WASHINGTON-Few issues are as common to or discussed more often among credit unions than regulatory examinations and examiners.
To better understand the examination process from the other side of the table, Credit Union Journal convened a roundtable of five NCUA supervisory examiners, one from each of NCUA's five regions.
Topics in the far-ranging discussion included confusion over NCUA's Documents of Resolutions (DORs), steps credit unions can take to prepare for examinations, post-exam appeals, the importance of clear lines of communication throughout the entire exam process, and more.
For a glimpse inside NCUA's examination team turn to page 12 of this issue for excerpts from this dialogue. Answers have been edited for length.
Credit Union Journal: If I'm Joe Average Credit Union, what can I be doing in the week leading up to an exam that would really improve the process? What don't most CUs do?
Marcus Vander Wall (Region 2): The number-one thing credit unions should do before an examination is be reading those e-mails and letters that examiners are sending credit unions with the items needed for the exam, and getting those things ready. If those things are ready on day one, the exam flows so much smoother.
A second thing I would say is prioritizing the exam for that particular week; making it something that management staff has the ability to respond to examiner questions to the extent that that's possible; making time for those conversations so they can occur during the exam. When those things don't happen is when problems begin.
Dennis Farmer (Region 4): One of the things we want to make sure is that the sooner we can get in and focus on our job, the sooner we can get out. Sometimes downtime becomes one of the things we experience...and when you have a large team of examiners, it does become a challenge when you have a couple of days of downtime. An EIC (Examiner In Charge) may want to come in a day or so early to make sure the logistics of the examination are in a form or fashion that would enable the team to hit the ground running when they arrive.
Joanne Black (Region 1): If credit unions are reading the Letters to Credit Unions that come out, many times the questionnaires the examiners are using during the exam process are attached to that letter, so they have a better understanding of the perspective the examiner is coming in with. For small CUs, that's one more burden, but it may help the exam process go smoother.
Lynn Markgraf (Region 5): For larger credit unions, having the examiner go on site a bit early to communicate with the manager. For smaller credit unions where that's obviously not going to happen, if they have a question about a list an examiner has sent them in terms of 'This is what we need for the exam,' make sure to call the examiner if you have questions or don't understand something that needs to be provided.
CUJ: When Credit Union Journal and other publications typically report on exam-related issues, coverage typically focuses on disputes/disagreements. But how often, in your view, is that the case when exiting a credit union and reviewing a report?
Vander Wall: In my experience, disagreements are very rare when looking at the exam as a whole. There may be minor points within an examination where there's some disagreement, but examiners are always instructed to talk things out with credit union management before we get to a final meeting, so that when we get to a final meeting there are very few surprises.
When there is disagreement, it probably stems from the beginning of the issue. Examiners may see something as a problem and credit union staff may not. If there's disagreement on whether there's an issue, there's going to be disagreement on whether there's a solution for it.
Joe Ostrowidzki (Region 3): If it's a regulation, there's really no bantering back and forth. It might be someone wanting to get something off of their chest, but they say 'It's a reg, so I'll do it.' Our examiners, particularly in those cases, are trained and encouraged to be open minded, and it's not just one way. They are also offering recommendations that they see day in and day out at a variety of institutions.
Markgraf: If for whatever reason there is an issue that comes up and the CEO is unhappy with the resolution at the examiner level, they really need to understand that they can also pull in the SE, and we can participate in the conversation. It doesn't just end with the examiner. If there is an issue, the SE wants to know what it is and we want the opportunity to dialogue about that particular issue to see if there is some consensus that we can come to at this level.
CUJ: Does that happen often?
Markgraf: From my experience it doesn't really happen that often, but sometimes it can be an effective resolution.
With my particular group, we really haven't had any major disputes where I've had to intervene, but if a credit union is not able to resolve the issue with the examiner, they shouldn't be discouraged. They should call the SE and bring them into the loop, and the three people can sit down and dialogue about the situation.
CUJ: When NCUA talks to credit unions about "best practices," what do they mean? Are some benchmarks or examples available? Or are these just more abstract guidelines?
Black: Generally what comes out in Letters to Credit Unions may contain most of the best practices that credit unions see in their examination reports. We have rules and regulations, and things that are best practices that are being labeled best practices, and they come from an examiner who is going out and seeing all these different operations and pulling best practices from those. The examiner finding is usually pretty specific related to what the best practice is that they're looking for in a particular credit union.
Vander Wall: In general, the first time an examiner will come on site after [NCUA issues a Letter] is the time that there will be the most inconsistency between the practice and what is being addressed in that Letter to Credit Unions. Sometimes the issue is coming to light shortly after the Letter is written. If CUs are reading those as they come out, the issues will not show up in exam reports as frequently.
CUJ: Are credit unions blowing those letters off?
Ostrowidzki: I don't think they're blowing them off. If they had a system where they did address them on a flow basis as they come in, some of those best practices that are in those documents wouldn't end up in a report because they've already seen and addressed it.
CUJ: I spoke with one CEO who said, "It seems NCUA is in CYA mode because of the failures that have occurred. We get that mistakes were made. But for those of us professionals who managed through such difficult times, why don't we get your support and benefit of doubt?' What is your reaction or how do you feel when you hear that sort of thing?
