CFPB was considering imposing the same testing and licensing standards on bank mortgage loan 

originators as on mortgage brokers. Member Brown indicated the subject matter tested for was 

often unrelated to work that loan originators actually performed, and that CFPB requirements may 

duplicate those imposed by bank regulators, ultimately causing banks to withdraw from that line of 

business. Mr. Miller said he would make a point of speaking to the CFPB about the issue; he also 

said that the CFPB was a data driven organization and encouraged Committee members to share 

relevant data with them. Mr. Pearce also commented that the CFPB had been receptive to the 

FDIC’s data and its insights about community banks. 

Members Hopkins and Urrabazo discussed concerns about fair lending violations based on 

disparate impact analysis and the lack of clarity about what regulators and the DOJ look at in such 

decisions. At Mr. Pearce’s invitation, Ms. Plunkett described the FDIC’s supervisory approach. 

She noted fair lending examinations are risk focused and often start where discretion is exercised, 

either in pricing or underwriting. Ms. Plunkett said the FDIC does not discourage the use of 

discretion but said management needs to monitor its results; for example, whether loans made in 

one area are priced higher than in others, or if loans are denied more frequently in one area or 

denied based on a prohibited basis. She said a monitoring system needs to be in place so a bank 

can explain the business reason for its disparities in pricing loans and other exceptions from the 

norm. Ms. Plunkett noted the FDIC regional offices have examination specialists who review the 

most difficult cases and provide training to bankers through various outreach events. 

Ms. Plunkett also described the HMDA Outlier Review which involves statistical analysis 

to identify those banks (usually 20 - 40 per year) which demonstrate the highest risk of pricing 

disparities. If a bank is identified as an outlier, a targeted fair lending review is conducted. She 

said, when evidence of a potential violation is found, the FDIC sends a "15-day" letter which 

explains the finding and gives the bank an opportunity to respond in writing. Upon request, 

examination staff will hold a conference call with the bank. Speaking about the Equal Credit 

Opportunity Act, Ms. Plunkett said cases involving a pattern or practice violation must be referred 

to DOJ, but, based on years of agency interaction, DOJ refers most cases back to the FDIC for 

administrative handling. DCP is exploring ways to make the process more efficient, Ms. Plunkett 

said. It also tasked a team of experts to review fair lending examinations from across the country 

to assure similar issues were handled consistently and to identify ways to be more effective and 

efficient. 

Member Brown said his bank was trying to analyze its HMDA data but noted it would be 

helpful if banks could use the same analytical tools as the FDIC. Member Mehium said she 

appreciated the focus on outliers and tying compliance reviews to consumer harm; she discussed 

additional methods of learning about harm from consumers themselves, for example, asking bank 

customers about their opinions during an examination, or correlating consumer complaints with 

information solicited by the CFPB. Member Mehlum also cautioned against the FDIC’s apparent 

view of a banker’s use of discretion as a red flag during a fair lending review. In her view, more 

broad-based consumer harm has been caused by giant, automated systems than has been caused by 

the exercise of discretion. Members Cole and Savarese expressed the view that examiners too 

often focus on technical violations where no actual consumer harm resulted. Member Savarese 

suggested it may be better framework for lenders to aim for compliance excellence rather than to 

June 5, 2012 
aim for perfection based on a fear of making technical violations. Mr. Pearce agreed the emphasis 

should be on consumer harm and it should infuse the entire examination and enforcement process; 

although mistakes cannot be ignored, the FDIC can communicate better about the relative 

seriousness of problems that it finds. 

