Credit Union Examination Rights
Credit Union Officials have the right to question and seek corrections to examiner findings, conclusions, and directives. - NCUA Examiners Guide
February 2, 2011 Dear Credit Union CEO: The League of Southern Credit Unions (LSCU) is committed to providing reliable, commonsense, regulatory compliance information to our members. We know that regulatory compliance and exam-related issues are among the top challenges your credit union faces. The League is making significant investments in our Regulatory Affairs functions and will continue to find ways to provide access to the best compliance information and assistance as part of your value of affiliation. In addition to providing the weekly e-Signal alerts and Governmental Affairs Updates electronically, access to up-to-date League InfoSight information, and alerts on major rules and proposals, we are now making available copies of the recently developed “Credit Union Examination Rights” Guidance Report; sometimes referred to as “The Credit Union Examination Bill of Rights.” This report lays out your rights and expectations when dealing with examiners and regulatory agencies. Additional copies of this report are available electronically via the LSCU website (www.lscu.coop) under the Regulatory Advocacy tab. I know credit unions have regulatory related education needs and many credit union staff participate in our training conferences and webinars each year. Enclosed, along with this complementary copy of the CUNA “Guidance for Credit Unions during the Current Economic Times and Beyond,” is our upcoming 2011 Education calendar. The League offers a variety of seminars, conferences, and webinars that address multiple regulatory, operational and management issues. We are very proud of our success in this area and invite you and other staff members to join us in 2011. We will continue our efforts to support and promote the credit union movement in Alabama and Florida, and continue to seek innovative ways to help your credit union cut through some of the operational burdens, and focus on service to your credit union members. Thank you for allowing the LSCU to serve you and the credit union movement. I look forward to speaking with you soon. Sincerely,
Patrick La Pine President/CEO
League of Southeastern Credit Unions (LSCU) 1-866-231-0545
LSCU Contact Information Alabama Office 22 Inverness Parkway, Suite 200 Birmingham, AL 35242 Fax: (205) 991-2576
or
Florida Office 3773 Commonwealth Blvd. Tallahassee, FL 32303 Fax: (850) 574-6374
E-mail LSCU or access the InfoSight Network at: www.lscu.coop
LSCU Regulatory Compliance Contacts Will McCarty Senior Vice President, Governmental Affairs 866-231-0545, ext. 2137 (Birmingham) will.mccarty@lscu.coop Bill Berg Vice President, Regulatory Affairs & Compliance Training 866-231-0545, ext. 1028 (Tallahassee) bill.berg@lscu.coop Scott Morris Director, Compliance 866-231-0545, ext. 2165 (Birmingham) scott.morris@lscu.coop
ACUA – Alabama Credit Union Administration ACUA Contact Information Alabama Credit Union Administration – Montgomery, AL 1789 Cong Wm L Dickinson Dr. Montgomery, Alabama 36109 Tel: (334) 271-2381 Fax: (334) 409-9635
ACUA Regulatory Compliance Contacts Larry Morgan Administrator Lloyd Moore Credit Union Assistant Administrator Peter C. Ukeje Credit Union Examination Coordinator
James M. Arndt, Jr Credit Union Examination Coordinator
Robert J. Russell Credit Union Examination Coordinator Keith Shepherd Lowery Credit Union Examination Specialist
Keith C. Edwards Credit Union Examination Specialist
Marie H. Steele Examiner, BSA Compliance Specialist
Cindy J. Davis ACUA Executive Secretary
Christy Ealum ACUA Administrative Assistant II
Florida OFR – Florida Office of Financial Regulation Florida Office of Financial Regulation Contact Information Florida Office of Financial Regulation – Tallahassee, FL 200 E. Gaines Street Tallahassee, FL 32399-0371 Tel: (850) 410-9800 Fax: (850) 410-9548 E-mail the Florida Office of Financial Regulation at: OFR@fldfs.com
Florida OFR Regulatory Contacts Linda B. Charity Director, Office of Financial Regulation (850) 410-9800 Linda.Charity@flofr.com Bruce Ricca Bureau Chief Bureau of Credit Unions (850) 410-9528 Bruce.Ricca@flofr.com
Regional Office Locations
County
FORT LAUDERDALE 1400 West Commercial Boulevard Suite 135 Fort Lauderdale, FL 33309 Tel: 954-958-5508 Fax: 954-598-7138
Broward
FT MYERS 2295 Victoria Avenue, Suite 292 Fort Myers, FL 33901 Tel: 239-461-4008 Fax: 239-338-2449
Collier, Lee, Charlotte, Hardee, DeSoto
Florida OFR – Florida Office of Financial Regulation JACKSONVILLE 921 N. Davis Street, Suite 225 Jacksonville, FL 32209 Tel: 904-798-5808 Fax: 904-359-2687
Alachua, Baker, Bradford, Clay, Columbia, Dixie, Duval, Flagler, Gilchrist, Hamilton, Jefferson, Lafayette, Levy, Madison, Nassau, Putnam, Suwannee, St. Johns, Taylor, Union
MIAMI 401 NW 2nd Ave., Suite N708 Miami, FL 33128-1796 Tel: 305-536-0308 Fax: 305-810-1100
Dade, Monroe
ORLANDO 400 W. Robinson St Orlando, FL 32801-1799 Tel: 407-245-0608 Fax: 407-245-0806
Brevard, Lake, Marion, Orange, Osceola, Seminole, Sumter, Volusia
PENSACOLA 4900 Bayou Blvd., Suite 103 Pensacola, FL 32503-2530 Tel: 850-453-7908 Fax: 850-494-7388
Bay, Calhoun, Escambia, Franklin, Gadsden, Gulf, Holmes, Jackson, Leon, Liberty, Okaloosa, Santa Rosa, Wakulla, Walton, Washington,
TALLAHASSEE 200 E. Gaines Street Tallahassee, FL 32399 Tel: (850) 410-9800 Fax: (850) 410-9548
Baker, Bay, Bradford, Calhoun, Clay, Columbia, Dixie, Duval, Escambia, Franklin, Gadsden, Gilchrist, Gulf, Hamilton, Holmes, Jackson, Jefferson, Lafayette, Leon, Levy, Liberty, Madison, Nassau, Okaloosa, Santa Rosa, Suwannee, Taylor, Union, Wakulla, Walton, Washington
TAMPA 1313 Tampa St., Suite 615 Tampa, FL 33602-3394 Tel: 813-218-5308 Fax: 813-272-2498
Citrus, Hernando, Hillsborough, Manatee, Pasco, Pinellas, Polk, Sarasota
WEST PALM BEACH 3111 South Dixie Highway, Suite 302 West Palm Beach, FL 33405 Tel: 561-837-5203 Fax: 561-837-5030
Glades, Hendry, Highlands, Indian River, Martin,Palm Beach, Okeechobee, St. Lucie
CUNA - Credit Union National Association CUNA Contact Information CUNA - Washington, DC 601 Pennsylvania, Avenue, NW South Bldg., Suite 600 Washington, DC 20004-2601
or
Tel: (202) 638-5777 Fax: (202) 638-7734
CUNA - Madison, WI 5710 Mineral Point Road Madison, WI 53705 Tel: (800) 356-9655 Fax: (608) 231-1869
E-mail CUNA at: cucomply@cuna.com
CUNA Regulatory Compliance Contacts Kathleen Thompson SVP/Associate General Counsel for Compliance and Legislative Analysis 202-638-5777, ext. 6740 (Washington, DC) kthompson@cuna.com Mike McLain Assistant General Counsel and Senior Compliance Counsel 800-356-9655, ext. 4185 (Madison, WI) mmclain@cuna.com Valerie Moss Director of Compliance Information 202-638-5777, ext. 6741 (Washington, DC) vmoss@cuna.com Nichole Seabron Federal Compliance Counsel 202-638-5777, ext. 6739 (Washington, DC) nseabron@cuna.com Paulette Young Regulatory Affairs Specialist 202-638-5777, ext. 6737 (Washington, DC) pyoung@cuna.com
NCUA – National Credit Union Administration NCUA Contact Information NCUA Region III – Atlanta, GA 7000 Central Parkway Suite 1600 Atlanta, GA 30328 Tel: (678) 443-3000 Fax: (678) 443-3020 E-mail NCUA at: Region3@ncua.gov
NCUA Regulatory Compliance Contacts Herb Yolles Region III Director Joe Ostrowidzki Associate Regional Director Operations
David Hibshman Associate Regional Director Programs
Donna Woods Director Division of Supervision
Larry Maynard Director Division of Insurance
Mark Skaggs Director Special Actions
TBD Director Division of Management Services
NCUA – National Credit Union Administration Region III - Atlanta Herb Yolles Region III Director
Joe Ostrowidzki Operations
Donna Woods DOS Director
Leilani Stamper Analyst
Vacant DMS Director
Curley Jones Mgmt Assistant Programs
David Hibshman Programs
Larry Maynard DOI Director
Mark Skaggs SA Director
David Freeman Exam Group A FL
Sherry McArthur Mgmt Assistant Operations
Sharon Graham Analyst
Kim Brown PCO
Sharon Daigle Exam Group B FL
Debra Tucker Admin Assistant
Elliott Weiss Analyst
Paula Rothman PCO
Christa Harrow Exam Group C AL/FL/GA
Rita Woods Analyst
Karen Kallis PCO
Steve Dennison Exam Group F AL/GA
Letrice Lucear Analyst
John Deane Analyst
Debby Ravino PCO
Scott Neat Exam Group J AL/MS/TN
Robert Parrish Analyst
Renee Chapman Analyst
Tim Bankroff PCO
Tom Bellamy Technician
Doris Gilstrap Analyst
Kim Paige PCO
Sharelle Banks Technician
Dawn McNeil Analyst
Federico Fernandez PCO
Todd Roscoe Analyst
Latasha Walker Admin Assistant
Sendy Rallings Analyst
Karliss Glaze Admin Assistant
Larkin Bailey RCMS
Rike Crumpler RCMS
Jim Dupre RCMS
SUPERVISORY ISSUES AND EXAMINATIONS: GUIDANCE FOR CREDIT UNIONS DURING THE CURRENT ECONOMIC TIMES AND BEYOND
RESOURCES DEVELOPED BY THE CREDIT UNION NATIONAL ASSOCIATION’S SUPERVISORY ISSUES WORKING GROUP
JANUARY 2011 (1st Edition)
TABLE OF CONTENTS INTRODUCTION AND BACKGROUND ........................................................................ 1 What This Guidance Provides .......................................................................... 2 QUICK SUMMARY OF CREDIT UNION EXAMINATION RIGHTS ........................... 5 SECTION I: GENERAL DUTIES OF EXAMINERS ......................................................... 6 Risk-Focused Exam ............................................................................................. 6 How the Examiner Operates Is Critical to the Success of the Exam ....... 9 Role of Credit Union Officials in the Examination Process ................... 10 Regulators’ Supervisory Tools ..................................................................... 11 SECTION II: CREDIT UNION EXAMINATION CONCERNS: (BASED ON PRELIMINARY SURVEY RESULTS) ...................................................................... 19 SECTION III: HANDLING DISAGREEMENTS WITH EXAMINERS ......................... 29 CUNA’s List of Credit Union Examination Rights (w/ Commentary) .. 29 Overview of the Examination and Regulatory Appeals Process .......... 36 SECTION IV: RECOMMENDATIONS FOR IMPROVEMENTS IN THE EXAMINATION AND APPEALS PROCESS ......................................................... 55 SECTION V: CONCLUSION .......................................................................................... 57 APPENDIX ....................................................................................................................... 59 CUNA’s Examination Policy ........................................................................... 59 Resources for Credit Unions ......................................................................... 63 **This Guidance is intended to be a resource for the credit union system on supervisory and examination issues. It does not constitute legal advice, even though the objective of this publication is to be as accurate as possible. Credit unions with specific problems should contact competent legal counsel, their league and/or their regulators.
