Ten Key Points about the Bank Examination Privilege

In January, the Business Law Section published The Bank Examination Privilege: When Litigants Demand Confidential Regulatory Reports by Eric B. Epstein, David A. Scheffel, and Nicholas A.J. Vliestra, a practical, user-friendly resource to understand the intricacies of the bank examination privilege. The book is available to order at the Section member price of $69.95 here.

***

Bank examinations are integral to the government’s supervision of the banking industry. A bank examination is an inspection of a bank or other financial institution by a federal or state regulator. The purpose of a bank examination is to assess the institution’s financial health and/or its compliance with applicable laws and regulations.

Bank examinations generally are non-public. Typically, an examination report is not shared beyond the regulator and the bank. However, when a bank is involved in a lawsuit, keeping such records confidential can be difficult. In a lawsuit, a party may seek copies of such records in the hope of using them as evidence as trial.

That’s where the bank examination privilege comes into the picture. The privilege is a federal rule that shields examination records, to an extent, in federal litigation.

The bank examination privilege is an evidentiary privilege. Evidentiary privileges exempt specific types of evidence from disclosure during a lawsuit. The bank examination privilege evolved from federal judicial decisions, and thus can be classified as a federal common-law evidentiary privilege. In many states, state law also shields examination records. The term “bank examination privilege” usually is understood to refer to the overarching federal rule, rather than the rule that exists in any particular state.

The privilege has a number of nuances that counsel should keep in mind when representing a financial institution in a federal lawsuit. We review ten of them below. A more comprehensive overview of the privilege can be found in our new treatise, The Bank Examination Privilege (American Bar Association 2017).

1. The Privilege Belongs to Regulators

The privilege belongs to regulators, not banks. Therefore, in a lawsuit, when a party asks a bank to turn over confidential examination records, the bank should promptly reach out to the regulator that conducted the examination. If the regulator asserts the privilege, one of two things may happen next. First, the bank’s adversary may back down. Second, the bank’s adversary may ask the court to override the regulator’s decision.

If the bank’s adversary asks the court to override the regulator’s decision, the bank can remain neutral and let the dispute play itself out between the regulator and the bank’s adversary. Often, however, the bank will actively work with the regulator to defend the privilege, and will submit arguments in support of the regulator’s position.

2. Courts Follow a Specific Procedure When Applying the Privilege

To resolve disputes related to the privilege, courts follow a specific procedure. First, the court considers whether the examination records fall within the scope of the privilege. Different judicial decisions use different wording to describe the exact boundaries of the privilege. In essence, the privilege protects an examiner’s confidential opinions and recommendations, and other deliberative aspects of the examination process.

The regulator bears the burden of showing that the records fall within the scope of the privilege. To determine whether the regulator has met this burden, a court may directly review the records, or a sampling of the records, in camera.

Next, if the records are privileged, the court will consider whether there is good cause to require disclosure of the records. The party seeking disclosure bears the burden of showing good cause. The good cause analysis usually focuses on five main factors: (1) the relevance of the records to the case; (2) whether the party can obtain the same information from other sources; (3) the seriousness of the case; (4) the government’s role in the lawsuit, and (5) whether disclosure will have a chilling effect on future bank examinations.

In some cases, after conducting this analysis, the court makes an across-the-board determination that the privilege shields all, or none, of the sought-after examination records. In other cases, the court finds that the privilege protects some documents but not others, or covers particular portions of documents.

3. The Privilege Is Not Limited to ROEs

Often, at the conclusion of a bank examination, the examiner will prepare a formal report known as a Report of Examination, or ROE. Much of the case law regarding the privilege concerns the applicability of the privilege to ROEs.

However, the privilege is not limited to ROEs. The privilege can extend to any type of communication. When applying the privilege, the relevant question is not what form the communication takes. The relevant question is whether the substance of the communication reveals privileged information.

For example, the privilege can encompass:

  • Regulator-to-bank communications other than ROEs, such as letters, e-mails, or oral communications;
  • Internal agency communications that are not shared with banks;
  • Bank-to-regulator communications, such as a response to an ROE; and/or,
  • Internal bank communications that are not shared with regulators, such as internal bank e-mails discussing communications with an examiner.

