Litigating Supervisory Ratings

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Todd Phillips is an assistant professor of law at Georgia State University, where he specializes in bank regulation, derivatives and securities, and administrative law. Prior to entering academia, Todd worked as Director of Financial Regulation at Center for American Progress and as a Senior Attorney at the FDIC.

The federal banking agencies (FBAs) are currently engaged in a rethink of practically every part of the supervisory process, including how supervisory ratings are determined and assigned. The Fed has proposed changes to its Large Financial Institution (LFI) rating framework, and the banking industry is encouraging regulators to curtail the management component of the Uniform Financial Institutions Rating System (UFIRS) framework, more commonly known as CAMELS. Rather than having a conversation about whether examiners should have discretion in rating banks’ management — the “M” component currently evaluates a bank’s ability “to identify, measure, monitor, and control” risks and operate in compliance with the laws — we should discuss whether and how banks can challenge their ratings in court.

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Bank examiners have been using categorizations or classifications since at least the early 20^th century when they categorized specific loans as “satisfactory,” “slow,” “doubtful,” or “estimated loss,” (Class I, II, III, and IV).¹ The first time Congress addressed the concept of supervisory ratings was in 1978, when it created the Federal Financial Institutions Examination Council (FFIEC) and tasked it with “mak[ing] recommendations for uniformity in other supervisory matters, such as … identifying financial institutions in need of special supervisory attention.”² The FFIEC quickly established UFIRS the next year, and has since established several other ratings systems. Some FBAs have adopted unique ratings systems, such as the Fed’s LFI framework for the largest of financial institutions.³ Congress directly created a rating system only once: the 1989 update of the Community Reinvestment Act required the FBAs to release banks’ CRA evaluations, including “the institution’s rating and a statement describing the basis for the rating.”⁴

UFIRS was originally designed to help regulators identify problem institutions in order to allocate their finite supervisory resources to higher-risk banks. First, it would “reflect in a comprehensive and uniform fashion an institution’s financial condition, compliance with laws and regulations and overall operating soundness.”⁵ Second, it would “help identify those institutions whose financial, operating or compliance weaknesses require special supervisory attention and/or warrant a higher than normal degree of supervisory concern.”⁶ No legal consequences would flow from a poor rating, though a bank might see more examiners roaming its halls.

The role of some ratings has changed over time, as Congress granted legal privileges (or imposed legal penalties) on the basis of supervisory ratings. Under the Gramm-Leach-Bliley Act, banks can become a “financial holding company” — and affiliate with nonbank financial companies — only if they and their insured depository institution subsidiaries all achieve “a composite rating of 1 or 2” under UFIRS or an equivalent system” and “at least a rating of 2 for management, if such rating is given.”⁷ The FDIC also uses CAMELS ratings to determine banks’ insurance assessments,⁸ and the FBAs consider many ratings in various other contexts, such as when adjudicating merger or branching decisions or determining “primary credit” eligibility for discount window credit.⁹ Accordingly, whereas supervisory ratings previously helped regulators allocate resources, they today are used as inputs for decisions that carry legal consequences for banks.

Irate About a Rating

These changes have created a curious state of legal affairs in terms of whether or how examiners’ ratings are subject to review. In 1994 — before ratings were used to determine legal consequences — Congress required the FBAs to develop procedures by which banks could appeal so-called material supervisory determinations, a category of actions that by statute includes “examination ratings.”¹⁰ Accordingly, supervisory ratings are reviewable via internal mechanisms unique to each agency. 

Because ratings carry legal consequences, however, courts have ruled that the assignment of ratings may be subject to judicial review. In Builders Bank v. FDIC, for example, a panel of the Seventh Circuit Court of Appeals held that the “effect of CAMELS ratings on [FDIC] insurance premiums creates a concrete stake that makes the current dispute justiciable.”¹¹ Yet, that same court explained that “[a]ssignment of a CAMELS rating does not appear to be a final decision,” such that ratings are not usually subject to immediate challenge. The Administrative Procedure Act authorizes judicial review of “final agency actions,” instead mandating that “preliminary, procedural, or intermediate agency action” will be reviewed “on the review of the final agency action.”¹² To that end, the court hypothesized that a supervisory rating “might be the basis of an administrative order directing a bank to change certain practices or desist from others,” and could be reviewed when that order is challenged.¹³

Under this court’s view, it is only when, for example, the FDIC decides banks’ deposit insurance premiums or when the Fed denies bank holding companies’ applications for financial-holding-company status that ratings are ripe for review.¹⁴ At first glance, this seems reasonable from an administrative-law perspective — that courts review intermediate agency actions when they review final actions is the standard applied across the government — but it may result in strange outcomes because regulators use other regulators’ ratings. When determining whether a holding company may become a financial holding company, the Fed relies on CAMELS ratings given by examiners employed by the OCC and the FDIC, as well as those assigned by examiners employed by the Federal Reserve System. Similarly, the FDIC uses Fed and OCC ratings in setting insurance premiums.

The result is that OCC-assigned ratings are final action for purposes of determining FDIC insurance premiums, but not for determining merger applications; FDIC-assigned ratings of banks without holding companies are final action for purposes of the Fed determining discount window eligibility, but not for determining insurance premiums; and Fed-assigned LFI ratings of bank holding companies are never final agency action, as they are only usable by that regulator in merger and financial holding company determinations.

Rate Around and Find Out

Given that FBAs’ ratings may be used by other FBAs to set rates and provide legal privileges, when should ratings be subject to litigation? If banks are required to wait until some legal consequence has flowed, we may have instances in which OCC- or Fed-supervised banks challenge the FDIC over their insurance premiums, requiring the FDIC to defend the other regulators’ ratings. But if banks (but not holding companies!) may challenge their ratings immediately when they are assigned at the end of annual examinations — after challenging them through the material supervisory determination appeals process, of course — the consequences of those ratings will be unclear, and courts may appropriately be reticent to hear such cases.

Rather than restrict the management component of CAMELS entirely, policymakers should address this thicket and ensure banks may receive judicial review of their ratings. Current administrative law doctrine does not answer this question well, and it may ultimately require legislation. I hope readers — and the regulators in the midst of reevaluating many parts of supervision — give it some thought.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1] Neil H. Jacoby & Raymond J. Saulnier, Business Finance in Banking at 213 (1947).

^[2] 12 U.S.C. § 3305(b)(1).

^[3] Large Financial Institution (LFI) Rating System, SR 19-3 / CA 19-2 (Feb. 26, 2019), https://www.federalreserve.gov/supervisionreg/srletters/sr1903.htm

^[4]  Pub. L. 101–73 § 1212(b), 103 Stat. 527 (codified at 12 U.S.C. § 2906).

^[5] OCC Examining Circular 159 (Revised) at 2, 1979 WL 27070 (Nov. 13, 1979).

^[6]  Id.

^[7] 12 U.S.C. § 1843(l).

^[8] 12 C.F.R. § 327.16

^[9] See Sarah Flowers, BPI Statement Before House Subcommittee on Financial Institutions, Bank Pol’y Inst. (Apr. 29, 2025), https://bpi.com/bpi-statement-before-house-subcommittee-on-financial-institutions/ (discussing these consequences)

^[10] 12 U.S.C. § 4806.

^[11] 846 F.3d 272, 275 (7th Cir. 2017)

^[12] 5 U.S.C. § 704.

^[13] Builders Bank, 846 F.3d at 275 (internal cites removed).

^[14] See, e.g., Am. Fed. Bank v. United States, 72 Fed. Cl. 586, 589 (2006) (permitting judicial review after rating downgrade increased insurance premium).

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