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CUNA GUIDANCE SUPERVISORY ISSUES AND EXAMINATIONS Introduction and Background The regulatory environment for financial institutions, including credit unions, has changed dramatically. Largely as a result of the economic crisis of 2008 and the subsequent weak recovery, credit union and bank regulators are placing greater demands on the performance, with an increased emphasis on safety and soundness, of the institutions they supervise. To some degree, this development should be expected. Over the last several years, there have been increased supervisory problems within the credit union and banking systems, many of which relate directly to the economic crisis. Further, with only slight progress toward an economic recovery, the number of problem case credit unions, as well as banks, continues to grow. This phenomenon has encompassed a cross section of institutions, including some that previously had very strong performance and a satisfactory or excellent regulatory rating. In addition, while credit unions did not cause the financial crisis, even healthy credit unions have felt its impact in their own markets and through premiums and annual assessments for costs to the National Credit Union Share Insurance Fund to handle troubled credit unions and for the National Credit Union Administration’s (NCUA’s) corporate credit union stabilization efforts. In good times or bad, all credit unions and their members deserve and benefit from strong, reasonable safety and soundness supervision. To that end, CUNA and state credit union leagues have consistently supported a regulatory regime that allows regulators to perform their legal oversight functions efficiently and effectively within the framework of their responsibilities. Credit union officials must also have the latitude they need to exercise their business judgments and operate their credit union in the best interests of their members—as intended by Congress and state credit union enabling laws. Yet a healthy, robust credit union system depends on a reasonable balance between safety and soundness, i.e., the regulators being able to do their jobs fairly on the one hand, and credit union managers and officials being able to perform their duties independently on the other, and both performing their duties competently and professionally. Undoubtedly, some institutions’ problems, including those that stem from difficult economic times, warrant heightened scrutiny, increased attention to risks, and improved internal controls. Even so, a number of credit unions from
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around the country, including those that are well-managed and well-capitalized, are raising concerns that their examiner has placed unreasonable demands on their operations. These credit unions are turning to their Leagues and CUNA for assistance and guidance in addressing these concerns. In response, CUNA Chairman Harriet May and President and CEO Bill Cheney appointed CUNA’s Supervisory Issues Working Group in late July 2010. The group, chaired by Ohio League President Paul Mercer, developed this guidance to assist credit unions in dealing with their examiners and their regulators’ heightened supervisory expectations. In addition to Chairman Paul Mercer, the members of the working group included1: Stacy Augustine, SVP, Policy and Public Advocacy/General Counsel, Northwest Credit Union Association Roger Ballard, President/CEO, NuVision Federal Credit Union, California Dave Chatfield, former President/CEO, California Credit Union Leagues Mary Ann Clancy, General Counsel, Massachusetts/New Hampshire/Rhode Island Credit Union Leagues Patrick Drennen, President/CEO, 1st Gateway Credit Union, Iowa John Kozlowski, General Counsel, Ohio Credit Union League Michael Lanotte, SVP/General Counsel, Credit Union Association of New York Kyle Markland, President/CEO, Affinity Plus Federal Credit Union, Minnesota Marla Marsh, President/CEO, Kansas Credit Union Association Keith Peterson, SVP, Summit Credit Union, Wisconsin Rod Staatz, CEO, State Employees’ Credit Union, Maryland Thomas Wolfe, Counsel, California and Nevada Credit Union Leagues CUNA is grateful to the entire working group whose members lent their talent and expertise to the development of the Guidance. What This Guidance Provides The Guidance is not intended to be an exhaustive manual but rather, an accessible, user-friendly reference concerning a number of supervisory issues that have surfaced as regulators’ concerns about managing risks in an uncertain economic environment have grown. Moreover, the Guidance seeks to provide resources about the supervisory process so that credit unions will have a better understanding of their
CUNA staff involved in this project were Mary Dunn, Eric Richard, Mike Schenk, Bill Hampel, Michael Edwards, Luke Martone, Paul Ledin, Dennis Tsang, and Naoka Clyburn. 1
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responsibilities and rights as well as a greater awareness of the proper role of the examiner. A prime objective of this Guidance is to assure credit unions they have options in responding to most supervisory issues and that when they feel an examiner has overstepped his or her authority, credit union officials are entitled to question an examiner’s findings and directives, suggest alternatives in most situations, and appeal decisions they feel are unwarranted, arbitrary, inconsistent with laws and regulations, or may jeopardize their ability to serve their members. The Guidance begins with a summary of the ―Credit Union Examination Rights.‖ These rights are presented in greater detail in Section III, but because of their significance, are highlighted at the beginning of this report as a quick reference tool for credit unions. In developing the list of examination rights, the CUNA Supervisory Issues Working Group, with considerable assistance from credit union league attorneys who were members of the group, built on the work of CUNA’s initial Examination and Supervision Subcommittee, which was chaired by former Virginia League President Gene Farley. Based in large measure on directives to examiners found in NCUA’s Examiner’s Guide, the list of rights in the Guidance addresses the types of processes, procedures and professionalism that credit unions should expect throughout their examination. Section I provides a short discussion of the duties of credit union examiners, based on relevant authorities, including NCUA examination procedures. Credit union officials likewise have important responsibilities in the examination process, which are also highlighted in this section. (While NCUA’s Examiner’s Guide was a useful resource in developing this report, many of the principles discussed in this guidance would also apply to state chartered credit unions. Nonetheless, state credit unions are encouraged to work with their Leagues and state regulators to address specific issues regarding state examination practices, appeals, and other regulatory concerns.) Section II addresses real problems credit unions have reported in connection with examinations. To facilitate the reporting process, the CUNA Supervisory Issues Working Group directed that a new site be included on CUNA’s website that would allow credit unions to provide information in confidence about their latest examination experiences, positive or negative. This reporting tool will be ongoing, and CUNA will continue to report to regulators and the credit union system on any material concerns credit unions may raise. Section II also
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highlights the preliminary findings of the survey; the link to the entire list of questions is provided in the Appendix. Section III discusses how to handle disagreements with examiners and regulators on supervisory issues, drawing from key documents such as NCUA’s Examiner’s Guide, the Federal Credit Union Act (FCU Act), and NCUA Letters to Credit Unions. In producing this report, it became very clear to the CUNA Supervisory Issues Working Group that credit unions often do not understand how they can appeal examiner decisions and findings they dispute. Further, regulators are often not as transparent as they should be regarding this process. In light of this, Section III reviews the appeals processes that are available to credit unions when disputes with examiners arise. The CUNA Supervisory Issues Working Group also considered areas in the examination process that can be improved both for credit union officials as well as for examiners. Their recommendations are highlighted in Section IV. The report concludes in Section V that the examination process must reflect the cooperative nature of the credit union system, while recognizing there is reasonable tension between regulators and those they supervise, even in the best of times. Lower safety and soundness standards are not the goal of this Guidance. However, meaningful improvements in the examination process, including the treatment of disagreements and reasonable challenges to agency directives, are essential to the continued success of the credit union system. Finally, the Appendix to this report provides CUNA’s current policy on examination issues, which was revised in September 2010 to reflect the current supervisory environment. It also lists further resources that may be useful to credit unions as they prepare for their next examination or seek to rectify or redress current examination disagreements or disputes. While everyone is extremely busy, credit unions that have supervisory concerns are encouraged to refer to key documents such as NCUA’s Examiner’s Guide and to review other relevant materials, such as NCUA ―Letters to Credit Unions‖ that address examination and supervisory issues that are listed in the Appendix. These documents not only address NCUA’s expectations but also provide important information about options and flexibility that may be available to credit unions in dealing with examination issues. We hope you find this Guidance useful.
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CUNA GUIDANCE SUPERVISORY ISSUES AND EXAMINATIONS QUICK SUMMARY OF CREDIT UNION EXAMINATION RIGHTS Credit unions have the right to: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.
Manage risk without being directed by examiners to eliminate it. Respectful conduct from their examiner. Be examined by well-trained, competent examiners who understand the unique characteristics of credit unions. Meet and discuss examiner findings, conclusions, directives and administrative actions with the examiner. Question, and seek corrections to, examiner findings, conclusions, and directives. Provide alternative and/or additional data, conclusions, and solutions to address problems identified by the examiner. Know the specific authority or legal basis for an examiner’s directive. Receive clearly written examination reports, notices, etc., on a timely basis. Receive exam reports, findings, directives, and administrative actions that are based on all relevant facts. Be evaluated on their own strengths and weaknesses and not solely on the basis of regulator concerns about trends. Be evaluated for progress toward objectives that are realistic and achievable, proportionate to the risk presented. Examination findings and directives that are risk prioritized. Appeal examiner findings, conclusions, or directives without retaliation from their regulator. Have instructions on how to appeal, detailed on every exam report form provided to credit unions. Record meetings with examiners and other agency personnel. Have a representative, such as an attorney, present during meetings with the examiner and other regulatory personnel. Have any published orders—such as consent orders—address only facts and not conjecture or speculation by the examiner. Have confidential, non-discoverable communications with their legal counsel regarding examination issues. Develop and use ―high-level‖ policies, which should be separate and distinct from detailed procedures. Have a lead examiner that is state or federal, consistent with the credit union’s charter type. Know the timing of when NCUA will publish a Letter of Understanding and Agreement. Defer to their CPA if there is a disagreement between the officials and their regulator regarding issues related to U.S. generally accepted accounting principles. Have communication (i.e., discussion of draft findings) with their examiner prior to final issuance of the examination report. Have directives from examiners (including verbal and written comments) be consistent with regulatory requirements, policies, and Letters to Credit Unions. For example, there were inconsistencies noted between how examiners treated the assessment’s effect on credit union earnings and an NCUA letter to credit unions on the subject.
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CUNA GUIDANCE SUPERVISORY ISSUES AND EXAMINATIONS Section I: General Duties of Examiners2 Simply stated, the examiner’s chief duties are to review a credit union’s financial performance and assess how well the credit union is managing its risks. Using NCUA’s Examiner’s Guide for authority, this section looks briefly at those duties and also discusses how the examiner should perform his or her job, based on specific directives to examiners found in the agency’s Guide. Risk-Focused Exam In 2002, NCUA began implementing a risk-focused examination program under which examiners are directed to evaluate a federal credit union’s performance based on its financial condition and on the ability of its management to identify, measure, monitor, and control current and potential risks. State credit union regulators also follow this approach. As NCUA’s Examiner’s Guide points out, Risk is fundamental to the operation of a credit union. Examiners, therefore, should not insist that the credit union eliminate risk but instead, should ensure that credit unions identify and manage their risks. The desired reward for taking risk is stable profitability and increased net worth. Credit unions must balance risk and reward responsibly. The examiner’s job requires assessing that the appropriate balance exists. NCUA, Examiner’s Guide (NEG), page 1-3. 1. Areas of Risk Considered by the Examiner Examiners review the credit union’s policies, practices, personnel, and control procedures for managing risks (both current and potential ones) in seven key areas, which for purposes of this Guidance, are broadly summarized below: Credit risk – are the credit union’s loans and investments performing well? This discussion is based on examinations conducted by the NCUA. Also, large credit unions in particular often have several examiners conducting their examination and state credit unions of all sizes may be examined by NCUA as well as their state regulator. The use of ―examiner‖ in this Guidance covers those situations where multiple examiners are involved. 2
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Interest rate risk – how are changes in interest rates affecting the credit union’s products and investments? Liquidity risk – can the credit union meet its obligations as they come due and could it quickly liquidate assets if necessary without sizeable losses? Transaction (or operational) risk – does the credit union maintain an adequate internal controls process and can it process transactions, deliver products and services, and manage information flows well? Compliance risk – is the credit union meeting its compliance and contractual requirements and preparing for known future requirements, and are officials meeting their fiduciary duties? Strategic risk – are the credit union’s strategic goals appropriate and feasible; do the credit union’s business decisions line up with its goals? Reputation risk – has the credit union avoided negative publicity and/or minimized the impact of negative publicity, given the circumstances? However, examiners will also consider specific risks within each category, how well the credit union has performed due diligence3 in managing and anticipating risks, and the credit union’s overall risk management program. 2. Specific Documents Subject to Review While the risk-focused approach allows examiners to concentrate their attention on the credit union’s risk and management of that risk, according to the NCUA Examiner’s Guide, every exam will include a review of: The credit union’s 5300 Call Report; The supervisory committee audit; and Compliance with the Bank Secrecy Act. However, examinations are not limited to these basic areas and for example, will certainly include a review of the credit union’s net worth and prompt corrective action compliance. Other general areas of review include the credit union’s asset liability management process, the
Due diligence refers to legal, strategic and operational considerations a credit union should assess before engaging in an activity or working with a vendor, for example. For more information, see CUNA’s Due Diligence Resources for Credit Unions available at http://www.cuna.org/initiatives/due_diligence.html. 3
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adequacy of the credit union’s Allowance for Loan and Lease Losses account, payments processing capabilities, and regulatory compliance. More specifically, in preparing for and conducting the exam, in addition to reviewing the 5300 Call Report and financial performance report, the examiner will review the credit union’s previous exam report; annual audit work papers and the audit plan; the list of internal audits completed during the year; the strategic and business plans; the budget and assumptions; board minutes regarding risk areas; new and modified policies; and internal documents such as contracts, or other operational documents. In reviewing a credit union’s risk management, examiners are directed to recognize ―the differing levels and complexity of risk present in each credit union.‖4 The examiner’s assessment of the credit union’s risk profile will include consideration of current and future risks. Examiners are encouraged to discuss issues and concerns with the credit union’s management during the review; such discussion should be very helpful to the officials as well as to the examiner. 3. Communication of the Risk Assessment to the Credit Union Once the examiner has concluded the assessment of the credit union’s risk, the examiner’s conclusions and rationale for findings should be discussed with the credit union’s management. While it may be useful to a credit union for an examiner to share his or her views on best practices, an examiner’s assessments should be based on safety and soundness requirements, legal limitations that credit unions must meet, and/or generally accepted accounting principles (GAAP). Even so, an examiner’s concerns based on his or her other experiences and the experience of other examiners and their supervisors can be extremely valuable and should be considered by the credit union’s officials. Credit union managers should expect the examiner to explain the level of risk identified in the categories listed beginning on page 6 and the direction of the risks (whether they are improving or not). Any problem, supervisory issues, or weaknesses in risk management identified by the examiner should be discussed with management, including how the problems will be addressed by the credit union and the timeframe for any corrections. Examiners should provide the legal authority or applicable provisions under GAAP for their directives and recommendations. 4
NCUA, Examiner’s Guide at page 1-11.