4. The Privilege Is Not Only about Documents

The majority of judicial decisions regarding the privilege concern the applicability of the privilege to documents. But the privilege is equally applicable to oral testimony. When giving oral testimony at a deposition or at trial, a bank employee may be entitled to withhold privileged information about the bank’s interactions with examiners.

5. Various Regulators May Assert the Privilege

Many of the legal precedents regarding the bank examination privilege involve three specific federal regulators: the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and/or the FDIC. But that does not mean that the privilege is necessarily limited to these three regulators. Other federal regulators, such as the Consumer Financial Protection Bureau, also have taken the position that the privilege encompasses their communications with supervised institutions. Financial institutions should not assume that the privilege is confined to examinations by the OCC, Federal Reserve and/or FDIC.

6. The Privilege Is Distinct from FOIA Exemption 8

Outside of the litigation context, members of the public may ask administrative agencies to release records under the Federal Freedom of Information Act (FOIA). FOIA contains various exemptions that permit agencies to withhold specific types of records. Exemption 8 allows agencies to withhold records related to bank examinations.

At times, FOIA Exemption 8 is mistakenly conflated with the bank examination privilege. Clearly, FOIA Exemption 8 and the privilege stem from the same underlying concern: the need to preserve the confidentiality of bank examinations.

However, the exemption and the privilege focus on two different procedural situations. FOIA Exemption 8 applies to FOIA requests. The privilege governs the exchange of information in a lawsuit under the Federal Rules of Civil Procedure.

The exemption and the privilege also differ substantively. For example, as noted earlier, parties potentially can show good cause to override the privilege. By contrast, FOIA Exemption 8 does not contain a good cause exception.

7. The Privilege Is Not an Administrative Regulation

A variety of federal administrative regulations restrict the disclosure of bank examination records. For example, the OCC’s policy is that such records are “non-public OCC information,” and therefore are “confidential and privileged.” See 12 C.F.R. § 4.36(b). As a result, the OCC “will not normally disclose this information to third parties.”

The bank examination privilege is not a direct application of such regulations. The privilege recognizes that such regulations are grounded in reasonable concerns. However, the privilege is a common-law doctrine, not an administrative regulation.

8. The Privilege Is Related to the Deliberative Process Privilege

The deliberative process privilege shields the internal deliberations of administrative agencies. Some courts have described the bank examination privilege as an extension of the deliberative process privilege. In effect, the bank examination privilege extends the deliberative process privilege to cover a specific type of external agency communication: communications between agencies and financial institutions.

9. State Statutes Sometimes Displace the Privilege

In federal litigation, when the parties’ claims and defenses are based solely in federal law, courts generally resolve privilege disputes by applying federal privilege law. By contrast, when the parties’ claims and defenses are based solely on state law, federal courts usually decide privilege disputes by applying state privilege law.

Based on this rule, when a case involves federal-law claims and defenses, federal courts routinely apply the federal bank examination privilege. But in some state-law cases, federal courts instead have looked to state privilege law to determine whether bank examination records are privileged. Depending on the state, state privilege law may offer more, less, or the same degree of protection for examination records.

10. There Often Are Other grounds for Withholding Examination Records

The bank examination privilege is an important tool for keeping bank examination records confidential during a federal lawsuit. However, in many cases, there also are other valid reasons to withhold such records. For example, a bank may be able to show that such records are entirely irrelevant to the lawsuit. Such records also may come within the scope of other evidentiary privileges. For instance, if such records reflect communications between a bank and the bank’s counsel, they may be subject to the attorney-client privilege. Because the bank examination privilege is not an absolute privilege, it is important for financial institutions to assert all applicable bases for withholding examination records.

ABOUT THE AUTHORS

New York City, NY

Eric B. Epstein

Eric has over 10 years of litigation experience. He has first-chaired trials in federal and state courts.

Eric also is the lead author of a legal treatise, The…

New York City, NY

David A. Scheffel

David has extensive experience in consumer financial services litigation and co-chairs Dorsey’s Consumer Financial Services practice. He defends financial institutions against individual and class…

Minneapolis, MN

Nicholas A.J. Vlietstra

Nick Vlietstra is a Partner in Dorsey’s Finance & Restructuring Group. Nick has expertise in consumer law and regulation, government investigations and inquiries, workplace investigations, and…

Login or Registration Required

You need to be logged in to complete that action.

Register/Login