Supplement to Audit Report No. 03-009,
Examiner Assessment of High Loan-Growth Institutions,
dated
December 23, 2002
May 6, 2003
This supplement contains copies of correspondence between the Office of
Inspector General (OIG) and the Division of Supervision and Consumer
Protection (DSC) subsequent to the issuance of Audit Report
No.
03-009, dated December 23, 2002. The intent of this supplement is to show
progress made on the resolution of matters that were unresolved at the
time the OIG issued the final report.
TABLE OF CONTENTS
I. OIG Assessment of Management Response to the Final Report
Memorandum dated February 10, 2003, from the Assistant Inspector General for Audits to the Director, Division of Supervision and Consumer Protection
II. Management Response to the Final Report
Memorandum dated February 3, 2003, from the Director, Division of Supervision and Consumer Protection to the Assistant Inspector General for Audits
I. OIG Assessment of Management Response to the Final Report
Federal Deposit Insurance Corporation
Office of
Audits
Office of Inspector General
Washington, D.C. 20434
DATE: February 10, 2003
MEMORANDUM TO: Michael J. Zamorski, Director, Division of Supervision and Consumer Protection
FROM: Russell A. Rau [Electronically produced version; original signed by Stephen M. Beard for Russell A. Rau], Assistant Inspector General for Audits
SUBJECT: Assessment of DSC Response to Final Report Entitled Examiner Assessment of High Loan-Growth Institutions (Audit Report No. 03-009)
We have reviewed your February 3, 2003 memorandum replying to our request for DSC management to reconsider its response to unresolved recommendations 1-6 contained in the subject audit report. We recognize that DSC firmly believes its examination workforce is employing appropriate risk-focused examination procedures to accurately assess the risks that may be associated with high loan-growth, and we appreciate DSC's reconsideration of our recommendations. According to your office, examiners' use of sound judgment, based upon considerable experience and training, should be given extensive weight in assessing the quality of examinations and the extent of workpaper documentation needed, and that, taken as a whole, your supervision program is risk-focused, proactive, and effective in addressing situations involving high loan-growth.
Based on your memorandum and the results of a meeting between our offices on February 4, 2003, we have agreed that an upcoming DSC initiative may bring resolution to the unresolved recommendations. However, the decision on resolution for each recommendation will not be possible until we see how they are addressed. Specifically, our analysis of DSC's response to the six unresolved recommendations is set forth below after the listed recommendations:
- Revise policies and procedures to define the term "significant loan
growth" and to require examiners to target and specifically sample new
loans for examination when a financial institution has experienced
significant loan growth since the last full-scope safety and soundness
examination.
- Revise policies and procedures to require examiners to report on new
loans sampled for review purposes when a financial institution has
experienced significant loan growth since the last full-scope safety and
soundness examination.
- When loan growth is a high-risk factor, clarify existing policies
and procedures to specifically detail how examiners should assess and
comment on:
- the loan quality of newly originated loans,
- the loan review system, and
- loan underwriting.
- When loan growth is a high-risk factor, clarify existing policies
and procedures to detail how examiners could incorporate a loan
migration study into the assessment of loan quality and
underwriting.
- Re-emphasize to examiners the need to assess and report on
management’s processes for controlling risk when potential high-risk
indicators are present.
- Revise existing policies and procedures to require examiners in
their review of high loan-growth banks to perform a risk assessment of a
bank’s internal loan risk rating process that is based on a methodology
that incorporates a review of non-adversely classified loans.
OIG Analysis: As described in DSC's February 3 memorandum, the division has undertaken a number of initiatives to evaluate and enhance its loan sampling methodology and envisions further efforts in the near term that may address the concerns cited in our report. Specifically, within the next several months the division will commence a process improvement review that will focus on the issue of examination workpaper documentation. This review will be designated "Process Redesign IV" and will include representatives from other divisions and offices. For this initiative, DSC has invited the OIG's input, which we will provide as part of the process for resolving the open recommendations. If the DSC initiative addresses the concerns covered by the recommendations, we may accept the results of this initiative as alternative actions to the recommendations. At this time, however, the recommendations remain unresolved, undispositioned, and open.
No further response is required from DSC management at this time. We will continue to monitor implementation of these actions. To indicate we have agreed that the upcoming DSC initiative may bring resolution to the unresolved recommendations, we will include this memorandum and your February 3 memorandum along with the final report summary in the materials provided to the FDIC Audit Committee in advance of the February 18 meeting. If you have any questions concerning the report, please contact me at (202) 416-2543 or Mike Lombardi at (202) 416-2431. We appreciate the courtesies extended to the audit staff.
cc: Lynn B. Dallin, DSC
Michael MacDermott/Corrine Watts, OICM
II. Management Response to the Final Report
Federal Deposit Insurance
Corporation
550 17th St.
NW Washington DC, 20429
Division of Supervision and Consumer
Protection
February 3, 2003
MEMORANDUM TO: Russell A. Rau, Assistant Inspector General for Audits, Office of Inspector General
FROM: Michael J. Zamorski [Electronically produced version; original signed by Michael J. Zamorski], Director, Division of Supervision and Consumer Protection
CONCUR: John F. Bovenzi [Electronically produced version; original signed by John F. Bovenzi], Deputy to the Chairman and Chief Operating Officer
SUBJECT: Audit Report: Examiner Assessment of High Loan-Growth Institutions (Audit Report No. 03-009)
Thank you for the opportunity to provide additional comments with regard to our December 5, 2002, response to the Office of Inspector General (OIG) draft audit report regarding examiner assessment of high loan-growth institutions. We reviewed your final report, including your response to our comments. We have very carefully reconsidered the audit findings and your recommendations. The Division of Supervision and Consumer Protection (DSC) believes that our original response was comprehensive and continues to convey DSC’s position on your observations and recommendations. In addition, we offer the following comments.
DSC agrees that high loan-growth is a potentially high-risk area and that thorough examiner assessment of this area is critical. We are committed to proactive, vigilant, and effective examination processes to monitor and mitigate risks in the institutions we supervise. We continue to assess potentially high-risk situations, through onsite and offsite examination programs, and we are confident that our supervision of such situations is effective and efficient.
DSC firmly believes that its examination workforce is employing appropriate risk-focused examination procedures to accurately assess the risks in financial institutions, and in particular those risks that may be associated with high loan-growth. The essence of a bank examination is the exercise of sound judgment regarding highly variable fact situations. Our examiners’ use of sound judgment, based upon considerable experience and training, should be given extensive weight in assessing the quality of our examinations and the extent of work paper documentation needed. Taken as a whole, our supervision program (onsite and offsite) is risk-focused, proactive, and effective in addressing situations involving high loan-growth.
Over the past few years, DSC has undertaken a number of initiatives to evaluate and enhance our loan sampling methodology, and we envision further efforts in the near-term. In regard to assessing work paper documentation, there have been many discussions within DSC, with the other banking regulators, and with the OIG regarding the issue of examination work paper documentation. In fact within the next several months we intend to commence a new initiative, which we will designate Process Redesign IV (in our continuing series of process improvement reviews), that will focus on the issue of examination work paper documentation. We will invite OIG to participate in this process along with representatives from other Divisions and Offices of the FDIC as we have in past process improvement initiatives. This initiative will allow a broader review of the examination documentation issue.
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