The Federal Reserve System’s Ombudsman and Amendments to the Material Supervisory Determination Appeals Process
by the Office of the Ombudsman of the Board of Governors of the Federal Reserve System
The Board of Governors of the Federal Reserve System (Board) has an Ombudsman’s Office that serves individuals and financial institutions affected by the Federal Reserve System’s (System) regulatory and supervisory activities. This article provides an overview of the Ombudsman’s Office and explains recent amendments to the System’s procedures for an institution to appeal a rating or other supervisory action (material supervisory determination [MSD] appeals process).
The Role of an Ombudsman
The term ombudsman is Swedish in origin (translating as representative). Its function is to assist “individuals and groups in the resolution of conflicts and concerns.”1 The ombudsman profession dates back to 1713, when King Charles XII of Sweden appointed an ombudsman to help promote good governance and conflict mitigation.2 The role of ombudsmen has continued to evolve from its public sector origins and is now also used in the private sector and academia worldwide.3 Organizations and businesses that employ ombudsmen include the United Nations, the International Monetary Fund, the American Red Cross, the Inter-American Development Bank, the United States Olympic and Paralympic Committee, American Express, Coca-Cola, Mars Inc., and United Technologies Corporation.
There are different types of ombudsmen, including organizational, advocate, and classical.4 The Federal Reserve’s ombudsman is organizational in nature because it facilitates the informal resolution of concerns or disputes.
The Federal Reserve’s Ombudsman’s Office
Establishment of the Office of the Ombudsman
In 1995, as required by the Riegle Community Development and Regulatory Improvement Act of 1994 (Riegle Act), the Board established the position of ombudsman. Other financial regulators, including the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency, also have ombudsmen. The Riegle Act directed each federal banking agency to appoint an ombudsman to:
- act as a liaison between the agency and any party with any problem the party may have in dealing with the agency as a result of its regulatory activities; and
- ensure that safeguards exist to encourage complainants to come forward and preserve confidentiality.5
Responsibilities of the Ombudsman’s Office
The Office of the Ombudsman is guided by four core values: independence, informality, fairness, and confidentiality. The office operates outside of the System’s supervisory and regulatory processes and is therefore independent. It is housed within the Office of the Secretary, which is a separate division from the Board’s supervisory divisions. Thus, the Ombudsman staff does not report to the supervisory staff.
The Office of the Ombudsman has three major functions. Primarily, it is available to facilitate the fair and timely resolution of complaints related to the System’s supervisory and regulatory activities. In performing this function, the Ombudsman’s Office most commonly hears from representatives of state member banks (for which the System is the primary federal regulator) about a specific supervisory determination. For example, financial institutions have contacted the Ombudsman’s Office about supervisory component and composite ratings; findings in safety and soundness and consumer compliance examinations; timing, process, or other concerns relating to examinations; and the review and approval of pending applications. To help resolve such matters, the Ombudsman’s Office works collaboratively with representatives of the supervised institution and with senior staff at the Board or Reserve Bank, as appropriate. In short, the Ombudsman’s Office tries to facilitate productive communication and to keep the resolution process on track.
The Office of the Ombudsman also serves as an intake point for whistleblower complaints against supervised institutions or institution-affiliated parties. After receiving such a complaint, the Ombudsman’s Office develops a plan for handling the matter based on the specific facts and circumstances. The office generally gathers information from the complainant and shares the information with appropriate Board or Reserve Bank staff. However, if an individual wants to remain anonymous outside of discussions with the Ombudsman’s Office, identifying information is not shared.
The Board’s general practice is to attempt to resolve problems informally, unless the severity of the problem requires a formal approach. In keeping with this policy, the Office of the Ombudsman typically assists individuals or financial institutions before a formal process is initiated, often obviating the need to use a formal process. Moreover, the Ombudsman’s Office can continue to assist an individual or institution in resolving a dispute even if it has escalated to a formal process. The Ombudsman’s Office has informally assisted financial institutions while an MSD is pending to provide information about the process and to help address issues that may arise.