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Most important, examiners should also be willing to listen to credit union officials and to consider mitigating factors and alternative approaches other than the ones the examiner is recommending to address risk areas identified in the examination. Conferences and discussions between the examiner and the credit union’s officials can be very important. NCUA’s Examiner’s Guide discusses two key meetings: the joint conference and the exit interview. Under NCUA’s procedures, every credit union is entitled to a joint conference that generally involves a quorum of the members of the board. Joint conferences are required by NCUA for every examination of a credit union that has a CAMEL 3, 4 or 5 rating. The purpose of the joint conference is to reach an agreement with the board regarding unwarranted risks and actions that the credit union will take to address those risks. Prior to the joint conference, examiners are directed to provide a preliminary review of the examination results to key management and may provide it to some board members. Ideally, the key issues of conflict will be addressed during the joint conference and there will not be additional material issues raised in the examination report or the exit interview. Credit unions are also entitled to an exit interview, which does not require a quorum of the board members; it usually involves management and possibly one or two board members. During the exit interview, the examiner is expected to discuss current and potential risks to the credit union, examination findings, any needed corrections, and actions that the examiner directs management to take or refrain from taking to address problem areas. How the Examiner Operates Is Critical to the Success of the Exam It is clear from NCUA’s Examiner’s Guide that examiners are expected to work with the credit unions they supervise in a professional manner at all times. To the greatest extent possible, given the circumstances, cooperation rather than coercion should be employed by the examiner. When the examination process is working as intended, there is mutual respect between the credit union’s officials and the examiner. Moreover, under an optimal examination system, examiners can be an important resource for addressing problems at some credit unions. Just as credit union officials want to succeed and have an operationally sound financial institution, reasonable regulators want credit unions to succeed. There is no success in failure, so
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regulators try to remain abreast of developments that may undermine a financial institution. While credit unions widely employ best practices, examiners should likewise apply best practices to their own work. As supported by the Credit Union Examination Rights identified in this report, best practices for examiners should include: Providing ample notice to credit unions prior to the examination of the areas of review, any specific concerns, and current examination priorities for the regulator. Providing ample notice to credit unions of changes they are expected to implement. Assessing credit unions based on accurate, current data and the credit union’s specific risk profile. Discussing with the credit union any problem areas during the course of the examination. Avoiding surprises to the credit union’s management or board at any point in the examination process or follow-up. Working with credit union officials to develop a mutually agreed upon approach to problems. Role of Credit Union Officials in the Examination Process Of course, the priorities, expertise, and commitment of the credit union’s management and board are absolutely essential to effective risk management and financial performance. Credit unions that operate to their best capabilities have boards and management that are well-informed about the general performance and risk containment of the credit union, as well as the examination priorities of the regulator. They also stay current on areas of significant risk for the credit union and take steps to minimize those risks, as appropriate. Capable officials and well-defined board policies and credit union procedures, including monitoring systems, are additional hallmarks of wellrun credit unions. In particular, credit unions should develop their own, individualized risk management program and review the program on a regular basis to ensure it is working well. Changes in the risk management program should be made as necessary to ensure the credit union is
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positioned to stay on top of and address areas of risk as thoroughly as necessary. To maximize the examination process, credit union officials will also want to work with their examiner in a professional manner and cooperate to the greatest extent possible in providing requested data and materials, other appropriate information, and access to personnel. Cooperation on the part of the credit union’s officials, as well as from the examiner, including in the development of solutions to problem areas, will also help ensure the credit union benefits from the examination to the greatest extent possible. Regulators’ Supervisory Tools Credit union officials and their examiner should have the same objective—a safe and sound institution. Yet, given the fact that credit unions and examiners have differing roles and sometimes different objectives, it is not surprising that disagreements between credit union officials and examiners arise, particularly when regulators have heightened concerns about certain negative trends or the economy in general. As discussed later in this Guidance, credit unions have rights and significant resources at their disposal they can rely on as they seek to resolve disagreements or disputes with examiners, including rights of appeal. However, there is no doubt that, as Congress and state legislatures intended regulators have significant administrative authority to compel a credit union to act or to refrain from acting, particularly if the specter of safety and soundness concerns can be invoked. This section explores those powers. (The ability of a credit union to appeal a supervisory order or sanction is discussed further in Section III.) These powers include the following, which are discussed in greater detail below: Strategic use of the examination report; Downgrading CAMEL rating or PCA net worth categories; Issuing a Document of Resolution; Issuing a Letter of Understanding and Agreement; Issuing Cease and desist orders; Removing and prohibiting officials; Assessing civil money penalties (fines); Placing a credit union into conservatorship; Terminating insurance; and Placing a credit union into involuntary liquidation.
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Strategic Use of the Examination Report In addition to ―moral suasion,‖ or the examiner’s attempt to persuade or cajole a credit union to accept or implement a particular solution, the range of supervisory tools for credit union regulators starts with the examination report. While the report captures the performance of the credit union, it also is used to flag problem areas and to set out activities or a plan of action for the credit union to address any weaknesses. It can also be used to encourage developments and outcomes at the credit union. The exam report may include the Examiner’s Findings,5 or the examiner may provide the draft of findings to the credit union’s management. The findings will list material operating exceptions, any legal violations, and unsafe and unsound practices or policies. According to NCUA’s Examiner’s Guide, ―[w]hen identifying a finding, the examiner should cite the specific section of the FCU Act, FCU Bylaws, NCUA Rules and Regulations or other authority.‖6 Downgrading CAMEL ratings or PCA Net Worth Categories The CAMEL rating system used by credit union regulators is based on the common system developed for banks and credit unions under the Federal Financial Institutions Examination Council Uniform Financial Institution Rating System. Examiners assess CAMEL components of capital adequacy, asset quality, management, earnings and liquidity/asset-liability management. A credit union’s CAMEL rating may be downgraded based on the examiner’s assessment of the credit union’s overall performance or because of significant weaknesses identified by the examiner in one or more of the components. Prompt corrective action (PCA) net worth categories are based on a credit union’s net worth ratio, such as 7% for a well-capitalized credit union. Credit unions that have less than 7% net worth are subject to certain requirements, depending on their net worth category. As the net worth declines below 6%, a credit union will be subject to net worth restoration plan requirements and increasingly harsh PCA sanctions such as limitations on activities and growth, dismissal of officers or directors and ultimately, mergers, conservatorship, or liquidation. Also, as PCA categories correspond to net worth levels, examiners may downgrade a credit union’s PCA category based on material safety and soundness concerns. While downgrading a CAMEL rating and/or a PCA net worth category and subsequent actions As defined in the Examiner’s Guide, examination findings are ―material operating exceptions, violations of law or regulation, and unsafe and unsound policies, practices, and procedures‖ in the Examiner Findings workpaper. 6 NCUA, Examiner’s Guide at page 20-7. 5
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may be appealed, as discussed further in this Guidance, historically, few downgrades have been overturned. Issuing a Document of Resolution (DoR) A DoR is issued by the examiner to the credit union to document agreements reached with the credit union on how it will reduce unacceptable material risks. Examiners are directed to try to reach agreement with the credit union’s management prior to the joint conference. Credit unions that do not agree to a DoR may be subject to other orders and sanctions from NCUA, such as a Letter of Understanding and Agreement. However, a credit union whose examiner presents the institution with a proposed DoR with which management does not agree should be able to contact the regional director to discuss the credit union’s concerns. Credit unions are reporting that NCUA and some state regulators are increasingly foregoing the DoR and requesting a credit union sign a Letter of Understanding and Agreement, if material weaknesses are identified by the examiner. Yet the Examiner’s Guide indicates examiners should try to first use the least intrusive methods to achieve cooperation with credit unions: Examiners should strive to reach agreements with the officials on needed corrective action. If the officials will not agree to a Document of Resolution, the examiner should work with them to develop alternative solutions or give them additional time to develop acceptable plans of their own. NEG page 20-4. [For the Joint Conference,] the officials then need time to read, discuss, and understand what the Document of Resolution means and the effect it will have on the credit union. Examiners may minimize conflicts if management and officials agree to plans of action before the joint conference. NEG page 21-4. Examiners may find that using a ―working copy‖ of the Document of Resolution, which was previously discussed with management, promotes better understanding and discussion at the joint conference. Key officials and staff will more likely ―buy into‖ and implement plans that they have a part in developing. The willingness of the examiner to adjust or revise recommendations during the joint conference can directly affect the plan’s effectiveness. NEG page 21-5 If the examiner and credit union do not reach agreement for needed corrective action during the joint conference, the
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examiner should give the officials a reasonable amount of additional time after the joint conference to discuss the Document of Resolution and develop an alternate plan of action. In this situation, the examiner should footnote the Document of Resolution to require that officials present the examiner with the board-developed plans of action, usually within 30 days7 after the joint conference. NEG page 21-5. Issuing a Letter of Understanding and Agreement (LUA) Both published and unpublished LUAs are supervisory tools used by NCUA. Here is the description of an LUA from NCUA’s Examiner’s Guide: An LUA is essentially a contract between NCUA and a credit union. The credit union agrees to take, or not take, certain specified actions. Regional directors issue LUAs when credit unions have not adequately responded to less severe measures, such as Documents of Resolution. NCUA also requires LUAs for newly chartered credit unions and to grant permanent special assistance. NCUA SUP 16 authorizes regional directors to enter into LUAs with elected and appointed officials of FCUs and FISCUs. NCUA Regional directors discuss and negotiate publication of LUAs with the credit unions to prevent unfair surprises to credit unions and their officials. The regional directors will address the issue of publication in every LUA between NCUA and a federal credit union by including one of the following three provisions: This LUA will not be published; This LUA will be published; or The regional director is reserving for a reasonable time the right to publish this LUA. NEG page 29-10.
These should be read generally as calendar days, not business days. NCUA rules and guidance, as well as the Federal Credit Union Act, do not specify whether these sorts of ―within a certain number of days‖ requirements are calendar days or business days, but most courts would rule that these requirements are measured in calendar days because the Act and NCUA rules, etc., do not expressly say ―business days.‖ NCUA, however, sometimes interprets similar time period requirements related to its internal procedures as business days, not calendar days; for example, NCUA notices regarding hearings before an administrative law judge (ALJ) generally state that the ALJ ― will make his or her recommendations to the NCUA Board, where possible, within ten (10) business days following the close of the record.‖ 7
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The FCU Act requires that the NCUA Board publish and make available to the public any written agreement for a violation of which may be enforced by the Board, unless the Board determines that publication is not in the public interest.8 This would include an LUA. NCUA’s publication of an LUA facilitates its enforcement. (Violations of the terms of a published LUA constitute grounds for administrative actions.) The NCUA may enforce a published LUA by bringing an administrative action and proving noncompliance with the published LUA. Violation of an LUA may ultimately result in a cease and desist order, civil money penalties, or removal and prohibition of credit union officials. While credit unions are often pressured by the examiner or regional director to sign an LUA, it is important to recognize the serious consequences of violating an LUA. NCUA’s ability to pursue a cease and desist order, civil money penalties, and removal and prohibition orders is assisted by establishing a violation of an LUA as compared to establishing a violation of any law or regulation, or unsafe or unsound practice, which must be proven before any of the administrative sanctions may be ordered. Additionally, the terms and/or requirements of an LUA are typically much broader than law or regulation, thereby subjecting the credit union and its officials to greater exposure for a violation. Credit unions are urged to seek advice of qualified legal counsel when issues concerning whether to sign an LUA arise. Cease and Desist Orders A cease and desist order is an order that either mandates that a certain activity terminate and/or that a certain action be taken. Before a cease and desist order can be issued to any credit union or any ―institutionaffiliated party,‖9 NCUA must provide the credit union or party an opportunity to be heard at an administrative hearing. This administrative hearing process is initiated by the NCUA Board when it issues and provides a Notice of Charges to the credit union. It is not uncommon for NCUA to issue a temporary cease and desist order if it determines that the violation or unsound practice is likely to cause insolvency or otherwise prejudice the interests of the members prior to the completion of the formal hearing process. This temporary cease and desist order is effective immediately without a hearing but can be
8
See 12 U.S.C. § 1786(s). Institution-affiliated parties include individuals such as committee members, directors, officers, employees of an insured credit union or any consultant, joint venture partner, or any other person as determined by the NCUA who participates in the conduct of the affairs of an insured credit union. See 12 U.S.C. § 206(r). 9
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appealed to the U.S. District Court where the credit union is located. (Section III discusses appeals procedures for administrative actions.) Removal and Prohibition Officers, directors and other institution-affiliated parties may be removed or prohibited from further involvement with the credit union for violation of any law, rule, final cease and desist order, written condition imposed by NCUA, committed or engaged in any act, omission, or practice which constitutes a breach of such party’s fiduciary duty; or based on any written agreements between NCUA and the credit union if the party has engaged in any unsafe or unsound practice in connection with the credit union. The violation must involve personal dishonesty or demonstrate unfitness to serve and must cause the credit union to suffer, or probably suffer, financial loss, harm to the credit union’s members or the party must have received financial gain as a result of the violation. Civil Money Penalties (Fines) NCUA may assess fines for violations by a credit union or an institutionaffiliated party. The administrative procedures for such penalties are also the same as those for cease and desist orders, removal and prohibition actions. A Notice of Charges must be provided to the credit union or institution-affiliated party providing the violations of law, rules, orders, written conditions or written agreements. The amount of the penalty depends in part on whether the party recklessly or ―knowingly‖ engaged in unsafe or unsound practices. Conservatorship The Board may, without notice, appoint itself or another (including, in the case of a state-chartered federally insured credit union, the state official having jurisdiction over the credit union) as conservator and immediately take possession and control of the business and assets of any insured credit union under the following specific situations: The Board determines it is necessary to conserve the assets of the credit union or to protect the NCUSIF or the interests of the members; The credit union consents to such an action by the Board; The Attorney General notifies the Board in writing that an insured credit union has been found guilty of a criminal offense;
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There is a willful violation of a final cease and desist order; There is concealment of books, papers, records, or assets of the credit union; The credit union is significantly undercapitalized (less than 4% net worth), and has no reasonable prospect of becoming adequately capitalized; or The credit union is critically undercapitalized (less than 2% net worth). Termination of Insurance The FCU Act authorizes NCUA to terminate an insured credit union’s share insurance based on grounds that are virtually the same as for a cease and desist order (See page 15 of this Guidance, above). NCUA may terminate the insurance of any federally insured credit union that meets the conditions provided in the regulation, but generally reserves insurance termination for state credit unions. For a federal credit union, NCUA generally follows procedures summarized below for liquidation. Chapter 30 of NCUA’s Examiner’s Guide details the procedures for termination of insurance. Involuntary Liquidation Where the Credit Union is Insolvent Under the FCU Act and NCUA’s rules,10 the Board may liquidate a federal credit union if it is bankrupt or insolvent. This is one of the most severe legal sanctions that NCUA may impose and the credit union does not have the legal authority to seek an administrative hearing before the institution is closed. Notice is served on the credit union as with other sanctions for solvent credit unions. However, the order is effective immediately and NCUA becomes the owner of the assets, books, and records of the credit union. Involuntary Liquidation The Board may also close any credit union if it is significantly undercapitalized and has no prospect of becoming adequately capitalized, or the credit union is critically undercapitalized. In addition, there are other grounds under the FCU Act for revoking the charter of a federal credit union and placing it into involuntary liquidation. These may include abandonment of the credit union’s operations by the officials, other specific, serious violations of the charter, 10
See 12 U.S.C. § 1766(b); 12 C.F.R. pt. 709.