Ms. Ryan then introduced the day’s fourth panel, "The FDIC’s Preliminary EGRPRA 

Plan," and its moderators, Roberta McInerney, Deputy General Counsel, and Mindy West, 

Acting Associate Director, RMS ("EGRPRA" refers to the Economic Growth and Regulatory 

Paperwork Reduction Act of 1996). Ms. McInerney explained that the EGRPRA review was a 

periodic review of regulations aimed at eliminating outdated and unnecessary ones. She noted 

the EGRPRA review complemented other FDIC efforts to be efficient and effective and, because 

of the importance of reducing regulatory burden and previous banker requests for more time to 

provide comments, Acting Chairman Gruenberg had asked staff to begin the EGRPRA review a 

year early (the previous one was completed in 2006). Ms. McInerney noted the EGRPRA 

review requirement applied to all the agencies that belong to the Federal Financial Institutions 

Examination Council ("FFIEC"), including the Office of the Comptroller of the Currency and the 

Federal Reserve Board of Governors, but not the CFPB. 

Ms. McInerney gave the Committee an overview of the EGRPRA review’s process 

which, consistent with the law, begins by establishing categories of regulations by type (such as 

safety and soundness, or consumer protection) and assigning each agency regulation to a 

category. Then, the agencies publish the categories of regulations at regular intervals for public 

and banker comment on ways to reduce burden. Once public input is received and reviewed, 

Ms. McInerney said the agencies identify significant issues raised, eliminate regulatory burdens 

where they can, and publish a report for the Congress. If regulations had been issued with other 

agencies, any changes to them would be done on an interagency basis, she said. The report to 

Congress identifies and analyzes areas of burden reduction that require legislative rather than 

regulatory action. Ms. McInerney said the FDIC recently published on its website a preliminary 

discussion of the EGRPRA process, a list of the previous categories, and a request to bankers and 

the public to make recommendations about categories and the placement of regulations in them 

(including how to treat Dodd-Frank Act regulations). 

Ms. West made several observations about how earlier Committee member 

recommendations would tie to the EGRPRA review. She also noted the EGRPRA process was 

transparent; every comment received will be reviewed by staff and shared with the public. Ms. 

West noted the previous EGRPRA review placed 131 regulations into 12 categories, and the 

categorization of regulations was, itself, an attempt to minimize burden on banks in analyzing 

regulations and providing comments. She also noted the FDIC would soon request further input 

on the categorization of regulations and the frequency of EGPRA requests for comment; the 

FDIC would also ask for input on how to treat the Capital rules now being promulgated. Ms. 

West also said, in the previous EGRPRA review, bankers had said that mere "tweaking" of 

regulations is often not helpful because any change to a regulatory requirement requires bank 

resources to respond. 

In response to a question from Member Gray, Ms. West said about 14 statutory changes 

had resulted from the previous EGRPRA review; among the more significant ones were changes 

June 5, 2012 
161 

to the frequency of bank examinations and changes to Regulation 0 requirements. In response to 

a question from Member Mehium, Ms. West said, in the previous EGRPRA review, agency 

leaders met with industry representatives several times in roundtable discussions. Member 

Baronner said such gatherings would help avoid misunderstandings and unintended 

consequences of the comment process. In response to inquiries from Members Mehium and 

Savarese, Ms. West said, in the previous EGRPRA review, the burden reduction 

recommendations that required statutory changes had been sent to Congress as a single package. 

Member Brown suggested that the EGRPRA review of the Regulation B spousal 

signature requirements would be productive; he said the current requirements were complex and 

created negative outcomes in actual application. Member Hopkins recommended that mortgage 

documentation requirements be reviewed from the ground up, he commented that the large 

numbers of papers requiring signatures obscured important information from borrowers and the 

revisions currently under review by the CFPB were too limited. Member Brown later suggested 

that HMDA reporting requirements could also be productively reviewed. 

Ms. McInerney noted the CFPB was now responsible for a variety of consumer 

protection regulations for which the Federal Reserve was previously responsible and the CFPB 

had requested public input on those rules. She also observed that the CFPB is required to consult 

with the FDIC about many regulatory changes it makes and the CFPB had begun doing so. Ms. 

