Can We Talk? NCUA Rebuffs Longer Exam Windows.

Agency rejection of return to 18-month cycle generates call for further discussion.

The NCUA has rejected a renewed request from some industry leaders to return to the pre-financial crisis 18-month examination cycle, but the idea did generate some discussion in recent days.

NAFCU and the Cooperative Credit Union Association kicked things off with a mid-August letter to the agency asking that federally chartered credit unions deemed to be low risk no longer be examined once every 12 months.

This approach would preserve the agency’s ability to address risk through requisite supervision and monitoring, but would streamline NCUA staff and resources for a more cost-effective budget, NAFCU President/CEO Dan Berger wrote.

The shorter exam window was implemented after the 2008 financial crisis and is no longer necessary because the industry’s health is so much improved, advocates say. Returning to one examination every 18 months would save resources for the examiner and the examinees alike, the trade groups says, and would follow the lead of the Small Bank Exam Cycle Reform Actthat was reported out of committee in the House in late July. Plus, it would add validity to the agency’s announced commitment to regulatory reform.

And it would allow the NCUA the breathing room to make better use of technology and data to become a more effective examiner in the future, wrote Paul Gentile, president/CEO of the CCUA, which represents credit unions in Massachusetts, New Hampshire, and Rhode Island.

The NCUA seems to have forgotten that it’s not 2008, but, instead, 2015 and that the credit union community in the NCUA’s own assessment is strong and resilient. That the top-tier of credit unions require full-tilt examination every 12 months is worthy of challenge and rigorous debate.

I believe that moving exams to an 18-month cycle does not threaten safety and soundness and will not add significant or systemic risk,Gentile said in the letter. 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.

In a follow-up letter letter from Gentile published this week in the Credit Union Journal, Gentile says most credit union leaders recognize how difficult the regulator’s job is and that a cookie-cutter approach to examination does not work. That’s why a dialogue on the exam process is so vital. It’s one of the key aspects of regulatory burden and uniquely one that the NCUA has the administrative authority to amend.

No dice, the agency says. The current 12-month exam cycle has proven to be both more appropriate and more effective than an 18-month cycle, NCUA spokesman Ben Hardaway replied in an e-mail to the Journal. One of the key lessons from the financial crisis was the need to detect and resolve problems earlier, Hardaway says, citing GAO and NCUA inspector general reports that buttress that position.

That quick rebuke drew response from around credit union land, including from NCUA Board member Mark McWatters, the lone GOP appointee on the three-member panel who frequently clashes with Democratic appointees Debbie Matz and Rick Metsger.

In an Aug. 21 letter to the Journal, McWatters calls for further study: That the NCUA would scuttle this request without debate among the board offices further evidences the lack of transparency and collegiality within the agency. As we all know, more than 70% of the NCUA’s operating budget consists of examination and travel-related costs, and any reasonable suggestion regarding how to better manage the inexorable increase in these costs merits thoughtful reflection.

McWatters also renewed his call for congressional hearings on the NCUA budget. That issue generated headlines of its own this summer when Matz reiterated her opposition to the idea and told a congressional panel that credit unions calling for cuts were not representing the best interests of their members.

In his letter, McWatters stressed that he wasn’t endorsing the NAFCU/CCUA proposal and that as a regulator, his definition of low risk may well be different than the industry’s. But he did say, The NCUA seems to have forgotten that it’s not 2008, but, instead, 2015 and that the credit union community in the NCUA’s own assessment is strong and resilient. That the top-tier of credit unions require full-tilt examination every 12 months is worthy of challenge and rigorous debate.

On Thursday, agency spokesman John Fairbanks added that the agency plans a formal response to NAFCU’s letter.

Here’s what some other industry leaders had to say on the issue.

Taking it to them.Sharon Lindeman, vice president of regulatory advocacy at the California and Nevada Credit Union Leagues, says her organization would like to not only see the longer exam window, but also calls for the federal regulator to follow the lead of state regulators in limiting exams to insurability issues during full exams every 18 to 24 months at well-run state-chartered credit unions. We’ll be taking these messages to the NCUA at our annual Hike the Hill event next week, Lindeman says.

Helping you. Helping us.The credit union system is healthy and the NCUA can offer a measure of regulatory relief by increasing the examination window to 18 months for well-run credit unions, says Jim Phelps, senior vice president for the Cornerstone Credit Union League, which represents Texas, Oklahoma, and Arkansas. This provides credit unions with more time to focus on serving their members. The banks have already moved toward this change. Moving to a longer cycle allows the NCUA more time to assist credit unions that truly need help.

Bad from the beginning.This from a veteran credit union CFO whose first career was as an examiner: I must say, I have to wonder if their study has shown that those CUs who were on an 18-month exam cycle actually had suffered an insurmountable decline in financial stability prior to the financial crisis. I can’t imagine that to be the case. I have a sneaking suspicion that off-site quarterly monitoring done by the NCUA would have produced red flags if something that dramatic were happening. If red flags appeared, the district examiner would have contacted the CU to investigate.That’s much less expensive than automatically sending a team of examiners to swarm in every 12 months, year in, year out.

Please pass the ROI. Pam Perdue, chief compliance strategist for Continuity, cites the time, effort, and documentation needed for exams, which she says typically consume weeks of human bandwidth. And for all but those in the worst of shape, the process rarely yields significant findings or meaningful insights on the part of the typical credit union. Furthermore, the NCUA’s stance on this issue contradicts the burden relief’ decree made earlier in the year by Chairman Matz, Perdue says. (In March, Matz declared 2015 the year of regulatory relief.)

Perdue whose New Haven, Conn., firm works with credit unions and banks decries the agency’s nearly continuous inspection of credit unions that consistently do well in their exams. Look to the competition, she says, where the risk-focused approaches taken by banking regulators have proven to be a workable model. The NCUA should consider migrating toward comparable criteria for examination scheduling.

Let’s be reasonable.Gaye DeCasare, CEO of Northern Virginia-based compliance consultancy COMPASS 4 CUs, says she understands the initial impetus for the shorter exam window but that now it’s time to re-think this. I do think it’s a good idea to extend the exam cycle for certain low-risk credit unions. I think it was appropriate to tighten up in 2008, because there was a very real fear that things could go south quickly in the financial crisis, DeCasare says. But in reviewing the data, I wonder how many well-capitalized, CAMEL 1 credit unions got into serious trouble.

I believe most weathered that storm because they were well-positioned going into it. Those are the credit unions that probably don’t need annual review. By extending the cycle for low-risk credit unions, the NCUA can redirect its resources to the credit unions that need more attention.

Another straw for the CAMEL.This would appear to be another case where the NCUA disagrees with the FDIC exam cycle. What are CAMEL ratings used for anyway? To allocate examination and supervision resources. CAMEL 1s and 2s should be on a less-frequent schedule based on their risk, which is obviously low if they’re receiving a 1 or 2, says Michael Wettrich, president/CEO of Education First Credit Union ($91.60M, Westerville, OH) and a former senior examiner for the state of Ohio.

Maybe it’s not over yet.From Jim Blaine, president/CEO of State Employees’ Credit Union ($30.84B, Raleigh, NC) I believe Mr. Hardaway’s comments were preliminary perhaps a bit too spontaneous and I understand a more considered response from the NCUA will be forthcoming.Clearly if the FDIC can achieve safety and soundness with an 18-month exam cycle, the NCUA is no less capable, are they?

September 3, 2015

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