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bylaws, FCU Act or regulations that cannot be reversed and that may cause insolvency, or serious operational deficiencies that the officials have not acted to correct and if continued, may cause insolvency. Because of the severe consequences of this action, this procedure cannot be initiated without a recent examination and documentation from the examiner as to the scope of the credit union’s problems and support for the recommended action. Proper procedures for dealing with administrative actions and how credit unions may exercise their rights of appeal when there are disagreements with examiners or when administrative actions are imposed are addressed in Section III. With this review of supervisory tools, the next section of this Guidance addresses credit unions’ concerns about how some of those tools have been applied to them.
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CUNA GUIDANCE SUPERVISORY ISSUES AND EXAMINATIONS Section II: Credit Union Examination Concerns: Based on Preliminary Survey Results CUNA Examination and Supervision Issues Reporting Form Preliminary Results Summary CUNA’s Working Group on Supervisory Issues, in coordination with State Credit Union Leagues, analyzed examination and supervisory issues raised recently by credit unions throughout the country. In August, 2010, the Working Group, in conjunction with CUNA’s Regulatory Advocacy Department and Policy Analysis Division, constructed an Examination and Supervisory Issues Reporting Form. The Reporting Form was subsequently placed on CUNA’s web site and is being used as a tracking mechanism to gather detailed information on exam related issues on an ongoing basis. Credit unions were informed of this effort and were invited to participate in the reporting process in several stories that appeared in CUNA’s Regulatory Alert newsletter, CUNA’s News Now daily online newsletter, and in variety of state league publications. It is important to note that statistical sampling techniques were not employed in this process—all participants are self-selected and participated based on invitations in the various publications outlined above.11 By the end of November 2010 a total of approximately 200 usable responses had been submitted by credit unions throughout the nation. In general, the preliminary results indicate that reporting credit unions have a fairly high level of dissatisfaction with exams and the level of dissatisfaction has increased significantly during recent exams. The following pages provide a brief, preliminary summary of the Exam Reporting Form findings.
Because respondents were self-selected it is conceivable—if not probable—that the survey findings may overrepresent credit unions that actually encountered problems with their examiners, rather than being reflective of the experiences of the general population of credit unions. 11
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Demographic Profile Credit unions were asked to provide a variety of descriptive statistics about their credit union’s operations. The following provides a brief demographic summary of the credit unions that completed the reporting form: Responding credit unions represented 28 states and the District of Columbia. States with the most responding credit unions included Ohio (19), Maryland (18), and Utah (11), while Arkansas, Arizona, California, Indiana, Kentucky, Michigan, and West Virginia each reflected eight or nine responses. No credit unions headquartered in Florida, Massachusetts or Pennsylvania responded to the survey though 20 respondents did not indicate the state in which their credit union is headquartered. Overall, 67% of responding credit unions indicated that their credit union has a federal charter, while 33% indicated that their credit union is state chartered. In all, 36% of respondents are small, with total assets of $20 million or less; 30% are mid-size, with total assets of $20 million to $100 million, and 34% are large, with total assets of $100 million or more. A detailed distribution of respondents by asset size appears in Figure 1.
Number of Respondents By Credit Union Asset Size $1 billion or more $500 million to $1 billion $200 million to $500 million $100 million to $200 million $50 million to $100 million $20 million to $50 million $10 million to $20 million $5 million to $10 million $2 million to $5 million $1 million to $2 million $0.5 million to $1 million Less than $0.5 million
4 14 16 19 18
28 22 17 7 5 1 3
Figure 1
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At the time of their most recent exam, over one-half (52%) of respondents reported a net worth ratio of 10% or greater. About onethird (32%) reported net worth of 8% to 10%, while 9% reported net worth between 7% and 8% and 7% reported net worth below 7%. Overall, 72% of respondents indicated the CAMEL code their credit union received during its most recent exam. Among those providing their score 71% indicated that they received a scores of ―1‖ or ―2,‖ 18% received a score of ―3‖ and 11% received scores of ―4‖ or ―5.‖ Examination Process Satisfaction Responding credit unions reflect a fairly high level of dissatisfaction with exams and the level of dissatisfaction has increased fairly significantly in recent exams. Overall one-in-five (20%) of respondents indicated they were dissatisfied with their previous exam but 27% are dissatisfied with their most recent exam (rating their level of satisfaction as a ―1‖ or ―2‖ on a five-point scale where ―1‖ is equal to ―very dissatisfied‖ and ―5‖ is equal to ―very satisfied‖). At the other end of the spectrum it is important to note that 28% indicated that they are ―very satisfied‖ with their most recent exam whereas 24% indicated they were ―very satisfied‖ with their previous exam.
Level of Satisfaction with Exams 36.5% Previous Exam Most Recent Exam
27.8%
27.8% 23.6%
19.6% 17.1%
17.1% 10.8%
1: Very Dissatified
9.5%10.1%
2
3
4
5: Very Satisfied
Figure 2
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Some interesting observations about the most recent exam can be seen within the demographic groups we examined. For instance: In general, larger credit unions are more likely than their smaller counterparts to indicate that they are dissatisfied with their exams. On average, credit unions with less than $20 million in total assets rated their most recent exam a 3.8 on the five-point scale, whereas those with $20 million to $100 million in assets reflect an average rating of 3.1 and those with $100 million or more in assets reflect an average rating of 3.2. A more detailed breakdown of responses by asset size reveals that very large credit unions (those with $500 million or more in total assets) and very small credit unions (those with less than $10 million in assets) tend to reflect average ratings that are higher than their counterparts in other asset-size groups.
Average Level of Satisfaction with Most Recent Exam By Credit Union Asset Size (Based on a five-point scale where "1" is equal to "very dissatisfied" and "5" is equal to "very satisfied)
> $500 mil $100-$500 mil $20-$100 mil
$10-$20 mil < $10 mil
3.8 2.9 3.1 3.4 4.0
Figure 3
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Federal credit unions and state credit unions reflect little difference in average level of satisfaction with their most recent exam. Specifically, the average level of satisfaction among federal credit unions is 3.4 on the five-point scale, while the average level of satisfaction among state-chartered credit unions is 3.3 on the five-point scale. Credit unions in stressed states (defined as those in Arizona, California, Florida, Michigan, and Nevada) reflect an average level of satisfaction (3.3 on the five-point scale) that is similar to the level (3.2 on the five-point scale) reported by credit unions in non-stressed states. As might be expected, credit unions with low CAMEL ratings are substantially more likely than their counterparts with high CAMEL ratings to say that they are dissatisfied with their exam.
Average Level of Satisfaction with Most Recent Exam By CAMEL Code for Most Recent Exam (Based on a five-point scale where "1" is equal to "very dissatisfied" and "5" is equal to "very satisfied")
4-5
3
1-2
1.8
2.0
4.0
Figure 4
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Similarly, as shown in Figure 5, there is a high correlation between credit union net worth ratio and the level of satisfaction with exams— those with high net worth ratios tend to reflect more satisfaction in the exam process.
Average Level of Satisfaction with Most Recent Exam By Net Worth Ratio at Time of Most Recent Exam (Based on a five-point scale where "1" is equal to "very dissatisfied" and "5" is equal to "very satisfied")
> 10%
3.5
8%-10%
3.6
7%-8%
3.1
6%-7% < 6%
2.6 2.3
Figure 5 Specific Areas of Exam Process Concern Respondents were asked to indicate their level of agreement with a variety of statements about their most recent exam. The Reporting Form used a fivepoint scale where ―1‖ is equal to ―disagree strongly‖ and ―5‖ is equal to ―agree strongly.‖ Statements were presented in both positive and negative tense in an attempt to encourage respondents to read the questions closely and to ensure that positive and negative biases were balanced. For example, the form asks for level of agreement with the statement ―Exam staff seemed well trained,‖ and ―Exam staff did not seem well prepared.‖ The average level of agreement with each statement is summarized in Table 1. It should be noted that we attempted to simplify the analysis and make comparisons easier by altering the tense of some questions. Specifically, for presentation purposes only, all positive questions were restated as negative questions (i.e., ―Exam staff seemed well trained‖ was changed to ―Exam staff did not seem well trained‖) and the scales were reversed. In addition, some of
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the questions that appear in the table below have been amended slightly so that they fit in the table. Table 1. Average Level of Agreement with Various Statements (Based on a 5-point scale where “1” is equal to “disagree strongly” and “5” is equal to “agree strongly”) Seemed more interested in merging the CU than examining Didn't treat officials at the credit union fairly or respectfully Didn’t give sufficient time to respond to examiner directives Exam staff, central office, and regional office provided inconsistent feedback Unable to explain its recommendations and/or findings Didn't seem well trained Required inappropriate or unnecessary remedies Didn't seem well prepared Exam staff turnover required too much time to get them "up to speed" Didn't seem to use their time well Didn't allow enough time for management to review their findings, so resolved issues were more likely to be brought before the board Didn't offer helpful advice Didn't listen well and carefully consider alternative approaches Focused too much on "best practices" rather than on legal/regulatory requirements
1.6 2.0 2.2 2.3 2.3 2.4 2.4 2.4 2.5 2.6 2.6 2.6 2.7 2.9
As shown in Table 1, the most obvious issue that credit unions have with their most recent exam is that examiners tended to focus too much on best practices rather than on legal and regulatory requirements. Beyond this, there seemed to be a general feeling that examiners were ill-equipped or reluctant to: (a) consider alternative approaches; (b) offer helpful advice; or (c) use time well (as reflected in the general statement ―Didn’t seem to use their time well‖ and in the more specific issue of not allowing time for management to review findings before they were brought before the board). In general, the level of agreement with these statements tends to vary by credit union asset size, CAMEL code and net worth ratio in a way that is similar to the variations seen in the general level of satisfaction with exams. In other words, mid-size credit unions, those with high CAMEL codes (3-5) and those with low net worth tended to be more likely than their counterparts to agree with negative statements and to disagree with positive statements included on the Issues Reporting Form. Similarly, there tended to be little variation in the level of agreement among those in stressed/non-stressed states and little variation in the level of agreement among federal and state-chartered credit unions. A detailed analysis
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of the final responses by the various demographic groups will be made available. Other Problems with Exams Respondents were asked to provide feedback on three other commonly cited exam problems: examiner reliance on old or inaccurate data; failure of examiners to cite legal authority for directives; and examiners citing unsafe practices but failing to give specific guidance for the credit union to remedy the situation.
Average Severity of Other Exam Problems (Based on a five-point scale where "1" is equal to "a severe problem" and "5" is equal to "not at all a problem")
2.9
Failure to cite legal authority
4.0
Cited unsafe practices but failed to give guidance to remedy
3.1 4.2 3.3
Reliance on old or inaccurate data
4.3
Among CAMEL 3 CUs
Overall Average
Figure 6 In general, none of the commonly cited exam problems seemed to present severe systemic issues. However, among the three, the most obvious problems seem to stem from the examiner’s failure to cite legal authority—this is consistent with the responses to the attitudinal questions we asked wherein respondents reflected a high degree of agreement with the idea that examiners were overly focused on ―best practices‖ rather than on regulatory/legal requirements. In any case, it is worth mentioning that the average ratings of problem severity are likely generally high (indicating low problem severity) because the vast majority of responding credit unions have fairly high CAMEL scores. As might be expected, credit unions that received a low CAMEL in their most recent exam were more likely than their counterparts to indicate that each of the additional
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problems we examined were â&#x20AC;&#x2022;severeâ&#x20AC;&#x2013; problems as reflected by their lower average scores highlighted in Figure 6. DoRs, LUAs, and Cease and Desist Orders (CDOs) Respondents were asked if they were presented with a document of resolution, letter of understanding and/or a cease and desist order (CDO) in their most recent exam or separately.
Percent of CUs Presented with DoRs, LUAs and/or CDOs 67%
32%
8% 3% Yes, we were presented Yes, we were presented Yes, we were presented with a DoR with a LUA with a CDO
No, None of these
Figure 7 Only one-third of credit unions indicate that they were not presented with one of these documents. Interestingly, the incidence of receipt of each of these documents is similar in stressed (i.e., AZ, CA, FL, MI, NV) and non-stressed states. Beyond this, survey results show: 33% of those receiving a DoR, LUA, and/or CDO report that they did not have sufficient time to consider options before accepting or signing the document. Larger credit unions were more likely than their smaller counterparts to indicate that they did not receive adequate time to consider options. A majority of recipients (52%) signed their DoR/LUA and/or CDO as presented. In all 16% signed it after modification, 5% indicate they are
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still negotiating with regulators and 27% indicated some other form of disposition. Use of Supervisory Appeals Process12 Respondents indicate that they rarely use the supervisory appeals process. In fact, only 3% of respondents indicated they used the appeals process during their last two exams. Although 76% indicated that they did not feel the need to appeal, over one-in-five (21%) indicated that they wanted to appeal but did not. Among the handful of credit unions that appealed we find: Six of the nine credit unions indicated that they were â&#x20AC;&#x2022;very dissatisfiedâ&#x20AC;&#x2013; with the appeals process. Four of twelve agreed strongly with the idea that the appeals process took too long. Three of eight agreed strongly with the idea that their appeal resulted in retaliation by exam staff. Only one of eight indicated that the appeal resulted in removal of the exam staff. Three of eight disagreed strongly with the idea that their appeal led to an appropriate decision. Four of eight agreed strongly with the idea that the appeals process was a rubber-stamp for the exam findings. Three of eight disagreed strongly with the idea that the appeals process was fair even though the credit union disagreed with the outcome. Figure 8 highlights the reasons credit unions that felt the need but did not appeal.
Reasons Credit Unions Did Not Use the Appeals Process (Based on Those that Felt the Need to Appeal) 64%
64% 36% 19% 7%
We feared We did not think it We were not aware We thought the retaliation by exam would make a of the process process would take staff difference in the too long outcome
Other
Figure 8 12
How to appeal supervisory issues is addressed in Section III.