McInerney later noted the CFPB was not formally subject to the EGRPRA review requirements 

(although the CFPB must review its regulations on a five year cycle compared to the EGRPRA 

ten year cycle). Member Urrabazo suggested the CFPB and EGRPRA reviews could be joined. 

Member Savarese noted the FDIC often must examine banks for compliance with rules it does 

not write. She suggested it would be useful to include DOJ and the Department of Housing and 

Urban Development in the EGRPRA burden conversations to help keep them from drafting 

requirements that have unintended consequences on banks and consumers. Member Urrabazo 

suggested bankers and agencies identify members of Congress who could act as advocates for 

any EGRPRA burden reduction recommendation that required statutory change. 

Ms. McInerney said, in light of the interest expressed, FDIC may consider providing an 

EGRPRA update to the Committee. Ms. Ryan also suggested the FDIC EGRPRA staff could 

consider the earlier review’s practice of engaging with the banking industry and with other 

agencies, including the CFPB. 

The Committee stood in recess at 11:46 a.m. and reconvened at 1:30 p.m. that same day. 

Ms. Ryan introduced Bret Edwards, Director, Division of Resolutions and Receiverships 

("DRR") and Marshall Gentry, Assistant Inspector General for Evaluations, Office of the 

Inspector General ("OIG") who moderated the discussion of "Impact of the FDIC’s Shared Loss 

Agreements." Ms. Ryan noted that pursuant to a recently signed law, Public Law 112-88, 

referred to as House Resolution ("H.R.") 2056, the FDIC OIG is required to conduct a 

comprehensive study of the impact of the failure of insured institutions. The study requires the 

OIG to consider the impact of shared loss agreements ("SLA5") on loan modifications, credit 

availability, and participation loans; the study will also consider the FDIC’s plans for terminating 

SLAs. 

June 5, 2012 
162 

Mr. Edwards said the FDIC first used SLAs in selected purchase and assumption 

agreements of failed institutions in 1991. Under an SLA, the FDIC divides assets of a failed 

institution into commercial and single-family loan groups and sells the assets to Acquiring 

Institutions ("Al") after competitive bidding, with the FDIC agreeing to absorb a portion of 

certain losses according to the SLAs. Mr. Edwards later explained the FDIC’s initial approach 

was to absorb 80 percent of the loss with the Al absorbing 20 percent, up to a certain dollar 

threshold of loss after which the FDIC absorbed 95 percent of the loss. He added, as the market 

for failed bank assets has improved, the FDIC now accepts Al bids that propose sharing loss at 

any percentage up to a maximum FDIC loss of 80 percent. Mr. Edwards said the FDIC had 

determined loss share reduces the FDIC’s immediate cash needs at the time of failure, is 

operationally simpler, more seamless to failed bank customers than other forms of resolution, 

and moves assets quickly into the private sector. 

Mr. Gentry invited the Committee to provide feedback on whether the FDIC’s use of 

SLAs has an impact on the rate at which ATs modify loans. Member Brown said his bank was 

not an Al, and he had heard many consumer complaints about the difficulty borrowers 

experience in his area of Florida when they request loan renewals or modifications. He 

continued that his bank experienced more difficulty selling assets on which it had foreclosed in 

condominium developments, for example, where an SLA was a big presence compared to selling 

similar foreclosed assets where there was not a large SLA presence. Members Brown and 

Blanton said the real estate markets in their respective areas of Florida and Georgia were 

significantly negatively affected. Member Blanton added his concern as SLA agreements neared 

the end of their five-year coverage period, SLAs would return a large block of assets to real 

estate markets which had not recovered. Member Hopkins said his bank is an Al, and it was a 

misconception that an Al would merely dump properties onto the market explaining that an Al 

still shares in any loss. Director Hoenig asked whether the real estate impact discussed was the 

effect of excess supply or whether SLAs contributed to the negative effect. Member Brown said 

the negative effect was a result of both issues; he said, where an SLA was a large presence in a 

development, there was a significant negative impact on the value of condominiums. Member 

Blanton said that he saw a similar effect; he attributed it to the fact that an Al only had to 

experience 20 percent of a loss whereas a bank which had a similar property in OREO would 

have to experience a 100 percent loss and declined to sell. He thought that open banks would 

pursue different liquidation strategies for their OREO than SLAs do. 