The second major function of the Office of the Ombudsman is to investigate any claim that System staff has retaliated against a supervised institution. The Board has a strict policy prohibiting retaliation. The Ombudsman’s Office defines retaliation as any action or decision by Board or Reserve Bank staff that causes a supervised institution to be treated differently or more harshly than other similarly situated institutions because the institution has attempted to resolve a complaint by filing an MSD appeal or has used any other Board mechanism for resolving a complaint.6 Because of the ongoing relationships between financial institutions and the Board, the Office of the Ombudsman recognizes how difficult it can be for an institution to raise retaliation claims and ensures that all such claims are fully investigated. During this process, the Ombudsman’s Office collects and reviews relevant documents, interviews witnesses, and consults with Board or Reserve Bank subject matter experts.7 Throughout the course of an investigation, the Ombudsman’s Office also attempts to resolve retaliation claims informally, such as through discussions with the institution that filed the complaint and relevant Board or Reserve Bank staff.8
At the conclusion of an investigation, the Office of the Ombudsman determines if retaliation occurred and reports its factual findings and determination to the director of the appropriate Board division, the appropriate Board committee or governor, and the appropriate Reserve Bank officer in charge of supervision.9 The Ombudsman’s Office may also recommend to the appropriate division director that personnel involved in the claim of retaliation be excluded from the next examination of the institution or review that may lead to an MSD. However, the division director will make the final decision regarding any exclusions of System personnel from future examinations.
The third function of the Office of the Ombudsman is to provide feedback on patterns of issues.10 This function includes reporting to Board members and senior staff on issues that are likely to have a significant impact on the System’s missions, activities, or reputation that arise from the Office of the Ombudsman’s review of complaints, such as patterns of issues that occur in multiple complaints. This information includes aggregate data and may also include particular issues raised by institutions. To maintain confidentiality, the Office of the Ombudsman does not share any identifying information about an institution, unless expressly authorized to do so by the institution. This reporting function enables the Office of the Ombudsman to share directly with Board members and senior staff the office’s perspective based on the concerns of individuals and financial institutions affected by the System’s supervisory or regulatory activities.
In addition to performing these three major functions, the Office of the Ombudsman has established safeguards to protect the identity of the individuals and financial institutions. The Ombudsman’s Office also protects the confidentiality of the information it receives; upon request, the email address and phone number are not accessible to anyone other than Ombudsman staff. The Office of the Ombudsman shares identifying and other information with System staff only if the individual or financial institution has explicitly authorized the office to do so, except if disclosure is required by law, in the event of imminent risk of serious harm or in the case of fraud, waste, or abuse.
In sum, the Office of the Ombudsman serves in most instances as an informal resource and advocates for a fair and timely resolution of disputes or concerns. An institution’s use of the ombudsman is voluntary. The process of working through any dispute or issue depends on a financial institution’s willingness to continue with the resolution process. If a financial institution or individual no longer wants to pursue resolution through the office, it can terminate the process at any time.
The Material Supervisory Determination Appeals Process
The first part of this article provided a background on the Office of the Ombudsman, while this section discusses the process by which MSDs may be appealed, the role of the office in handling these appeals, and recent amendments to the appeals process. The Riegle Act also directed the federal banking agencies to establish an “independent intra-agency appellate process” for the review of “material supervisory determination[s]” and to ensure that “appropriate safeguards exist for protecting the appellant from retaliation by agency examiners.”11 In response, the Board established an MSD appeals process in March 1995 and an Ombudsman policy in August 1995. The Board recently adopted an amended MSD appeals process and a revised policy, drawing on experience with and feedback on the original policy.12 The purpose of the revised process is to improve and expedite the appeals process. Highlights of the amendments, which became effective on April 1, 2020, are summarized below.
The original process defined an MSD to include determinations related to examinations or inspection composite ratings, the adequacy of loan loss reserves, and significant loan classifications. The revised process clarifies that Matters Requiring Attention and Matters Requiring Immediate Attention constitute appealable MSDs. Specifically, the revised process states that an MSD includes, but is not limited to, “any material determination relating to examination or inspection composite ratings, material examination or inspection component ratings, the adequacy of loan loss reserves and/or capital, significant loan classification, accounting interpretation, Matters Requiring Attention (MRAs), Matters Requiring Immediate Attention (MRIAs), Community Reinvestment Act ratings (including component ratings), and consumer compliance ratings.” The revised process clarifies that it excludes from an appealable MSD any referral of a matter to another government agency. Finally, the revised process continues to exclude any supervisory determination for which an independent right of appeal exists.
The original appeals process consisted of three levels — an initial review panel, an appeal to the president of the Reserve Bank that issued the MSD, and an appeal to the appropriate Governor at the Board. The revised process has only two levels — an initial review panel and a final review panel, both of which have three members. Under the revised process, all appeals are filed with the Office of the Ombudsman. Generally, the initial review panel consists of three Reserve Bank employees, with the option for a Board employee to be appointed as one of the three members in appropriate circumstances. The final review panel must consist of at least two Board employees, at least one of whom must be an officer of the Board at the level of associate director or higher. Members of the review panels must not have been substantively involved in or, directly or indirectly, report to someone else who was involved in the MSD being appealed. Additionally, none of the panel members may be employees of the Reserve Bank whose MSD is being appealed.