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CUNA GUIDANCE SUPERVISORY ISSUES AND EXAMINATIONS Section III: Handling Disagreements with Examiners As a result of the survey responses in the previous section and to assist credit unions in their interactions with examiners and regulators, the CUNA Supervisory Issues Working Group developed the following list of examination rights that should be afforded to credit unions in the examination process. The list is drawn primarily from directives to examiners found in NCUA Examiner’s Guide on how examiners should perform their jobs and how they should deal with credit union officials. The citations from the Examiner’s Guide or other sources such as the FCU Act are provided along with each right. This list is intended to be useful for state and federal credit unions. I. CUNA’s List of Credit Union Examination Rights (with Commentary) 1.
Credit unions have the right to manage risk without being directed by examiners to eliminate it. Authorized by NCUA Examiner’s Guide (NEG) page 1-3. Commentary: As the Examiner’s Guide points out, examiners should not ―insist that a credit union eliminate risk but, instead, should ensure that credit unions identify and manage their risks. The desired reward for taking risk is stable profitability and increased net worth. Credit unions must balance risk and reward responsibly.‖
2.
Credit unions have the right to respectful conduct from the examiner. NEG pages 21-3 and 21-4. Commentary: Credit unions, as well as regulators, expect examiners to act professionally—which they do most of the time, according to credit unions. However, if a credit union feels that an examiner has stepped over the line in terms of conduct involving the credit union, the credit union should report the incident to the supervisory examiner or regional office, without fear of retaliation.
3.
Credit unions have the right to be examined by well-trained, competent examiners who understand the unique characteristics of credit unions. NCUA Strategic Plan 2011-2016, pages 1 and 2. Commentary: Strong safety and soundness depends, in large measure, on capable supervision. Examiners who are well-suited for
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their jobs in terms of experience, expertise, and conduct help support safety and soundness and strengthen the credit union system. 4.
Credit union officials have the right to meet and discuss examiner findings, conclusions, directives, and any administrative actions with the examiner, or privately among themselves without the examiner present. Credit union officials should be able to have management staff present at the officials’ discretion. NEG pages 1-11, 1-15, 21-2, and 21-3. Commentary: According to NCUA’s Examiner’s Guide, examiners are instructed to provide time throughout the examination process for discussion with management and officials regarding developments and findings in the examination. Examiners are encouraged to provide credit union officials with a draft copy of the examination report and give officials sufficient time to review it before the joint conference or exit interview. As the Examiner’s Guide notes, ―Nothing presented at the joint conference, exit interview, or in the examination report should surprise the [credit union’s] officials.‖ It is equally important that credit union officials not surprise examiners and that they take advantage of opportunities to meet with examiners and discuss issues throughout the examination process.
5.
Credit union officials have the right to question and seek corrections to examiner findings, conclusions, and directives. NEG page 1-15. Commentary: Accuracy is an essential component of strong safety and soundness regulation. Examiners are human and all humans make mistakes. It is not only appropriate but very important that credit unions work with their examiner to ensure all reports are as accurate and timely as possible and that all directives are based on accurate information.
6.
Credit union officials have the right to provide alternatives and/or additional data, conclusions, and solutions to address problems identified by the examiner. NEG pages 1-11, 2-3, 3-10, and 21-6. Commentary: According to the Examiner’s Guide, examiners are not expected to dictate credit union policies but rather should work with credit union officials to reach a favorable outcome. The Examiner’s Guide emphasizes cooperation and coordination between examiners and credit union officials, which should include flexibility for credit union management to provide alternative perspectives and data as well as alternative solutions to problems—as long as such alternatives are factually based and appropriate for the situation.
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7.
Credit union officials have the right to know the specific authority or legal basis for an examiner’s directive, and this authority should be provided by the examiner in the exam report or directive. NEG page 20-7. Commentary: The Examiner’s Guide makes it clear that examiners must be willing and able to provide to credit union officials the legal authority for the action they are suggesting or directing the credit union to take. In addition, examiners do not have flexibility to insist on actions or policies that are counter to or inconsistent with statutes, agency policy, or GAAP.
8.
Credit union officials have the right to receive clearly written examination reports on a timely basis. Any other directives and notices from the examiner should also be clearly communicated in writing. NEG page 20-1. Commentary: Credit unions should not be expected to comply with directives that are not in writing. In order for the credit union’s record of performance, including efforts to address problem areas, to be as accurate as possible, directives should be provided in writing to the credit union and included in the credit union’s examination history.
9.
Credit union officials have the right to have examination reports, findings, directives and administrative actions that are based on all relevant facts, including current data. NEG page 1-27. Commentary: The examination report should present a current, factual picture of the credit union’s financial performance and risk management. When material problems arise that the examiner expects the credit union to correct, the record must include a complete and well-documented accounting of the problems and the efforts by the credit union and the examiner to address them fully.
10.
Credit union officials have the right to be evaluated on their own strengths and weaknesses and not solely on the basis of regulator concerns about trends or general problems in the credit union system or within their peer group. NEG page 3-5. Commentary: While examiners must be mindful of problems and conditions in their regions and even across the country, it is essential for the accuracy of each credit union’s examination report that the examiner’s assessment of a credit union reflects an accurate
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depiction of the performance and operations of the credit union under review. 11.
Credit union officials have the right to be evaluated for progress toward objectives that are realistic and achievable, proportionate to the risk presented and the resources of the credit union, and in the timeframe established with the credit union. NEG page 3-11. Commentary: Goals and directives that are not realistic are counterproductive and undermine safety and soundness. Examiners should not arbitrarily set requirements that the credit union cannot meet but rather there should be coordination and cooperation between the credit union’s officials and the examiner regarding goals that are achievable within an acceptable amount of time for both the examiner and the credit union.
12.
Credit unions have the right for their examination findings and directives to be risk prioritized. NEG pages 1-1 and 20-1. Commentary: Examiners are directed to focus their reviews and reports on applicable risks, and those activities that present the greatest risk receive the most attention. A standard procedure that the examination findings and directives must be listed in order of their importance based on the amount of risk presented is fully consistent with the risk-focused examination process.
13.
Credit union officials have the right to appeal examiner findings, conclusions, or directives without fear of retaliation from their regulator.13 Commentary: It is clear that under the FCU Act, agency policy and practice, credit unions have the right to appeal ―material supervisory determinations, including decisions to require prompt corrective action‖ to the NCUA Board. As discussed in this Section, matters that may be appealed include, for example, cease and desist orders, removal of officials, and conservatorships. Credit unions also have the right to appeal material examination report findings, conclusions, and directives from the examiner. Documents of Resolution and LUAs are not generally ―appealable‖ because they are technically voluntary agreements, but the credit union should be able to appeal
See, e.g., 12 U.S.C. §1790d(k) (addressing PCA appeals); NCUA, Interpretive Ruling and Policy Statement (IRPS) 02-1 (―Supervisory Review Committee‖), available at http://ncua.gov/Resources/RegulationsOpinionsLaws/IRPS/2002/IRPS02-1.html; NCUA, IRPS 95-1 (―Guidelines for the Supervisory Review Committee‖), available at http://ncua.gov/Resources/RegulationsOpinionsLaws/IRPS/1995/IRPS951.html. 13
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to the regional director as part of the DoR or LUA negotiation process. 14.
Instructions on how to appeal examiner findings, conclusions, or directives should be detailed on every examination report form that is provided to credit unions. NEG page 17-1. Commentary: NCUA’s process for allowing an appeal is far from clear. NCUA and state regulators should ensure that all examination report forms which examiners provide to credit unions include sufficiently detailed information as to which issues may be appealed or challenged and the process for making such an appeal. CUNA and the Leagues are pursuing greater transparency in the appeals process.
15.
Credit union officials have the right to record meetings with examiners and other agency personnel and other regulatory proceedings related to the examination (subject to confidentiality). NEG page 21-2. Commentary: The Examiner’s Guide states that credit unions often use tape recorders to record their meetings at the joint conference, and that the NCUA examiners usually agree to the request, and may request a copy of the tape or transcript. A recorded meeting provides an objective transcript of the discussion between the examiner and the credit union officials.
16.
Credit union officials have the right to have a representative, such as an attorney or League representative, present during meetings with the examiner and other regulatory personnel. NEG page 21-6. Commentary: The Examiner’s Guide states that credit union officials have the right to invite other persons to the joint conference, and that an examiner will rarely object to the attendance of any outside individual. Proper communication about the attendees in advance will facilitate the meeting.
17.
Credit unions have the right to have any published orders—at least consent orders—address only facts and not conjecture or speculation by the examiner. NEG pages 20-1, 20-6, and 30-3. Commentary: Any published orders must be based on the facts in an examination report that are reviewed by the credit union. The Examiner’s Guide states that the examination report must have proper documentation to support an examiner’s findings and conclusions. For the confidential section of the report, examiners
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should only cover pertinent matters that are based on fact, and not ―statements based on gossip or hearsay.‖ 18.
Credit unions have the right to confidential, non-discoverable communication with their legal counsel regarding examination issues. Commentary: There are longstanding legal principles in this country regarding attorney-client privilege that also apply to a credit union’s management and officials in regard to examination and supervisory issues. 14
19.
Credit unions have the right to develop and use ―high-level‖ policies, which should be separate and distinct from detailed procedures. NEG page 21-5. Commentary: Examiners should not dictate broader credit union policies, but rather should lead and persuade officials to proper action. Credit union management and officials have the right to use business judgment in developing their policies.
20.
State credit unions have the right to a lead examiner that is a state regulator, consistent with the credit union’s charter type. NEG page 22B-3. Commentary: NCUA appears to be compelled to accompany state regulators during the examination of state-chartered credit unions, particularly on federal ―hot button‖ issues such as MBL and indirect lending. Thus, it is important that the lead examiner be comparable to the credit union’s charter type. It is also important that the state regulator—not NCUA—be responsible for assigning the credit union’s CAMEL rating during an examination.
21.
Credit union officials have the right to know the timing of when their regulators, such as NCUA, will publish an LUA. NEG page 29-10. Commentary: This right does not address whether NCUA should publish an LUA, it simply addresses the need for notification of when the LUA will be published. Currently, credit unions are learning about publication by either checking NCUA’s website or, more likely, via NCUA’s mass emails—which can be unintentionally inflammatory. See, e.g., Upjohn Co. v. United States, 449 U.S. 383, 386-99 (1981); Clarke v. Am. Commerce Nat ’l Bank, 974 F.2d 127, 129-30 (9th Cir. 1992); 12 C.F.R. § 747.24(c) (―Privileged documents are not discoverable. Privileges include the attorney-client privilege, work-product privilege, any government's or government agency's deliberative-process privilege, and any other privileges the Constitution, any applicable act of Congress, or the principles of common law provide.‖). 14
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NCUA should follow the lead of a number of state regulators that inform the credit union on when publication will occur. 22.
Credit union officials have the right to defer to their certified public accountant (CPA) if there is a disagreement between the officials and their regulator regarding issues related to U.S. generally accepted accounting principles.15 NEG pages 5A-4 and 7-28. Commentary: Credit unions over $10 million in assets are required to follow GAAP and a credit union’s CPA is responsible for ensuring that the credit union’s activities and financial statements are in compliance with GAAP. Therefore, rather than the regulator becoming involved in the specific accounting issues of numerous credit unions, the examiner should not seek to override the credit union’s CPA when disagreement on accounting issues arise, absent clearly erroneous guidance from the CPA. Such practice will benefit not only the credit union but also the regulator by freeing up its resources.
23.
Credit union officials have the right to communication (i.e., discussion of draft findings) with their examiner prior to final issuance of the examination report. NEG page 21-1. Commentary: The NCUA Examiner’s Guide states that examiners should set aside ―time periodically to discuss with management and officials developments in the examination.‖ NEG page 21-1. In addition, an examiner should provide ―credit union officials and management sufficient time to review it before the joint conference or exit interview.‖ NEG page 20-1.
24.
Credit unions have the right for directives from examiners (including verbal and written comments) to be consistent with agency policy, such as NCUA’s letters to credit unions. NEG pages 3-1, 6-15, 6-16, 620, 7-35, 9A-18, and 10-1 – 10-14. Commentary: While this seems like an obvious right, this is frequently raised by credit unions across the country. NCUA examiners must follow the guidelines in the Letters to Credit Unions. For example, the Examiner’s Guide states that credit unions must follow Letters to Credit Unions in areas such as CAMEL ratings, riskbased lending, and risk management.
15
See U.S.C. 1782(a)(6).
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II. Overview of the Examination and Regulatory Appeals Process While credit union officials generally want to cooperate and coordinate with their examiners and supervisory examiners, disagreements are inevitable. Regulators have processes and procedures to allow credit union officials to address those differences and to bring them to the attention of higherranking agency officials for further review when agreement is not reached between a credit union and its examiner. Even though there is an appeals process for state and federal credit unions, it is a fair statement that credit union appeal procedures within NCUA and several states are not as clear or as helpful to credit unions as they should be. CUNA and credit union Leagues are pressing regulators for improvements, to make these processes more transparent and efficient for credit unions and agencies. In the meantime, below is a concise description of our understanding of the appeals process for ―informal‖ disagreements with examiners as well as for challenges to more consequential regulatory directives and sanctions that agencies impose in order to compel a credit union to undertake or cease a certain activity. This report, which reviews NCUA’s appeal process, attempts to be as clear as possible about the steps credit unions need to follow for an appeal, despite the fact that the processes are in many ways opaque and confusing. State credit unions should check with their regulators and Leagues for specific information about state appeal processes. We also emphasize that the processes and procedures described below are simply our attempt at creating a comprehensive and user-friendly reference guide on the appeals process—an area in which little coherent guidance currently exists. In addition, we are keenly aware that the way the appeals process should proceed according to established policies and the way it actually does proceed may be inconsistent. Aside from increasing transparency, one of the primary objectives of this section on appeals is to lessen the inconsistency between the appeals process on paper and in practice. CUNA also wants to emphasize that credit unions faced with administrative or enforcement actions, including issues regarding appeals, should seek the guidance for their specific situation from a qualified attorney and as appropriate, their league.