Member Grady said his bank was also an Al and it had developed a loan modification 

program the FDIC had approved. He said, as an Al, his bank had to market properties and 

document a market price before the FDIC would accept payment obligations under the loss share 

program. Members Hopkins and Grady agreed that FDIC representatives ensure that AIs 

properly justify decisions to dispose of an asset at the time they make the decision and a failure 

to adequately justify would endanger the loss share coverage. Mr. Edwards observed that SLA 

agreements require AIs to treat the SLA assets in the same way they treat their similar non-SLA 

assets. He agreed an Al’s disposition strategy could be affected by the fact it would experience a 

20 percent loss. Mr. Edwards noted, when the FDIC resumed the SLA program in 2008, there 

was little market appetite for failing institutions and their assets without loss share and the 

alternatives to using SLAs (e.g.,selling assets immediately into a depressed market, taking assets 

June 5, 2012 
163 

into the FDIC to manage, including structured transactions) all had negative impacts compared to 

the use of SLAs. Mr. Edwards pointed out prospective AIs are now able to submit flexible bids, 

up to 80 percent, and as competition has increased recently, some winning bids have been at 50 

percent. In response to Mr. Gentry’s inquiry, Member Hopkins said, as an Al, his bank had the 

same incentive to work with customers on modifications. He said, if a customer had a problem 

and provided information, the bank would try to work with them, but it was more difficult if the 

customer was perceived as trying to take advantage of the Al. 

Mr. Gentry then inquired about a second area of the OIG report, whether and how the 

FDIC’s use of SLAs impacts credit availability. Member Hopkins said his bank became an Al 

so it could gain entry into a new market; because his bank had good capital ratios and the ability 

to expand, it found the SLA a useful way to enter an underserved market. Member Blanton 

indicated this was the right reason to enter an SLA, in contrast with AIs that enter an SLA just to 

liquidate assets and move on, without an intention to remain in the community. Mr. Edwards 

said there was some concern, as expressed by H.R. 2056, that the FDIC’s loss sharing program 

provided disincentives for credit extension but he thought the opposite was true. He said SLAs 

keep assets in community banks and, although some borrowers were in difficult circumstances 

when an SLA is signed, there was a potential they would obtain credit extensions. He noted, in a 

failed bank situation, the FDIC generally does not have an interest in developing a long-term 

relationship with the failed institution’s borrowers. SLAs have the benefit of transferring the 

customer to another banker who may have an interest in cultivating a long-term relationship. 

Member Brown inquired if, as an SLA neared its five year termination, there was an 

incentive for an Alto dispose of assets (instead of keeping the credit) because there was a risk of 

losing the SLA’s loss share coverage. Member Blanton also inquired whether SLAs had 

provisions that gave AIs more flexibility in disposing assets near the end of the agreements. Mr. 

Edwards said ATs can propose bulk selling some assets at a point in the last year of a five-year 

contract. He also said that, previously, the SLA would not permit an Alto modify a commercial 

loan’s term past the SLA’s fifth-year because five years was viewed as a lengthy period for 

commercial loans and there was an expectation that there would be significant economic 

recovery by five years. Mr. Edwards added, however, in recognition of economic conditions, 

ATs may now modify a commercial loan’s term beyond five years although loss share coverage 

ends within the five years. He also questioned why an Al would be motivated to dispose of a 

performing loan just because its SLA coverage was lapsing. Mr. Edwards said commercial 

