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On Nov. 17, the National Credit Union Administration adopted the 10 recommendations in the Exam Flexibility Initiative. What will this mean for all federally insured credit unions? What is the key objective of an NCUA examination? How can a credit union minimize the impact of an examination? How can a credit union effectively prepare for an examination?
First, let’s look at this flow chart from NCUA describing how the examination cycle will change for federal credit unions (see a flowchart for state-chartered CUs here):
Looking at this flow chart, if your credit union has assets in excess of $1 billion, you won’t be eligible for the extended exam schedule. It’s business as usual for you (i.e., an eight- to 12-month cycle). Credit unions with CAMEL rating composite of 3 or greater; a management rating component of 3 or greater; that are less than “well capitalized”; or that have significant recordkeeping problems, a document of resolution or enforcement actions in place are also ineligible for the extended cycle.
But will ineligible credit unions really lose out? On the short end of the cycle, an ineligible credit union will have the regulators visit every eight months instead of every 14 months; on the long, such a credit union would get visited every 12 months rather than every 24 months. The root of the problem is not really how often examiners come, but what credit unions and their leaders go through when they come.
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ndeed, most credit unions seem to be more concerned about the disruption and downtime caused by a typical onsite examination, rather than about how often NCUA comes knocking. The majority of commenters on EFI were concerned about onsite presence and better examination preparation. Of the 79 comments, only 15 “suggested extending the examination cycle or lengthening the time interval between examinations.”
So how can credit unions truly make things better for themselves when it comes to their NCUA examinations? Understanding where NCUA is coming from can help you minimize disruption and grief examination grief that credit unions complain about all too often.
At its November meeting, the NCUA board made it clear that the overarching duty of the agency is to maintain the safety and soundness of credit unions in order to protect the National Credit Union Share Insurance Fund. Understanding why it is necessary for NCUA to physically visit your credit union to accomplish this objective instead of simply crunching your numbers offsite is the first step in helping your credit union reduce the stress and strain of an examination.
As the insurer of credit unions, NCUA is limited with respect to how it can protect the NCUSIF. The agency, unlike other hazard and liability insurers, cannot increase premium costs on a one-by-one basis for credit unions that engage in risky conduct and suffer losses. Instead, NCUA must focus on any risky activity and persuade or compel credit unions to eliminate such activity through informal administrative actions (e.g., DORs, Regional Director Letters, Unpublished Letters of Understanding and Agreement, and Preliminary Warning Letters) or formal administrative actions (e.g., Published LUA’s, Cease and Desist Orders, or Civil Money Penalties).
While the quarterly filing of Form 5300 Credit Union Call Reports provides NCUA with a good snapshot of the health and activities of NCUSIF-insured credit unions and can alert the agency to developing trends and problems, this reporting system is insufficient to address other essential information that is needed to ensure credit unions are operating in a safe and sound manner. Onsite examinations are necessary for obtaining the other essential information.
What is it that NCUA needs to see up-close and personal? The 5300 contains all types of information on loans and how they are performing, but does not allow NCUA to determine the soundness of the underwriting (loan documentation) or lending policies. Additionally, the 5300 does not break out insider transactions, or results of internal and external audits of credit unions. These are just some of the things that examiner will review and analyze on site. Further, an NCUA examiner will have the opportunity to meet and speak with credit union officials and employees. In the former case, the examiner aims to determine, for example, whether new directors have a working familiarity with basic finance and accounting practices, as required by Section 701.4 of the NCUA Rules and Regulations. When meeting with staff, an examiner may question them about operations and other issues of concern.
Armed with the knowledge conveyed above, a credit union will be prepared and should be able to limit the length of time and aggravation that an onsite examination may cause. Often, a credit union will receive an “items requested” list before an examination. By being proactive beyond the requested list, your credit union should be able to reap the rewards of an efficient and uneventful examination.
Steven R. Bisker is a founding member of CU Counsel, PLLC in Washington, D.C., and was also assistant general counsel at NCUA for the first 13 years of his legal career.