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Informal Examination Appeals A credit union official is entitled to discuss any issues relating to the examination with its examiner on site or via telephone, including the contents of the examination report. NCUA states that examiners should prioritize communications with credit union officials and management throughout the examination process, there should be no surprises from the examination findings, and that examiners should set aside time to discuss findings with credit union officials and management. Examiners should also provide a draft copy of the examination report so that credit union officials and management will have sufficient time to review the report. Credit unions may request that the examiner include supplementary information and/or correct data or information in the examination report. As defined in the NCUA’s Examiner’s Guide, examination findings are ―material operating exceptions, violations of law or regulation, and unsafe and unsound policies, practices, and procedures‖ in the Examiner Findings workpaper. NEG page 20-7. A credit union official who disagrees with a final examination report issued by NCUA’s field staff must first submit a written appeal to its regional director within 30 days of receiving the examination report. Within 60 days of receiving the request, the regional director will provide a written response and take corrective action when appropriate. NCUA, ―Everything You Ever Wanted to Know about Exam Appeals,‖ The NCUA Report, March 2010; http://www.ncua.gov/NewsPublications/News/Newsletters/NCUA_Newsltr_ March10_5P.pdf. Supervisory Review Committee (SRC)16 If the regional director does not respond to the credit union within 60 days or if the credit union wishes to appeal, the credit union may—with approval of its board—submit a written appeal to the SRC. Comprised of three NCUA staff employees appointed by the NCUA Chairman, the agency’s SRC was established in 1995 under the Riegle Community Development and Regulatory Improvement Act. It provides an independent appellate process for reviewing material supervisory determinations. The SRC can also review revocation of any portion of a credit union’s RegFlex authority. See NCUA, IRPS 11-1 (―Guidelines for the Supervisory Review Committee‖); NCUA, IRPS 02-1 (―Supervisory Review Committee‖), available at http://ncua.gov/Resources/RegulationsOpinionsLaws/IRPS/2002/IRPS02-1.html; NCUA, IRPS 95-1 (―Guidelines for the Supervisory Review Committee‖), available at http://ncua.gov/Resources/RegulationsOpinionsLaws/IRPS/1995/IRPS95-1.html. 16
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SRC determinations are limited to: Composite CAMEL ratings of 3, 4, and 5 and all component ratings of those composite ratings; Adequacy of loan loss reserve provisions; and Loan classifications for ―significant loans‖—as determined by the appellant. An appealing credit union is entitled to a personal appearance before the SRC. The SRC will make a determination on the appeal within 30 days. However, during this review period, the material supervisory determination that is the subject of the appeal will remain in effect. If the SRC fails to respond favorably, the credit union may appeal to the NCUA Board within 30 days of the SRC’s response.
Credit Union Disagrees with Final Examination Report
Appeal to RD w/in 30 days of report
Appeal “material supervisory determinations” to SRC w/in 60 days of RD’s response
Appeal to NCUA Board w/in 30 days of SRC’s decision
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Prompt Corrective Action (PCA) Enforcement and Appeals As described beginning on page 11 of this Guidance, NCUA supervises prompt corrective action (PCA) which combines net worth standards with authority to impose agency sanctions if the standards are not met. Credit unions that have less than 6% net worth must submit a net worth restoration plan (NWRP) to NCUA. A state credit union must submit a NWRP to its state regulator as well. The plan must be filed within 45 days of becoming undercapitalized (less than 6% net worth) unless the net worth category was downgraded on the basis of other safety and soundness grounds. The regional director may extend the filing deadline. The appropriate NCUA regional director (and state supervisor for state credit unions) will review the plan and approve it, request some modifications, or reject it. The credit union should make every effort to work out its NWRP with its regulator(s), and the NCUA Examiner’s Guide makes it clear that credit unions may receive assistance from NCUA in developing their plans. While there is no formal process for appealing requirements of a NWRP, a credit union may raise concerns with the regional office, the NCUA Ombudsman (see page 51 of this Guidance, below), or the NCUA Board. NCUA has authority to take mandatory and discretionary supervisory actions under PCA. Mandatory supervisory actions include requiring an earnings transfer for credit unions with less than 7% net worth; limiting asset growth and specifically limiting member business loan growth, in addition to the requirement to submit a NWRP mentioned above. A list of discretionary supervisory actions from NCUA’s Examiner’s Guide is on page 41. Also, NCUA may liquidate or conserve a critically undercapitalized credit union within 90 days of its classification or can take other action if it feels it is appropriate. NCUA has an independent appeals process under which credit unions may appeal PCA supervisory actions;17 a chart addressing this process is on page 40 of this Guidance. The NCUA Board provides advance notice and an opportunity for a credit union to have a hearing before a PCA discretionary supervisory action is taken, unless NCUA feels the action is necessary to further PCA purposes. The credit union may also challenge the discretionary supervisory action in writing and request the action be modified or withdrawn. The credit union is not entitled to a hearing before the NCUA Board. Upon review, the Board, or its independent designee, may decide not to initiate the action or modify 17
See 12 U.S.C. § 1790d(k); 12 C.F.R. §§ 747.2001-747.2005.
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it or may decide to go forward with it. The credit union may request the NCUA Ombudsman to review a proposed discretionary supervisory action. If NCUA seeks to dismiss an official at the credit union, it must provide the individual with a copy of the order and a notice of the right to challenge the dismissal. The person may request an informal hearing and to present testimony. The dismissal remains in effect while the review is pending. NCUA may also place a significantly undercapitalized credit union or a new credit union that is not meeting its net worth standards and has no reasonable prospect of becoming adequately capitalized into conservatorship or liquidation. A conservatorship or liquidation may be challenged in court within 10 days.18
PCA – Mandatory and Discretionary Supervisory Orders
Appeal to NCUA Board
Judicial Review (In some situations)
Or Seek Ombudsman’s review
See 12 U.S.C. § 1786(h)(3) (―Not later than ten days after the date on which the Board takes possession and control of the business and assets of an insured credit union [as conservator], such insured credit union may apply to the United States district court . . . for an order requiring the Board to show cause why it should not be enjoined from continuing such possession and control.‖) ; 12 U.S.C. § 1787(a)(1)(B) (―Not later than 10 days after the date on which the Board closes a credit union for liquidation . . . such insured credit union may apply to the United States district court . . . for an order requiring the Board to show cause why it should not be prohibited from continuing such liquidation.‖). 18
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NCUA’s Final Rule on Prompt Corrective Action (2000)
Based on PROCEDURES FOR REVIEW OF PROMPT CORRECTIVE ACTION UNDER SUBPART L OF PART 747 NCUA’s Final Rule on Prompt Corrective Action 65 Fed. Reg. 8560, 8581 (Feb. 14, 2000) PCA Imposed Discretionary supervisory action, § 747.2002
Reclassification to next lower category on safety and soundness grounds, § 747.2003
Dismissal of director or senior executive officer, § 747.2004
Procedures for Review . Prior notice of proposed DSA and grounds therefor. . 14 calendar days to respond in writing, oppose or seek to modify DSA. . Failure to respond is deemed consent to DSA . May seek NCUA ombudsman's recommendation. . No right to hearing. . Final decision by independent person appointed by NCUA Board. . Once imposed, may later seek to modify or rescind. . Prior notice of proposed reclassification and grounds therefor. . At least 14 calendar days to respond in writing, seek informal hearing, seek to present witnesses. . Must explain why CU is not in unsafe or unsound condition, or has corrected unsafe or unsound practice. . Failure to respond is deemed consent to reclassification. . Hearing held within 30 days before presiding officer appointed by NCUA Board. . Right to be represented by counsel at hearing. . Presiding officer makes recommended decision. .Final decision by NCUA Board within 60 calendar days after the record is closed. . Once reclassified, may later seek to rescind. . Notice of right to seek reinstatement given when credit union is served with order to dismiss. . 14 calendar days to respond in writing, justify reinstatement, seek informal hearing, seek to present witnesses. . Failure to respond is deemed consent to dismissal. . Hearing held within 30 days before presiding officer appointed by NCUA Board. . Right to be represented by counsel at hearing. . Credit Union or official bears the burden of proof. . Presiding officer makes recommended decision. . Final decision by NCUA Board, must include reasons if reinstatement denied. . Dismissal effective pending final decision.
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Administrative Actions Separate from PCA As discussed in Section I, NCUA may take ―administrative actions‖ that are separate from PCA supervisory actions. These separate measures are among the most serious supervisory steps NCUA may take against a credit union or its officials as addressed in Chapter 30 of the NCUA Examiner’s Guide, these actions include: Letters of Understanding and Agreement; Cease and desist orders; Civil money penalties; Removal of officials; Termination of insurance; Conservatorship; Revocation of charter; and Liquidation. According to NCUA’s Examiner’s Guide, before taking an administrative action, the examiner should try to resolve the problems with the credit union’s officials informally. ―Often, a realistic Document of Resolution and frequent examiner contacts will resolve problems with no need for administrative action.‖19 Also, before taking administrative action, the examiner and the supervisory examiner must clearly understand the problems with the credit union and why previous steps to address the problems have failed. The administrative record ―must present a complete, factual, and fully documented history of the credit union’s problems and the attempts by NCUA and the credit union to resolve them.‖20 To initiate an administrative action, the examiner will recommend an action, and the NCUA regional office will consult with NCUA’s central office before implementing it. Once an action is determined, the examiner generally delivers the notice (or order) to the credit union, informing officials there of the violations or problems and what action is required of the credit union to address those issues. Refusal of the credit union to accept the notice does not mean it will not be enforced. Credit Unions May Challenge Administrative Actions Credit unions have the right to challenge a number of administrative actions. The appeals process may vary depending on the administrative action involved. It is important to note that there are only limited appeals associated with Letter of Understanding and Agreement (LUAs). LUAs as well as DoRs are essentially contracts with the agency and therefore credit 19 20
NEG page 30-2. NEG page 30-3.
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unions’ concerns regarding a proposed LUA or DoR should be resolved as part of the negotiation with the Regional Director or other agency representative. LUAs and DoRs are not generally appealable because they are, at least theoretically, contracts that both sides, the examiner and the credit union, have agreed to as discussed more fully in Section I. NCUA may enforce, in court, a published LUA by issuing a cease and desist order or imposing a civil money penalty (fines), and proving noncompliance with the published LUA. However, NCUA may take an administrative action, to compel compliance, even if an LUA is not published, if the credit union fails to meet the terms of the LUA and the credit union’s conduct constitutes a safety and soundness violation or violation of law or regulation. The LUA for a federal credit union must include whether it will be published or whether NCUA is reserving the right to publish the LUA at a later time. An LUA issued by NCUA (with the state supervisor) to state credit union need not address publication, unless required by state law or regulation. Once an LUA is signed, it is at that point when it becomes an enforceable agreement between the credit union and the regulator. Issues related to the signed LUA are not appealable to NCUA but may be subject to review by federal court. Credit unions should discuss issues related to LUAs with their competent legal representative and, as appropriate, their Leagues. Appeals for Cease and Desist Orders The FCU Act empowers NCUA to issue a Notice of Charges and to arrange for an administrative hearing to enforce a cease and desist order. When the notice is provided to the credit union, the examiner should make the officials aware of: (1) the timeframe in which they must respond by filing with an answer to the changes, and (2) the need to file a written notice of appearance with the administrative law judge. A credit union also has the right to challenge a temporary cease and desist order in federal court within ten days.21 There is a minimum 30-day period between when the notice is provided to the credit union and the date of the hearing. In the interim, NCUA may issue a temporary cease and desist order which takes effect immediately upon delivery. A temporary order is for major problems requiring immediate action. NCUA usually issues a temporary cease and desist order at the same time it issues a Notice of Charges and hearing, the temporary cease and
21
See 12 C.F.R. § 1786(f)(2).
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desist order is in effect until the NCUA Board withdraws it, and the Board issues a final order after a hearing, or a U.S. district court removes it.22 The credit union may agree without contesting the order, and it will become final. However, if there is no agreement, a hearing is held before an administrative law judge and the following process will occur:23 After the hearing, the judge sends a recommendation and the hearing record to the NCUA Board. Within 90 days, the Board makes a decision. The evidence must clearly support the Board’s decision. The credit union may appeal to the U.S. Court of Appeals within 30 days after receiving notice of the final order. The court may overturn the NCUA Board’s action if it determines the action is arbitrary and capricious. The final order remains in place during the appeal unless removed or modified by the court. The order is effective 30 days after the credit union has been notified. A final cease and desist order becomes effective 30 days after notice to the credit union and remains in effect unless modified or set aside by a reviewing court. If the credit union violates the terms of a cease and desist order, NCUA may enforce it in U.S. district court or by imposing civil money penalties (fines).24 Assessment of Civil Money Penalties (Fines) NCUA may assess fines against a credit union or involved party for violations of laws, orders, rules, or other violations.25 The size of the penalty depends on the seriousness of the violation, and is based on the following: First tier. Any credit union or institution-affiliated party (person involved in the affairs of the credit union) that violates a law or regulation, a final order of the NCUA Board, a published agreement with the Board (such as a LUA), or a condition imposed in a published writing by the Board in connection with the granting of any application (such as the Insurance Agreement), may receive a fine of not more than $5,000 for each day of the violation.26 Second tier. If the credit union commits a ―first tier‖ violation and exhibits reckless conduct or does not carry out its duties properly, and the violation is part of a pattern of misconduct, causes more than See See 24 See 25 See 26 See 22 23
12 12 12 12 12
U.S.C. § 1786(f). C.F.R. pt. 747. U.S.C. § 1786(f)(4). C.F.R. §§ 747.1-747.41, 747.1001. U.S.C. § 1786(k)(2)(A).