SLAs emphasize that AIs use the same work-out strategies for SLA assets as non-SLA assets; if 

an Al fails to do that, it risks having its loss claims rejected by the FDIC, which monitors them 

closely. In fact, Mr. Edwards stated that AIs have lost coverage on assets for not complying with 

the SLAs. In response to a question from Member Grady, Mr. Edwards reported that three early 

terminations of SLAs have occurred. Members Gray, Blanton and Brown also discussed with 

Mr. Edwards the treatment of loan modifications in comparison with TDRs. Member Hopkins 

suggested adding a new line to the Call Report entitled, "TDR covered under loss share," which 

he said would help clarify problems associated with performing loans still labeled as TDRs. In 

response to Mr. Gentry’s inquiry, Member Blanton said he did not think that SLAs have any 

negative impact on banks’ ability to extend or modify credit. 

June 5, 2012 
164 

Mr. Gentry then inquired whether SLAs have an impact on participation loans, especially 

in situations where an Al has a lead role in a participation loan and non-Al community banks 

have a downstream role. Member Blanton said community banks had been significantly 

damaged being in small, downstream positions in participation loans and he doubted there would 

be as many participation loans as there had been in the past. Member Brown agreed and said 

lead banks perceived to be weak would have trouble engaging junior partners in participation 

agreements because of community bank concerns about future developments; he said his bank 

developed an approach of buying 100 percent of the participation if the lead bank was viewed as 

high risk. Member Brown also said his bank was concerned about community bank repudiation 

rights as part of the participation agreements. Members Brown and Blanton said the problem 

was an SLA issue because, when an Al assumes the lead position in a participation at a discount, 

it creates an unequal situation for the downstream participants who are still involved at 100 cents 

on the dollar. Member Blanton described a situation where the downstream participants were 

obligated under accounting rules to write down the value of the participation and the Al lead 

participant could then buy the community banks’ downstream interests. 

Mr. Edwards observed that an Al is not able to change a participation agreement; his 

understanding was that some AIs may have enforced their rights and responsibilities more 

seriously than the failed bank that drafted the agreements. He said there had been an instance of 

inadequate information sharing by an Al in one situation but that had been resolved. Member 

Blanton agreed some downstream participants had not adequately understood participation 

agreements had been drafted to greatly favor the lead participant. Member Grady described a 

situation where his bank became a lead participant as an Al and a downstream participant 

experienced a complete loss; he said he understood their loss but there was little that could be 

done since the credit was essentially unsecured. Member Hopkins also spoke about becoming a 

lead participant as an Al and having a strong disagreement with a participant bank that was 

avoiding writing down its credit. 

In response to Mr. Gentry’s inquiry about the general impact of SLAs, Member Blanton 

said SLAs were a necessary thing to clean up banking issues. He said some communities had 

been hard hit because all their banks were in loss share and there were no strong community 

banks left to do business. Mr. Gentry then invited Committee feedback on the termination of 

SLAs. He inquired how the FDIC can make terminations orderly and avoid negative impacts on 

the DIF and on lending to the real estate industry. Mr. Edwards commented that most of the 

discussion had been about commercial SLAs, which had the bulk of SLA assets, and which 

generally had loss share for five years. He noted that single family SLAs generally involved a 

ten-year agreement. Member Blanton suggested the FDIC consider extending five-year SLAs an 

additional two years rather than allowing those assets to flow back onto the market at deeply 

discounted prices, especially in hard hit areas. Member Hopkins said his bank would be 

interested in exploring a "clean-up call" of assets remaining in an SLA, referring to Mr. 

Edwards’ earlier comment on early terminations. Mr. Edwards said the FDIC would be willing 

to discuss such issues and was considering various proposals. He said the FDIC had a pilot 

program in which SLAs with $1.5 million of single family assets left in a portfolio would receive 

an offer from the FDIC to close out the SLA. Mr. Edwards said the FDIC shared Member 

Blanton’s concern about releasing assets into areas with significant related asset concentrations 

and had not recovered as quickly as expected; he said the FDIC was considering strategies 

June 5, 2012 
165 

recognizing the interests of AIs, non-Al banks and the FDIC. Mr. Edwards and Mr. Gentry 

noted that H.R. 2056 required the OIG to submit a report to Congress by January 3, 2013 and 

that Congressional testimony would accompany the report. 

