Credit unions are pushing NCUA to revert back to an 18-month examination schedule.

Letters sent by NAFCU and the Cooperative CU Association (the joint league representing Massachusetts, New Hampshire and Rhode Island) called on the federal regulator to shift from the 12-month examination cycle that was adopted during the financial crisis in 2008 to an 18-month cycle as a way to reduce NCUA's operating costs — as well as the burden the shorter cycle put on credit unions.

NAFCU cited recently disclosed NCUA budget documents which revealed that the agency spends nearly $6.4 million each year on airfare and auto rentals, much of which is spent as part of the exam process.

The trade group also pointed to the Small Bank Exam Cycle Reform Act, in which Congress pointed to the benefits of an 18-month exam cycle for financial institutions with lower risk profiles.

"Although this legislation does not apply to credit unions, NAFCU believes that an 18-month exam cycle for financially sound, well-managed institutions, as compared to a 12-month cycle, is one way to provide relief and help regulators control examination costs," NAFCU wrote in the letter, signed by the group's president and CEO B. Dan Berger.

NAFCU emphasized that "low-risk" credit unions be subject to no more than two exams in a three year period. "This approach would preserve the agency's ability to address risk through requisite supervision and monitoring, but would streamline NCUA's staff and resources for a more cost-effective budget," wrote Berger.

Before the Crisis
Credit unions were on an 18-month examination cycle until 2008, at which time NCUA shifted to a 12-month cycle because of the financial crisis. Alicia Nealon, director of regulatory affairs at NAFCU, told CU Journal that this push to return to an 18-month schedule came as a result of the trade group's push for further budget transparency from NCUA, and that documents turned over recently by NCUA have given NAFCU a better understanding of how the agency is spending credit unions' dollars.

"We identified that the agency is spending a lot of money on travel, especially in terms of airfare and auto rentals," said Nealon. "We looked at those costs and the current environment, and given how well the credit union industry is healing since the financial crisis, we felt like this was one area where NCUA could [streamline its processes and save credit unions money]."

While NCUA regularly reexamines its rules as part of its rolling three-year reg review process, NCUA spokesman Ben Hardaway explained that exam schedules aren't included in that process, since they are covered under the agency's supervisory programs. Any changes to the exam schedule would have to be approved by the NCUA board, which in November 2008 agreed to move credit unions to a yearly cycle because, according to the November 2008 Board Action Memorandum, "current adverse economic conditions and the distress in the nation's entire financial structure place credit unions at greater risk of loss."

Shortening the exam cycle subsequently created 56 new positions at NCUA and cost the industry $6.8 million over the next two years, NAFCU said, though the group said it doesn't have an estimate for the amount of money that might be saved by reverting back to an 18-month schedule.

Longer Cycle, Lower Risk
The Cooperative Credit Union Association, the joint league representing CUs in New Hampshire, Rhode Island and Massachusetts, also chimed in on the issue, with CEO Paul Gentile sending a letter to all three NCUA board members outlining the links between the current shortened exam cycle and the compliance burden CUs face.

"Moving exams to an 18-month cycle does not threaten safety and soundness and will not add significant or systemic risk," wrote Gentile. "In reality, it will lower risk because an extended cycle allows examiners to spend resources in credit unions that need additional attention. It also permits flexibility to examiners to monitor emerging issues that require both examiner and credit union education, training and preparedness. Furthermore, an extended exam cycle allows credit unions to spend more time serving their consumer members and their communities."

Gentile added that since the new schedule was introduced, NCUA's ability to analyze CU data for troubling patterns and trends has improved, and that the agency should continue to hone its AIRES platform to better enable the exchange of information between CUs and examiners.

"The goal of the AIRES modernization project is to facilitate more up-front interactions with credit unions electronically so that the exam process is much more effective and efficient," he said.

Tech Solution?
For its part, CUNA also continues to push for exam reform, and the possibility of returning to the 18-month cycle was suggested during one session earlier this year at CUNA's Governmental Affairs Conference in Washington. Additionally, last year the trade group sent NCUA a letter suggesting ways in which it might implement technology to streamline the examination process and save money.

NCUA is currently working on a web-based portal for transferring sensitive electronic member information between credit unions and examiners, a project expected to be completed by year-end.

Lance Noggle, senior director of advocacy and counsel at CUNA, told CU Journal earlier this year that such a portal was "a step in the right direction."

Nealon said NAFCU would support "any effort by [NCUA] to streamline exams and make them more efficient. However they can achieve that, I think our members would support that, whether it's through technology [or] increased training for examiners so they know exactly what they're looking for. Credit unions want exams to be more targeted and more efficient."

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