Suffering from regulation brain drain? You're certainly not alone.
For today's credit unions, few concerns carry as much weight as the seemingly endless torrent of acts, regulations, and other requirements that must be effectively managed to appease regulators at the state and federal level.
Richard Holloway, CEO of Alta Vista Credit Union ($131M, Redlands, CA), spent 21 years as an examiner with the National Credit Union Administration (NCUA), a career trajectory that allowed him to experience both sides of the regulatory divide.
Before joining Alta Vista, Holloway also served as internal auditor and interim CEO for San Bernardino School Employees Federal Credit Union ($65M, San Bernardino, CA). Here, he shares his ideas for how credit unions, including his own, can facilitate the examination process while building a better, stronger institution in the process.
How has being CEO changed your perspective about compliance?
Richard Holloway: Although I'm on the other side of the fence, the examination process is still the same. When I was an examiner, I always liked it when the CEO came in each morning and asked how things were going and if I had any questions. That just opened up a dialog that was helpful, so that I didn't go off in the wrong direction or waste a lot of time. Not all CEOs do that. Some are adversarial, and some just accept anything the examiner says. I have a different approach. I try to have regular communications with the examiners so that there are no surprises at the end.
What kind of preparations do you undertake before regulators arrive?
RH: I have only gone through two regular NCUA examinations as CEO, one at San Bernardino and one here at Alta Vista. Examiners usually send you a list of what they want to see, and you definitely want to have everything they ask for on day one. Then, they'll usually ask for additional documentation during the exam. That's when you want to make sure that you're seen as working well with the examiners and that you're giving them what they ask for. You don't want them to think that you're not cooperating.
How does your background help you during the examination process?
RH: I understand the intent of the rules and regulations better than many CEOs, so if I feel the examiners are off base, I guide them to the essence of the regulation. For example, examiners should explain why they're writing you up for something and cite the regulation or supervisory letter behind it, not just say, ‘You need to do this because it's considered a best practice.'
CU QUICK FACTS
Alta Vista Credit Union
HQ: Redlands, CA
12-MO Share Growth: -8.24%
12-MO Loan Growth: 25.51%
We were written up for not monitoring how many new members we were getting after starting an indirect lending program. Our response was that we had no goal to increase membership through this program so why write it up. It didn't make sense for them to have that in there and they removed it.
Which areas of a credit union's business do examiners pay attention to?
RH: Examiners are risk-focused, especially in regards to concentration risk. They want to see appropriate levels of risk for the types of loans you do in relation to your net worth, so everything should be tied back to that. The stronger your net worth is, the more risk you can take.
How have the areas that examiners focus on changed over the past few years?
RH: Mostly because of the deteriorating economy, there's a lot more attention paid to modification programs and their success rates. If you're modifying loans because a member can't pay as agreed, examiners want to see how you modified that loan and you'll need to keep track of it to show how successful that was.
How can credit unions alleviate examiners' concerns about hot button activities such as indirect lending, business lending, or loan participations?
RH: It really goes back to having limits in place in relation to net worth and monitoring performance, which is then reported either monthly or quarterly to the board of directors.
With indirect lending for example, it might be that you're monitoring the loans you get through a dealer. You also should have done a background check on each dealer's financial stability and there should be thresholds and procedures in place to cut things off with anyone who gives you bad loans.
Our credit union doesn't do business loans, but if we did, I would want to make sure that the loan documents included covenants allowing us to review the property, the business, and the borrower's stability annually, with limits on the amount of loans for any one borrower tied to the credit union's net worth.
As for loan participations, it depends on the type of loan, but certainly you want to do due diligence on the third party. For business loans, you will still have to do those annual reviews yourself and not rely on the loan originator to do them for you.
With auto loans, you want to have an agreement in place about what those loans should represent — for example, A or B paper. And again you want to look at policies, collections, and practices and check out a few of the loans you want to purchase or participate in ahead of time.
How important is good documentation, and what do you do to ensure that you have it?
RH: It's very important. Examiners want to see the policies you've communicated to your board. Those policies and procedures should be updated annually or at least reviewed annually. If any changes are made, they need to be given to the board on a timely basis. That allows examiners to rely on the documents you've been sharing with your board of directors, who should be reviewing everything monthly anyway.
Also, good documentation goes a long way toward resolving any issues examiners find. This is especially true if you're responding to or correcting some finding in the examiners' report. They want to be sure that you resolved the problem so that it doesn't happen again.
What other best practices can you recommend for credit unions to manage the exam process and better their relationship with regulators?
RH: Make sure you're viewing credit reports no more than 60 days old and that other information is up to date when you're evaluating the collateral or determining the loan-to-value ratio. For real estate loans, you should have all the legal documents on file.
Segregated roles are another thing examiners look for. A dominant CEO who has his hands on everything can be perceived as someone who has too much control. Examiners don't want to see that much power concentrated in one person's hands because that's a red flag that someone might be covering something up.
Do examiners treat you any differently because they know you used to be one?
RH: If they do, it's not in a good way. Sometimes they just want to show you that they know their stuff too — that they're competent and they're not going to let things slide just because I used to be a regulator. But they also know I'm not going to let them blow something past me without having a discussion first. I've seen it just in the two exams that I've done so far. I will ask them things like ‘What if we don't correct this?' or ‘Are there other ways to resolve the issue?' They have to listen to our perspective and having that dialog helps them understand the situation better.
How can you tell if examiners are doing their job properly?
RH: The exam shouldn't take more than three weeks. If it's taking longer, you want to talk to the examiners or even a supervisor. Examiners should be working continuously on your credit union. They shouldn't come in for three days and then go away for a week before coming back. They should also give you sufficient time to review the report before going over all the findings with you. There should be nothing in that report at the end that has you asking ‘Where did all this stuff come from?'
Are there some common mistakes CEOs make regarding the examination process?
RH: CEOs who don't know any better think that examiners can write up what they want and not be challenged. The time to say something is while the examiners are still on the premises and before anything is written up. A lot of CEOs don't do that because they don't want to make waves or they're afraid there might be a backlash, but they really need to be having daily, if not weekly, discussions about the findings.
And the CEO should be the only person answering the examiners' questions. They shouldn't go behind your back and think the board of directors knows about day-to-day operations. Unfortunately, it has happened.