Ms. Ryan then invited the Committee to share any additional observations or concerns 

during the last panel, which was entitled,"Roundtable Discussion." Member Mehlum said she 

had two concerns about the viability of community banking: first was the rate of return to 

shareholders and what it needed to be; second was the cost of compliance, which she agreed was 

growing into a very important issue. Member Blanton repeated the recommendation that a way 

to reduce the cost of regulatory compliance would be for regulators to provide compliance 

guidance when they issue new regulations. Members Pierce and Rainey agreed that such 

guidance would need to be more specific than current guidance which tends to be too generic. 

Member Rainey provided an example concerning guidance on the oversight of third-party 

payment processors. She said, upon reading the guidance, she concluded her bank did not have 

significant risk based on its operations. Member Rainey was later surprised when the bank 

received a pre-exam request letter which appeared to indicate her bank should be taking a variety 

of compliance steps (despite the lack of risk exposure). Member Rainey indicated it would be 

helpful if the published guidance better predicted the examination standards that would be 

applied. At Ms. Ryan’s invitation, Ms. Thompson addressed the issue, noting that if a risk is not 

present at a particular institution, examiners should not be asking for information addressing that 

risk. Pre-examination planning should identify what issues need to be examined and which do 

not. 

Member Brown complimented the FDIC for being alert to the emerging risk of interest 

rate risk; he encouraged the FDIC to share specific information about problems it is seeing. Mr. 

Brown also said banks in his area are experiencing a problem with rules prohibiting mortgage 

originators from reimbursing clients when a mistake had been made; for example, reimbursing a 

client for the cost of a second appraisal when the first was faulty. He said the issue had been 

raised at a CFPB hearing and appeared to be shared broadly among mortgage originators. Mr. 

Pearce said he would gather more details and take appropriate action. 

Member Savarese said the rapid pace of change in technology is a significant concern. 

She said technology helps level the playing field between community banks and large 

institutions, but also imposes a cost structure community banks have trouble maintaining. She 

suggested FDIC guidance on emerging technological changes would be helpful. Ms. Thompson 

agreed specific technologies change rapidly, and it is difficult for banks to remain current. She 

emphasized the FDIC takes a principles-based approach; for any delivery mechanism a bank 

considers, the bank should assess the risks the new technology raises, such as security and 

privacy as well as cost, and respond to those risks. Ms. Thompson said each of the FFIEC 

agencies have information technology examiners who meet regularly and consider different 

technologies and their risks, as well as institutions’ unique risk profiles. 

Member Savarese said a second broad issue of concern is the regulatory oversight of the 

core systems providers many community banks rely on to provide data processing services. She 

said there appears to be some inconsistency in regulators’ communications about any problems 

found with the core systems providers. Ms. Thompson said the FFIEC works to conduct 

June 5, 2012 
166 

interagency examinations of technology service providers. She said when supervisory issues or 

enforcement actions emerge, the agencies communicate to the processer who then communicates 

with its customers. Ms. Thompson said the heads of supervision of each FFIEC agency meet 

monthly to discuss issues, including information technology, to help ensure supervisory 

oversight is consistent. 

Member Urrabazo described a situation in which an examiner informed his bank it 

needed to develop a policy about the Volcker Rule which explained why the rule did not apply to 

his bank. He also said he was advised his bank’s sales associates who provided financial advice 

to a local county - including something as minor as telling the county representative what the 

renewal rate for a certificate of deposit would be - would require the bank employee to register 

with the Securities and Exchange Commission (SEC) to ensure compliance with the Volcker 

Rule. Acting Chairman Gruenberg noted the Volcker Rule was only a proposed rule, not a final 

one, so there should not be any compliance requirements. Mr. Watkins said RMS does not 

impose a requirement for a bank to take any special action regarding the Volcker Rule, and very 

few community banks would engage in any activity that would be considered a trading operation 

covered by the proposed rule. He said banks need to have policies on the types of investments 

suitable for their investment portfolios, and banks need to have systems to evaluate their assetand-liability matches, but nothing such as Member Urrabazo described. Ms. Thompson and Mr. 

