WASHINGTON-Credit union representatives wasted no time here lining up to ask questions of-and criticize-NCUA and its examiners, with one person saying his most recent exam was practically an "interrogation."
A line of nine directors and CU execs formed quickly during a 15-minute Q&A to close a session of CUNA's GAC last week that was fittingly titled "Hot Examination Issues In 2012." Attendees confronted NCUA on issues that centered on examiner inconsistency, lack of clarity and arbitrary actions.
Taking the heat were representatives of NCUA's Office of Examination and Insurance, including Director Larry Fazio, Director of Risk Management Tim Segerson, Director of Supervision Matthew Biliquoris, and J. Owen Cole, Jr., director of the division of capital markets.
The first question came from a board member at a small credit union who termed the CU's latest review "almost an interrogation. We are a small credit union and got examined by four first-tier examiners, which surprised me." The director explained that the examiners were asking for a great deal of documentation, including board minutes, to support decisions the supervisory committee had made.
Fazio explained that field staff want to work with supervisory committees to "see what you are doing to fulfill your role. I cannot say, however, that the roles of the supervisory committee are something our examiners are focusing on."
Biliquoris stated that the agency has been speaking with examiners about stronger communication with credit unions and ongoing collaboration. "But I would hope there would be a clear understanding from examiners about why they are asking for what they are asking for."
Another executive stepped up to the microphone in the crowded session held in the Washington Convention Center's main auditorium, and shared that examiners recently issued his CU Documents of Resolution that in his opinion are not based directly on NCUA rules. "The basis for much of the DORs was 'industry best practices' as standards, rather than NCUA regulations," he said.
The exec concluded by asking NCUA why the DORs were not based on NCUA rules and regs, and "not subjectively determined best practices," which drew a large round of applause from the room.
Fazio responded by saying that if all examiner actions were based strictly on regulations, NCUA would have to create "a lot of regulations. Everything would have to be spelled out." Fazio continued by explaining "there are a great deal of risks we have to stay ahead and on top of," and that if NCUA does not have some flexibility to stay in front of evolving risks it could well lead to higher CU assessments.
Fazio added that the agency continually works to ensure exams are fair and balanced through ongoing examiner training and a strong quality control program. "I don't think we can ever get to place where every recommendation is tied to a rule or regulation. We can work hard, however, when we cannot tie a DOR to a regulation, to tie it to some other guidance NCUA has already issued. We can work together to figure that out."
Another question that drew support from attendees was raised by a CU executive who described his credit union as being caught in the middle of two NCUA directives, one to ensure credit unions are generating sufficient income, and another to ensure credit unions are not exposed to interest rate risk. "Our credit union is doing its best to prepare for rising rates, yet examiners told us we don't have enough yield."
Earlier in the session the panel had shared that examiners will be paying close attention to see that CUs are preparing for rising rates, as well as watching out for those chasing yield.
Afterward, Fazio told Credit Union Journal that if the credit union has made a conscious strategy to accept a lower level of profitability in order to offset forward-looking risk, or to achieve some longer-term strategic business objective that is part of a well thought-out plan, "then we support the decision and that will reflect well on the examiner's assessment of the institution."
Suddenly, A Problem
Another small CU exec complained in a stern tone that examiners had given his CU a DOR for a practice it had been conducting for the past 20 years. "This was never raised as an issue in any previous exam, so why now? Our board drilled the examiners and they could not come up with answers as to why they had not addressed the issue in the past."
Again, afterward, Fazio told CU Journal, "Without knowing the exact facts of the review, it's hard to comment on the examiner's decision. Even though maybe nothing's changed in the credit union's practice that was cited, it's possible that the credit union is doing more of the practice now. So in the past it was not very material, and now it is. It also could be due to a new rule being put in place."
During the panel presentation, NCUA outlined a number of areas examiners are paying attention to, including:
* Exposure to interest rate risk
* Heavy concentrations in real estate loans
* Large amounts of deposits in rate-sensitive products, such as MMAs
* Over-reliance on a single vendor
* Ongoing vendor due diligence, including having strong contracts in place that allow CUs ways to exit a partnership
* MBL controls
* "Contingent liquidity"-credit unions having a plan, perhaps access to the Fed's discount window, to access funds if they need to borrow in a crisis situation.