Also under the revised, streamlined process, an institution must file an initial appeal within 30 calendar days of receiving the MSD, and the initial review panel will issue a decision within 45 calendar days of the date the appeal is received.13 An institution must file a final appeal within 14 calendar days of the initial review panel’s decision, and the final review panel will issue a decision within 21 calendar days of the filing of a final appeal.14
The revised process also addresses a potential timing conflict between the Prompt Corrective Action (PCA) framework15 and the original MSD appeals process by expediting the appeals process. If an MSD being appealed relates to or causes an institution to become critically undercapitalized, the appeals process is further expedited. An institution must still file an initial appeal within 30 calendar days of receipt of the MSD, but the initial review panel will issue a decision within 35 calendar days of the date the appeal is received.16 An institution must file a final appeal within seven calendar days of the initial review panel’s decision, and the final review panel will issue a decision within 10 calendar days of the final appeal filing.
The revised process also defines specific standards of review applicable at each level of the appeal. The initial review panel considers whether the MSD being appealed is consistent with applicable laws, regulations, and policy and is supported by a preponderance of evidence in the record. The initial review panel will make its own supervisory determination and will not defer to the judgment of the Reserve Bank staff who made the MSD being appealed. The initial review panel may, however, rely on any examination work papers developed by the Reserve Bank or materials submitted by the institution if it determines it is reasonable to do so. The final review panel determines whether the initial review panel’s decision was reasonable.
Finally, the Office of the Ombudsman may attend, as an observer, meetings or deliberations relating to the appeal if requested by either the institution or System personnel. Ombudsman staff will also follow up with institutions that have filed an MSD appeal to inquire whether retaliation has occurred. As in the prior policy, the Office of the Ombudsman is the authorized recipient of all retaliation claims made by supervised institutions involving the Federal Reserve.
As explained earlier, the three main functions of the Office of the Ombudsman are (1) to facilitate the fair and timely resolution of complaints related to the System’s supervisory and regulatory activities, (2) to investigate any claim that System staff has retaliated against a supervised institution, and (3) to provide feedback on patterns of issues. The Ombudsman’s Office staff is dedicated to helping the System and its constituents resolve issues efficiently and effectively. For more information, visit www.federalreserve.gov/aboutthefed/ombudsman.htm, send an email to email@example.com, or call 1-800-337-0429.
- 1 See the International Ombudsman Association website at www.ombudsassociation.org/what-is-an-organizational-ombuds.
- 2 C. McKenna Lang, “A Western King and an Ancient Notion: Reflections on the Origins of Ombudsing,” Journal of Conflictology, 2(2), 2011.
- 3 See Lang, 2011.
- 4 According to the International Ombudsman Association, an organizational ombudsman “serves as a designated neutral within a specific organization and provides conflict resolution and problem-solving services to members of the organization (internal ombuds) and/or for clients or customers of the organization (external ombuds).” An advocate ombudsman typically advocates on behalf of aggrieved individuals or groups, and a classical ombudsman typically investigates claims about government policies and processes and often makes recommendations for redress or policy changes. See www.ombudsassociation.org/ombuds-faq.
- 5 See 12 U.S.C. §4806(d)(2). In 2010, when Congress created the CFPB, it directed the CFPB to appoint an ombudsman to carry out these roles. See also 12 U.S.C. §5493(a)(5).
- 6 “Internal Appeals Process for Material Supervisory Determinations and Policy Statement Regarding the Ombudsman for the Federal Reserve System,” 85 Federal Register 15175, 15182 (March 17, 2020).
- 7 See 85 Federal Register at 15181.
- 8 See 85 Federal Register at 15181.
- 9See 85 Federal Register at 15181.
- 10See 85 Federal Register at 15181.
- 11 See 12 U.S.C. §4806(a),(b)(2).
- 12 See 85 Federal Register at 15175.
- 13 The initial review panel may extend the period for issuing a decision by up to 30 calendar days if it determines that the record is incomplete and that additional fact-finding is necessary for the panel to issue a decision.
- 14 The final review panel may extend the period for issuing a decision by up to 30 calendar days if it determines an extension is appropriate.
- 15 For an overview of the PCA framework, refer to section 4133.1 of the Board’s Commercial Bank Examination Manual, available at www.federalreserve.gov/publications/files/cbem-4000-202004.pdf.
- 16 This period may be extended by up to an additional seven calendar days if the initial review panel decides that such time is required to supplement the record and consider additional information received.