Markgraf: In talking to credit union CEOs, we're not necessarily dinging them for the economy, so to speak. The economy is what it is; it happened to everybody. What we look more at is their risk-mitigation process and what are they doing to counter what's going on in the economy. I don't think that we're in CYA mode because of the failures; I think the economy did cause a significant disruption in credit unions, and some of them that didn't have certain types of products-such as mortgage loans-maybe are in a better position and didn't get hit as hard as [others]. Overall, NCUA has been working with credit unions and acknowledging that the economy is a significant factor, and we're focusing more on how to mitigate the risk that's already on the books.
I feel like we are giving them credit for what they're doing; part of our assessment is the economy-and that, to a degree, is beyond their control.
CUJ: It won't surprise you that many managers of small CUs feel they are not 'understood,' especially if they are operating in a small town or market. Do you hear that? What sensitivities are there, if any, to smaller CUs in smaller markets that they operate a bit differently than large CUs in large markets?
Vander Wall: My experience has been that credit union examiners understand those one-manager-shop credit unions very well, because they're on site that particular week and they're doing their exam work at the same time as the manager is there running their credit union. They often hold their questions for a time when the manager is not serving members or on a phone call. They see the whole process from beginning to end, and that's something credit union examiners don't often have the ability to do at larger CUs. A full week on site is generally the norm, and during that process, no matter where you're from, you get the opportunity to understand the conditions a one-person shop manager is dealing with.
CUJ: Many smaller CUs also feel far too much time is spent in their shops. How is that being addressed?
Markgraf: We do spend quite a bit of time because they do ask for the assistance. In my group, we've paired them up with mentor credit unions. Compliance is a big issue for small CUs, and they have trouble keeping abreast of all the new regs and so forth, and it's just hard for them. So we've paired them up with mentor CUs where they've had their BSA audits completed, paired them up with the [Office of Small Credit Union Initiatives], so they can get assistance that way.
CUJ: Do credit unions go to the Office of Small Credit Union Initiatives (OSCUI)?
Ostrowidzki: I'm surprised at how much I do see it. I can't give numbers, but my examiners are out there thinking quicker than I am about 'Maybe I can use this resource.'
Black: I see small credit unions looking to us as a resource and wanting us in there more. We do have a small CU exam program where we're trying to shift resources and move more time into larger credit unions where we see more risk, and out of the small CUs, so those credit unions that are complaining about it should see some reduction in exam time on site at the credit union.
CUJ: What kind of changes are we talking about?
Markgraf: We've already implemented the small CU program, and I don't think there are any major shifts. Maybe from the credit union standpoint, with the exception of the time the examiner spends on site, I don't think they're going to really notice a difference in what we do and don't do. It's more of a process of risk-identification changes than anything else.
CUJ: NCUA has recently announced that CUs have an appeal process, a way to challenge the findings and recommendations of examiners through you and higher. What kinds of appeals have you experienced so far?
Vander Wall: (After a pause on conference call) I think the reason there's silence on the line is that the appeal process isn't used all that often.
Markgraf: I've never had an appeal.
Vander Wall: I think it's very rarely used. What we as supervisors would like to happen is if a credit union does feel like they would be using that avenue, we'd like to be part of the process before it comes to that point, to see if there's anything we can do to resolve significant disagreements about material issues.
Black: I think in the vast majority of cases, it really is that the examiners and the credit unions work out the issues. Maybe you'll call me naÃ¯ve, but I think we have a pretty good working relationship with most of the credit unions.
Ostrowidzki: Once you wipe away the emotions of a debate or discussion regarding a concern and we look at the facts on both sides, usually the issues get resolved. People might whine or complain when they feel something should have been changed, but they know when it comes down to it, 'Do I need to address this? Yeah.'
CUJ: Chairman Matz also recently commented that the agency is "training our examiners on the differences between DORs and examination findings. There have been legitimate issues raised there. That's not to say our examiners are going to back off when there are issues there. But we will make more of an effort to distinguish, and I think you will feel that as the year unfolds." Where has the confusion in this area really been?
Ostrowidzki: I've been around the credit union industry for 25 years, and the evolution of DORs change, but the findings and recommendations or DORs, those documents have two distinct purposes and need to complement one another. We've had a lot of changes in the economy, and they do take different shapes and sizes during different times. We've got a lot of examiners learning how to use these documents and they've come in during a time when maybe they weren't used as thoroughly as they had been. There's a lot of training going on and a lot of further discussion for staff to ensure we use these documents more consistently.
Farmer: One thing that's always present is examiner judgment. We use a risk-based exam, and the judgment of examiners may be somewhat different. One may consider something a finding and one may consider it a DOR. If there is a misunderstanding with regard to whether something should be an examiner finding or a DOR, management should take that opportunity through the exam process to share their perspective on the issue. In the end, the overall objective is to get to an agreement. If there is confusion, I'd encourage them to sit down and talk.
CUJ: You cannot attend any credit union meeting without hearing about the "compliance burden." What are your views on that burden, and what, if anything, can a CU do to lighten it?
Markgraf: For some CUs, we can partner them up and help lighten their burden, but we can't take that burden away from them because it's required by law. The league is a good resource; they have some compliance people. I know the Arizona league has a person on board that helps credit unions with the new things that are coming out and helps them deal with their compliance questions. But I'm not sure that it will be lightened. They have to comply, so the best thing we can do for them is to partner them with resources that could make their lives a bit easier in being compliant with those regulations.
Black: [NCUA does] issue Letters that sometimes try to clarify those things. If they're reviewing some of those they'll at least have a better perspective of what we're going to be asking when we come into enforce some of those.