Watkins offered to discuss the matter further with Member Urrabazo. Member Urrabazo also 

recommended the FDIC represent community banks in the deliberations of other agencies, such 

as the SEC, whose rules on topics such as defining who is a financial advisor, would impact 

community banks. Mr. French said FDIC staff had discussions with SEC staff on the issues 

Member Urrabazo raised and he would make further inquiries about the results of them. 

In response to an inquiry from Member Brown about the status of guidance on mobile 

banking, Ms. Thompson said the FDIC published an article on mobile banking in the Supervisory 

Insights journal, but no checklist had been assembled. Member Pierce inquired as to how FDIC 

management communicates emerging trend information to examiners. Ms. Thompson responded 

that the FDIC uses a variety of channels, including interactive video meetings where a 

presentation is made on a specific topic, examples are discussed, and examiners can raise 

questions. She also said examiners and bankers participate in industry calls, during which new 

policy or guidance being prepared for issuance is discussed. She noted that Supervisory Insights 

helps communicate supervisory information to bankers. 

Member Savarese suggested the FDIC try to speed up the dissemination of information 

on the development of best practices; she noted there was some perception banks were being 

examined to the standards of best practices. Mr. Watkins clarified examinations are conducted 

looking at the traditional CAMELS factors, risk analysis, laws and regulations. To the extent 

best practices have developed, he said examiners share them as a useful piece of information for 

the bank’s consideration. Member Savarese said although examiners do not indicate failure to 

follow a best practice will impact an examination rating, the examination reports imply there is a 

deficiency if the bank is not complying with them. She noted bank directors often do not fully 

understand how to evaluate examination discussions of best practices and said that, due to the 

relative power of examiners over community banks, bankers are hesitant to inform the examiner 

that certain best practices are not appropriate for their institution. Member Savarese indicated 

June 5, 2012 
167 

what should be a dialogue between examiner and banker becomes a one way communication. 

Mr. Watkins said the FDIC will continue to work on improving examination communications. 

Member Flynn expressed a concern, with new developments in technology, a substantial 

portion of the payments system had migrated to unregulated businesses. She said the payment 

system was the future of banking, and community banks were losing their place in it. Member 

Baronner noted because of the recent passage of the Jumpstart Our Business Startups Act, his 

bank had been able to deregister with the SEC, which would save the bank a great deal of work. 

He also observed accountants and regulators appear to work at cross purposes concerning the 

allowance for loan loss reserves and recommended they work together to develop a consistent 

methodology. 

Acting Chairman Gruenberg said that he found the Committee’s meetings to be very 

productive learning experiences. He said that FDIC hopes to issue its action plan concerning the 

Community Banking Initiative toward the end of the year. 

There being no further business, the meeting was adjourned at 2:35 p.m. 

Robert E. Feldman 

Executive Secretary 

Federal Deposit Insurance Corporation 

And Committee Management Officer 

FDIC Advisory Committee on Community Banking 

June 5, 2012 
Minutes 

of the 

Meeting of the FDIC Advisory Committee on Community Banking 

of the 

Federal Deposit Insurance Corporation 

Held in the Board Room 

Federal Deposit Insurance Corporation Building 

Washington, D. C. 

Open to Public Observation 

June 5, 2012 - 8:32 A. M. 

I hereby certify that, to the best of my knowledge, the attached minutes are accurate and 

complete. 

lI J, 

Martin J. Gmenber 

Acting Chairman 

Board of Directors 

Federal Deposit Insurance Corporation 

Dated: August 21, 2012