Report: FDIC Gave Repeat Violators High Grades

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WASHINGTON -- Federal Deposit Insurance Corp. examiners awarded high performance ratings to state banks that repeatedly violated consumer protection rules, according to the agency's inspector general.

What's more, examiners were slow to demand improvements once flaws were identified, according to a report released Tuesday.

Of the 1,945 state, nonmember banks examined in 2005, 83% had "significant" consumer compliance violations, and 837 were repeat offenders. Of those, 85% still got the best Camels ratings of 1 or 2.

"As a result of repeat, significant violations, consumers and businesses of the affected institutions may not obtain the benefits and protections afforded them by consumer protection laws and regulations," the inspector general said.

FDIC officials and industry representatives downplayed the report, saying the inspector general overstated the seriousness of violations and ignored the subjectivity of examinations.

But Allen Fishbein, the director of housing and credit policy at the Consumer Federation of America, called prompt action by regulators "the cornerstone of compliance and consumer confidence."

"The finding that repeated and significant violations for some institutions were allowed to continue over several exam cycles undermines that public confidence," he said.

The report noted that the FDIC's division of supervision and consumer protection focuses its efforts on violations by banks with lower Camels ratings. But the inspector general found that flexibility toward higher-rated institutions means significant violations go unresolved for too long.

Among its recommendations, the inspector general advised the agency to follow up on repeat, significant violations at all institutions -- regardless of their Camels rating.

Camels ratings factor into how much the FDIC charges a bank for deposit insurance, and with premiums on the verge of an increase, a bank's rating will have a bottom-line impact.

FDIC Chief Operating Officer John Bovenzi said the audit wrongly identified violations as "repeat," when in reality different violations of the same law occurred in consecutive exam periods.

"The way they set this up, I think, it overstates their case," Mr. Bovenzi said.

"The report mischaracterizes their own findings, which are on a fairly small sample to begin with. It uses the word 'repeat' to imply that the same violation has occurred between exams and that we're not being timely," Mr. Bovenzi said. "The FDIC is committed to protecting the consumer and ensuring that the consumer protection laws are being followed. …