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a minimal loss, or results in a monetary gain or other benefit to the party involved, the NCUA Board may assess a fine not more than $25,000 a day for each day of the violation.27 Third tier. Any credit union that knowingly commits ―first tier‖ violations, knowingly engages in unsafe or unsound practices, knowingly breaches any fiduciary duty, or knowingly or recklessly causes a substantial loss to the credit union or a substantial monetary gain or other benefit to an involved party because of the violation, may receive a fine of not more than $1,000,000 per day for each day of the violation, or in the case of a credit union, 1 percent of assets, whichever is less.28 The procedure for a fine is:29 The NCUA Board issues a Notice of Assessment, which addresses the law and facts on which it based. The credit union or party has 90 days to make payment, but may request a hearing within 20 days. An administrative law judge will hold a formal hearing if requested by a credit union.30 After the administrative hearing, the administrative law judge submits a recommended decision to the NCUA Board. The NCUA Board issues its final order, but the party or credit union may appeal to a U.S. court of appeals within 20 days of receipt of the final order. Removal or Suspension NCUA may remove directors, officers, or committee members as provided in § 206(g) of the FCU Act as an initial course of action or as a continuation of a cease and desist order if the officials refuse to comply as directed.31 NCUA may also suspend or remove institution-affiliated parties for certain criminal offenses pursuant to § 206(i) of the Act.32 Removal can occur only if NCUA has issued a Notice of Intent to Remove or a Notice of Suspension and Intent to Remove and after completion of the
See 12 U.S.C. § 1786(k)(2)(B). See 12 U.S.C. § 1786(k)(2)(C). 29 See 12 C.F.R. pt. 747. 30 See 12 U.S.C. §1786(k)(2)(H). 31 See 12 U.S.C. § 1786(g); 12 C.F.R. §§ 747.1-747.41 (addressing NCUA’s general administrative review procedures for cease and desist orders, most removal and prohibition actions, and other most other NCUA actions), 747.901-747.905 (addressing review of NCUA Board disapprovals of a FICU director, committee member, or senior executive pursuant to 12 U.S.C. § 1790a), 747.2004 (addressing review of orders to dismiss directors and senior executives under PCA). 32 See 12 U.S.C. § 1786(i); 12 C.F.R. §§ 747.301-747.311 (addressing review of suspensions and prohibitions where a felony is charged). 27 28
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appropriate administrative process as provided in the FCU Act and NCUA Rules and Regulations.33 The notice to remove an official will contain a statement of facts for removal and establishes the time and place for holding a hearing before an administrative law judge; this is usually between 30 and 60 days after serving the notice. The examiner informs the official when the notice is delivered that unless the official personally or an authorized representative, appears at the hearing, the judge will assume the official has consented to the removal. An Immediate Suspension Notice will usually be a part of, or provided with, the Notice of Intent to Remove, although it may be provided any time after the Notice of Intent to Remove. It is effective immediately and remains in effect until dismissed or until the NCUA Board issues a final order. It may be challenged in court within 10 days, and the NCUA Board may enforce the order by suing in U.S. District Court or by assessing civil money penalties.34 A party who has been removed or suspended from office is also automatically removed, suspended, and prohibited from participating in the affairs of any federally insured financial institution unless the credit union’s regulator provides express written consent. Prohibitions A prohibition is similar to removal but is broader because it may be applied to institution-affiliated parties who may not have been elected or appointed by the credit union. The examiner prepares a recommendation for prohibition pursuant to § 206(g) of the FCU Act in the same way as he or she does for other administrative actions.35 NCUA may also prohibit institutionaffiliated parties for certain criminal offenses pursuant to § 206(i) of the Act.36 A prohibition of a person, like the removal of an official, can follow only if NCUA issued a Notice of Intent to Prohibit and completed the appropriate administrative proceedings or the institution-affiliated party consented. NCUA may combine proceedings for removal and prohibition if appropriate. The procedures for a prohibition action are essentially the same as those for a removal action.
See See 35 See 36 See 33 34
12 12 12 12
C.F.R. pt. 747. U.S.C. § 1786(g)(4). U.S.C. § 1786(g); 12 C.F.R. §§ 747.1-747.41. U.S.C. § 1786(i); 12 C.F.R. §§ 747.301-747.311.
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The examiner must inform the institution-affiliated party of the basic requirements regarding the hearing. The hearing will be held not less than 30 days and not more than 60 days after the notice is provided. Usually, the region directs the examiner to complete a follow-up supervision contact before the hearing date.37 The examiner participates in the hearing as a witness for NCUA. NCUA may issue an immediate prohibition order to protect the credit union or the interest of its members on the same basis and for the same reasons as an immediate removal of official order. The discussion in the section, Immediate Suspension of an Official, applies equally here. NCUA also has authority to issue a removal or prohibition order against institution-affiliated parties for cases involving a felony. Conservatorship Unlike the other supervisory administrative actions addressed previously, in this section, conservatorship does not involve an administrative hearing. The NCUA Board does not have to notify the credit union of its intended action or provide it with the opportunity to challenge it before conservatorship has begun. Within 10 days after the NCUA Board places a credit union into conservatorship, the credit union may challenge the action in U.S. district court.38 Whether or not the credit union challenges the conservatorship action, it is effective immediately upon service of the order to the credit union.39 Written approval of the state regulatory authority is required for a conservatorship of a state credit union. If the state does not approve within 30 days, however, and the NCUA Board responds in writing to the state, the NCUA Board can place the credit union into conservatorship without state approval, with a unanimous vote of the Board. Termination of Insurance Termination of insurance is the most severe action NCUA can initiate for federally insured state credit unions. Following are the administrative procedures for termination of insurance:40 The NCUA Board issues a Notice of Charges, with a request for corrective action. The credit union has 120 days to make such See 12 U.S.C. § 1786(g)(4). See 12 U.S.C. § 1786(h)(3). As noted earlier in this Guidance, these should be read as calendar days, not business days. See footnote 7, above. 39 See 12 U.S.C. § 1786(h). 40 See 12 C.F.R. §§ 747.201-747.208. 37 38
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corrections, although the Board may reduce this time to not less than 20 days if the insurance risk is sufficient. If the credit union does not take corrective action, then the NCUA Board may issue a Notice of Intent to Terminate Insured Status. This sets out a statement of the facts justifying termination, and establishes a time and place for an administrative hearing within 30 to 60 days. An administrative law judge holds an administrative hearing. The administrative law judge files a recommended decision with the NCUA Board. The NCUA Board issues its final order. The credit union may appeal to the U.S. Court of Appeals, but the order is effective unless modified or lifted by the Board or the court. NCUSIF insurance continues for one year from the date of termination on current shares; however, the NCUSIF does not insure new shares. Revocation of Charter and Involuntary Liquidation of Solvent Credit Unions NCUA may place a solvent federal credit union into involuntary liquidation for PCA or safety and soundness reasons.41 This is the most severe enforcement action NCUA can take against a solvent federal credit union. NCUA issues a Notice of Intent to Revoke Charter and Place into Involuntary Liquidation or a Notice of Suspension of Charter and Intent to Place into Involuntary Liquidation. If a Notice of Suspension is issued, operational control of the credit union is immediately transferred to NCUA. All subsequent administrative steps are the same for both a Notice of Intent and a Notice of Suspension.42 The credit union has 40 days in which to:
File a written statement stating why it should not be liquidated; Request an oral hearing; or Consent to liquidation by a board of directors’ resolution.
If the credit union files a written statement, the NCUA Board will render a decision within 45 days. A Notice of Revocation of Charter and Involuntary Liquidation will be issued where the grounds for liquidation are found to exist.
41 42
See 12 U.S.C. § 1766(b)(1); 12 C.F.R. §§ 747.401-747.406. See 12 C.F.R. §§ 747.401-747.406
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If the credit union requests a hearing, it will be held before an administrative law judge. The judge submits the recommended decision to the NCUA Board. The NCUA Board issues a final order. Revocation of Charter and Involuntary Liquidation of an Insolvent Credit Union NCUA must appoint itself liquidating agent of an insolvent federal credit union upon ―finding‖ that it is insolvent.43 The credit union may challenge the liquidation in court.44
General Appeals Process for Administrative Action
Administrative Actions
Appeal to NCUA Board (may be possible)
Judicial Review (may be possible)
Recovery of Legal Fees If a credit union challenges NCUA in a legal proceeding and prevails, it may recover attorneys’ fees, if is meets strict eligibility requirements.45 Sections 747.601-747.616 of NCUA’s regulations provide guidance on the payment of attorneys’ fees and other expenses to certain credit unions and others that prevail over NCUA in a legal proceeding, unless NCUA’s position was ―substantially justified‖ or special circumstances make such payment unjust. NCUA has the burden of proving that a payment should not be made. To avoid an award, NCUA must show that its position was factually and legally reasonable.
See 12 U.S.C. § 1787(a)(1)(A). See 12 U.S.C. § 1787(a)(1)(B); 12 C.F.R. § 709.3. 45 In order to qualify for recovery of legal fees under this authority, an individual must have a net worth of not more than $2 million, and a credit union must have a net worth of not more than $7 million and not have more than 500 employees. See 12 C.F.R. § 747.602. 43 44
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Generally, an entity is considered to have prevailed over NCUA if: (1) the entity won an action after a full hearing or trial on the merits, (2) a settlement favorable to the entity is reached, or (3) the proceeding against the entity has been dismissed.46 Other Administrative Appeals Credit unions may also appeal other decisions. For MBL decisions and waivers and foreign branching, a credit union may appeal to the NCUA Board.47 Freedom of Information Act requests can be appealed to the Office of the General Counsel.48 Appeals of creditor claims in liquidation should follow the administrative review process.49 NCUA Ombudsman The NCUA Ombudsman is an office that was set up to investigate complaints and recommend solutions. The Ombudsmen does not make decisions regarding complaints but will help identify options and make recommendations to the parties involved such as credit unions and examiners to help resolve issues or complaints. Issues or complaints must relate to regulatory issues that first were appealed, and were not resolved at the operational and regional levels. The role of the Ombudsman is not entirely clear, but in general, the Ombudsman: Is a liaison between credit unions and NCUA; Reports to the NCUA Board; and Is supposed to be independent from the agency’s operational programs. If a credit union wishes to request assistance from the Ombudsman, it must submit an Ombudsman Complaint Form. The form states: The Ombudsman is not an office of first recourse. We ask that you first attempt to resolve your complaint with the appropriate NCUA regional office … before filing a complaint with the Ombudsman. If you have been unsuccessful in resolving your concern with the See See 48 See 49 See 46 47
12 12 12 12
C.F.R. C.F.R. C.F.R. C.F.R.
§§ 747.601-747.616. § 747.13. § 792.28. pt. 709.
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NCUA regional office, please fill out this complaint form and return it to our office by mail. As described below, there is a list of issues the Ombudsman may not look into, but there is no list provided in the NCUA Examiner’s Guide of specific areas that are within the scope of the Ombudsman. The Ombudsman can help explain NCUA’s regulations or help raise systemic or recurring issues. The Ombudsman may not decide on matters in dispute or advocate the position of a credit union, NCUA, or other parties. The Ombudsman does not handle matters that are: Subject to formal review as set forth in NCUA regulations or policies; Involving an enforcement action where a Notice of Charges has been filed, such as an LUA; In litigation; Involving a conservatorship or liquidation; or Within the Inspector General’s jurisdiction, such as the material loss review of a failed credit union. Information on how to communicate with the NCUA Ombudsman is included in the resources information in the appendix.
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Credit Union must first appeal to Regional Director
If the issue is not resolved, contact the NCUA Ombudsman (in limited situations)
NCUA Ombudsman Serves as liaison and may not decide matters Cannot review certain matters, including matters: o Subject to formal review as set forth in NCUA Regs; o Involving certain enforcement actions; o In litigation; or o Involving conservatorship or liquidation.
Ombudsman may then make a recommendation to the NCUA Board
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Small Business Administration (SBA) Ombudsman The SBA has established an SBA Office of the National Ombudsman. The office was established under the Small Business Regulatory Enforcement Fairness Act. Credit unions with less than $10 million in assets have the right under that act to contact the SBA Ombudsman to raise concerns or issues about NCUA compliance matters or enforcement actions. Contact information for the SBA Ombudsman is included in the resources information found in the Appendix. Judicial Review Judicial Review of NCUA Administrative Adjudications: Most NCUA administrative adjudications, if contested, result in a finding and order by the NCUA Board. NCUA Board orders issued through the administrative appeals process can generally be appealed to a U.S. Court of Appeals within 30 days of the Board’s action. See NEG Chapter 30. Judicial Review of Cease and Desist, Conservatorship, or Liquidation Orders: The credit union has 10 days to seek judicial review of a temporary cease and desist order,50 to stay an officer or director removal or prohibition (pending completion of NCUA’s administrative process),51 to review a conservatorship order,52 or to review a liquidation order,53 in U.S. District Court. In many situations, a federal judge has discretion to award attorneys’ fees out of the credit union’s assets.54
See 12 U.S.C. § 1786(f). See 12 U.S.C. § 1786(g)(6). This does not apply in the case of a suspension, removal, or prohibition for certain criminal offenses; such matters require an administrative hearing before the NCUA Board. See 12 U.S.C. § 1786(i)(3); 12 C.F.R. §§ 747.301-747.311. 52 See 12 U.S.C. § 1786(h). 53 See 12 U.S.C. § 1787(a). 54 Section 206(p) of the Federal Credit Union Act, 12 U.S.C. § 1786(p), allows a federal judge to award institutionaffiliated parties funds for legal expenses out of the credit union's assets as the court "deems just and proper" for challenges to NCUA actions involving the agency’s section 206 powers (e.g., to challenge a conservatorship pursuant to 12 U.S.C. § 1786(h)(3), or to challenge the removal or prohibition of an institution-affiliated party, etc.). NCUA rules, however, put forth the agency's interpretation that section 206(p) does not apply to actions challenging NCUA’s appointment as liquidating agent. See 12 C.F.R. § 709.3 (―No credit union funds shall be available to pay expenses incurred in bringing a legal action to challenge the Board's liquidation action.‖); Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor Claims Involving Federally Insured Credit Unions in Liquidation, 56 Fed. Reg. 56,921 (Nov. 7, 1991). 50 51
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CUNA GUIDANCE SUPERVISORY ISSUES AND EXAMINATIONS Section IV: Recommendations for Improvements in the Examination And Appeals Process Effective examination of credit unions to evaluate their financial performance and safety and soundness record is essential for the strength and continued viability of the credit union system. Examiners have an important job to do and credit unions expect them to do it well. Likewise, credit union officials have critical functions to perform to the satisfaction of their members as well as of their regulators. This includes the ability to exercise appropriate business judgment in making decisions that affect the operations of their credit unions. In that connection, CUNA, credit union Leagues, and credit unions fully support adequate and efficient regulatory supervision. Nothing in this Guidance should be construed as advocating decreased or weaker safety and soundness standards. However, with widespread and growing concerns about overzealous examiners and aggressive examination practices, it is time to consider how the process can be improved to strengthen safety and soundness while facilitating, to the greatest extent possible, cooperation and professionalism when examiners and credit union officials interact. The recommendations listed below, which will be shared with credit union regulators as well as credit union officials, are intended to improve the examination process from the perspective of the examiner and of credit union officials. CUNA urges regulators, examiners, credit union management and board members alike to adopt the recommendations that are appropriate to their function in order to improve the examination process and enhance safety and soundness throughout the entire credit union system. I. Recommendations to Credit Unions 1.
Ensure the credit union’s officials are fully informed regarding any areas of material weakness at the credit union and the credit union’s risk management program.
2.
Ensure the credit union’s policies and practices are appropriate for the credit union’s risk profile, up to date and consistent with legal requirements.
3.
Work with the examiner to provide necessary financial data and access to personnel on a timely basis.
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4.
Seek to work with the examiner on a professional basis and be willing to meet and listen to his or her concerns, recommendations and directives.
5.
Do not hesitate to provide reasonable supplementary information to the examiner or to seek corrections in examiner reports, findings, or directives that the credit union feels are incorrect.
6.
Do not hesitate to point out discrepancies between the examiner’s directives and the regulator’s Examiner’s Guide or legal requirements.
7.
Do not hesitate to appeal examiner or regional office decisions on material, supervisory issues that the credit union feels are in error, unrealistic, inappropriate or inconsistent with its regulator’s policies or procedures.
8.
Use CUNA’s Examination and Supervision Issues Reporting Form after each exam to report on your latest examination experiences.
Recommendations to Credit Union Regulators/Examiners 1.
Implement the Credit Union Examination Rights.
2.
Improve the appeals process to make it fully transparent. Fully explain in examination reports how appeals are made—including what issues may be appealed to the NCUA Board, the NCUA Supervisory Review Committee, the NCUA Ombudsman and/or to a federal court should be clearly described.
3.
Clarify and address the distinction between the role of the Supervisory Review Committee, and the NCUA Ombudsman.
4.
Hold periodic, regional outreach meetings with credit unions on the examination process.
5.
Seek comments on changes in the NCUA Examiner’s Guide.
6.
Discuss with credit union officials the results of any off-site review before the examination begins.
7.
Create a website on the regulator’s homepage for ―Examination Issues‖ to explain all examination policies and priorities, and the appeals process. Credit unions should be able to ask questions and submit appeals online.
8.
Develop best practices for examiners and allow credit union officials to comment on the practices before they are implemented.
9.
Clarify the difference between guidance and regulations, and insurance review versus regulatory examination.
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CUNA GUIDANCE SUPERVISORY ISSUES AND EXAMINATIONS Section V: Conclusion As this report makes clear, credit unions around the country—in every region— are raising very serious concerns about examination issues. These concerns are based not on a desire for less safety and soundness but on the need for credit union officials to exercise their sound business judgment in order to fulfill their fiduciary duties as intended under the FCU Act or parallel state laws. While a number of credit unions relayed to CUNA through our Examination and Supervisory Issues Reporting Form that they have no problems with their examiner, the responses also indicate widespread concerns about examiner practices and agency policies. There is also an overarching anxiety that regulators and examiners seem more concerned about eliminating credit unions’ risk than they are about allowing capable credit union officials to manage such risks. Regulators and credit union officials each have an important job to do, and each one must perform their functions well if the credit union system is going to survive into the future. Supervisors must set and implement reasonable safety and soundness standards and ensure those standards are met on a timely basis. Likewise, credit unions officials must be able to determine the vision for their institutions, reflecting members’ needs, and must have ―space to operate‖ to implement that vision, consistent with prudent management and legal requirements. Even in the most cooperative of systems, tensions will exist between those who make the rules and those who must live under them. Further, troubled economic times magnify supervisory worries—which has certainly been the case during this unprecedented recession. Yet, while regulators have tremendous powers to ensure safety and soundness objectives are reached, the examination process should be fair, well-balanced and tailored to address problems presented. In addition, credit unions have the right to challenge inappropriate examiner directives and to present alternative solutions when issues arise. This means that the appeals process must be transparent and well-understood by examiners and credit union officials alike. Moreover, credit union officials must be able to, and in some cases encouraged to, appeal examiner directives, without any fear of reprisals.
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With credit unionsâ&#x20AC;&#x2122; concerns regarding regulatory burdens, compliance requirements and examiner inflexibility on the rise, CUNA, our Supervisory Issues Working Group, and the Leagues want to make sure credit unions have access, through this Guidance, to solid resources that will help promote professional understanding between credit union officials and their examiners as well as help emphasize their separate but supportive roles and responsibilities. No one associated with this Guidance wants to undermine or lessen safety and soundness. However, CUNA and the Leagues, through the distribution of this Guidance and the continued focus on improving the examination process, urge regulators to continue working with the credit union system to achieve meaningful improvements and transparency in these processes so that safety and soundness can continue to be achieved and the needs of the credit union system can be met while allowing credit unions to pursue even greater success for the benefit of their members.
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CUNA GUIDANCE SUPERVISORY ISSUES AND EXAMINATIONS Appendix CUNA’s Examination Policy As part of its work, the CUNA Supervisory Issues Working Group reviewed CUNA’s policy on the examination of credit unions. In light of current concerns credit unions have been raising, the Working Group determined the policy was inadequate and needed to be revised. The Working Group developed a number of changes which were approved by the CUNA Governmental Affairs Committee and CUNA Board and are now official CUNA Board Policy. CUNA Position (last updated September 2010): CUNA strongly supports fair and balanced safety and soundness regulation and oversight to protect the financial resources of credit unions and their members; minimize costs to the National Credit Union Share Insurance Fund (NCUSIF) borne by all federally insured credit unions; and preserve credit unions as unique institutions, offering meaningful choices to consumers in the financial marketplace. With the same vigor, CUNA urges regulators to handle the supervision and examination of credit unions in a professional manner, taking into full account legal requirements credit unions must meet as well as the need for credit unions to have reasonable flexibility to serve their members well. Federal and state regulators should incorporate supervisory policies, procedures, and practices that: I. Regulator Examination Policies 1.
Foster credit union uniqueness and facilitate credit unions’ ability to serve members. All of the regulator’s rules, policies, examination procedures and practices should be consistent with this objective.
2.
Provide credit union examiners with thorough training on credit union philosophy and uniqueness, as well as on credit union financial reporting and regulatory requirements. Additionally, examiners should recognize the unique operating environment of credit unions certified as Community Development Financial Institutions.
3.
Explain all examination policies and priorities, particularly new ones, and provide the information in one ―Examination Issues‖ location on the regulator’s website and in the regulator’s documents, such as letters to credit unions and examiner’s guides.
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4.
Ensure consultation and coordination between the National Credit Union Administration (NCUA) and state regulators when the credit union involved is state chartered.
5.
Create a culture within the regulator that requires proper conduct from examiners and other staff at all times and does not tolerate behavior from regulator personnel that is intimidating to a credit union’s officials or is otherwise inappropriate.
6.
Clarify and define a regulatory examination as distinguished from an insurance review.
7.
Direct examiners to follow all policies and procedures in the Examiner’s Guide closely, including GAAP where applicable, and to provide the credit union with the legal basis or GAAP policy for their directives.
8.
Ensure examiners are aware they should focus on safety and soundness issues and should not seek to substitute their business judgment for that of the credit union in the absence of safety and soundness concerns.
9.
Direct examiners and regulator personnel to use current and accurate information in all examination reports, Documents of Resolution (DoRs), Letters of Understanding and Agreement (LUAs) and as the basis for administrative actions.
10.
Allow a reasonable amount of time before policies take effect, giving every credit union reasonable lead time to implement and/or adapt to new rules, policies, and procedures.
11.
Ensure regulator examination policies and practices are implemented fairly and consistently within each region and across all regions. Additionally, while examiners should base recommendations on current information, examiners should have a thorough understanding of any recommendations in past examinations in order to further increase consistency of future recommendations.
12.
Differentiate between ―guidance‖ that is often contained in regulator letters to credit unions from ―regulations‖ that require strict compliance. Standards contained in ―guidance‖ should be limited to those standards for which compliance is not mandatory. Any standards for which credit unions will be required to follow should be consistent with sound business practices and issued under the Administrative Procedure Act. Credit unions should have the opportunity to comment on such standards and regulators should undertake periodic reviews for relevance.
13.
Address, within examination policies, the rights of a credit union to have its attorney, accountant or other appropriate official present at meetings with the examiner or other regulator personnel.
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14.
Provide that the credit union’s board of directors has the right to have credit union personnel present at the exit interview.
15.
Recognize that the credit union may record or transcribe meetings with the examiner or regulator staff.
16.
Acknowledge that the credit union is entitled to offer alternative solutions to address problem issues identified by examiners.
17.
Encourage the credit union to point out to the examiner or regulator staff discrepancies between the examiner’s directives and the regulator’s Examiner’s Guide.
18.
Promote confidence on the part of credit unions that the regulator’s appeals process is fair to all parties, that credit unions and examiners are well-informed about the process and how it may be utilized, and that there will be no reprisals for appealing a regulator directive or decision. Information about the appeals process should be included on the regulator’s website, in the Examiner’s Guide, and on the examination report, as indicated below.
19.
Undertake, on a regular basis, a random sampling review of the regulator’s handling of specific supervisory issues and problem cases, separate from the NCUA’s Office of Inspector General reports on material losses to the NCUSIF; make a summary of the findings available on the regulator’s website.
II. Regulator Examination Reports 1.
Ensure examination reports fairly evaluate the level of risk the credit union’s activities present. This includes assessing the safety and soundness of a credit union’s lending, investments, and other programs, products, and services, based on the overall performance of the program. For example, a credit union’s lending program should be reviewed on the basis of the general performance of its loan portfolio.
2.
Require all requests and citations from the examiner or regulator staff be provided to the credit union in writing.
3.
Direct examiners to distinguish clearly in the examination report ―directives‖ the credit union would be expected to follow from ―recommendations‖ the credit union would not have to accept. Additionally, examiners should prioritize any directives in the examination report.
4.
Release all examination information in a timely manner to the credit union.
5.
Require all examiners to provide a listing to the credit union of any records they have removed for review.
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6.
Permit credit unions to include data, documentation and other input with the examination report addressing differences of facts or opinion between the credit union’s officials and the examiner.
7.
Provide a listing of the credit union’s rights in dealing with examiners and information on how a credit union can appeal decisions of the examiner or other regulator field or regional staff on or with all examination reports.
III. Regulator Administrative Actions 1.
Instruct examiners to first seek to resolve issues involving material disputes with credit union officials, which would include consideration of a credit union’s alternatives, before developing a DoR, an LUA, or taking other administrative action.
2.
Direct examiners, if a supervisory action becomes necessary, to follow a hierarchy of administrative actions and for example, not to issue an LUA when a DoR would be more appropriate for the circumstances.
3.
Permit a credit union, when a DoR or LUA is drafted, to have the opportunity to review the DoR or LUA within a reasonable time frame, based on the circumstances, and present appropriate alternatives to the examiner prior to accepting the DoR or LUA.
4.
Ensure examiners have an understanding of the confidential nature of information obtained during an examination and ensure any information made public by the regulator does not contain such confidential information. Additionally, publication of any administrative action should only occur if doing so is in the public interest, as required by the FCU Act.
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CUNA GUIDANCE SUPERVISORY ISSUES AND EXAMINATIONS Resources for Credit Unions CUNA’s Examination Experience Reporting Form. Click to report on your credit union’s examination experiences http://www.cuna.org/initiatives/member/exam_supervisory.html CUNA’s Examination & Supervisory Resources for Credit unions, available at: http://cuna.org/reg_advocacy/member/hot_topic/exam_supervisory_resc.ht ml CUNA’s Due Diligence Resources for Credit Unions, available at: http://www.cuna.org/initiatives/due_diligence.html ―Everything You Ever Wanted to Know about Exam Appeals‖ NCUA’s Newsletter, dated March, 2010, available at http://www.ncua.gov/NewsPublications/News/Newsletters/NCUA_Newsltr_ March10_5P.pdf Guidelines for NCUA’s Supervisory Review Committee (RegFlex), IRPS 02-1, dated April, 2002, available at http://www.ncua.gov/resources/RegulationsOpinionsLaws/IRPS/2002/IRPS0 2-1.html Guidelines for NCUA’s Supervisory Review Committee, IRPS 95-1, dated March, 1995, available at http://www.ncua.gov/resources/RegulationsOpinionsLaws/IRPS/1995/IRPS9 5-1.html NCUA Examiner’s Guide http://www.ncua.gov/GenInfo/GuidesManuals/examiners_guide/examguide. aspx Administrative Actions – Chapter 30 of NCUA Examiner’s Guide http://www.ncua.gov/resources/RegulationsOpinionsLaws/Regulations.aspx NCUA Ombudsman http://www.ncua.gov/Resources/Ombudsman/index.aspx SBA Ombudsman http://www.sba.gov/aboutsba/sbaprograms/ombudsman/index.html For questions and comments please contact Mary Dunn at mdunn@cuna.com; Mike Schenk at mschenk@cuna.com; Michael Edwards at medwards@cuna.com or Paul Ledin at pledin@cuna.com.
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