The NCUA has just made two moves that seem to indicate the regulator is moving towards a more nuanced balance of risk versus resources in its oversight of the nation’s federally insured credit unions.
The first was the NCUA board’s July 21 announcement that it no longer requires all credit unions to undergo an exam every calendar year. The second is considering a staff recommendation that it add an “S” for interest rate sensitivity to the CAMEL rating system. (The agency has scheduled a webinar on that issue on Aug. 18, and it will be the topic of our blog in this space next week.)
The longer, more flexible exam cycle — which follows a similar FDIC move — would allow regulators to focus more on credit unions that pose the most risk to the National Credit Union Share Insurance Fund.
Read more about how the federal regulator grows its own budget instead of using credit union's cooperative insurance fund to rehabilitate or resolve credit unions in difficulty in Chip Filson's "NCUA Continues To Milk The Share Insurance Cash Cow."
Here’s what the announcement says: “Regional directors will have discretion in scheduling exams for federally insured, state-chartered credit unions with assets over $250 million, based on several factors including the institution’s risk profile and the amount of time since the last exam.”
That may be somewhat ambiguous, but credit union attorney John DeLoach says his reading of it is that regional directors now have discretion to vary the exam cycle from eight months to 23 months for all federally insured credit unions.
“This move will not only ease the examination burden on more conservative, less ‘risky’ credit unions, but allow the NCUA to devote more exam resources and focus on credit unions that have more risk but do not require a move into the NCUA’s special action examination program,” says DeLoach, of WilliamsGautier Law in Tallahassee, FL.
“I can get behind any plan that lessens the burdens on the majority of credit unions and helps prevent credit unions that do have problems from sliding into disaster,” he says.
The July 21 move by the NCUA board was a follow-up to the agency’s May rollout of its Exam Flexibility Initiative, which included a promise from board chair Rick Metsger that he wanted to see changes in the examination process “sooner than later.”
Reaction varied. For instance: “Yes, it would be better to have a longer exam period but it probably won't make that big of an impact in the long run for us,” said Joann Bisson, president and CEO of Trademark Federal Credit Union ($84.7M, Augusta, ME. ) “Overall, though, it would be nice to have more actual lift on regulatory burden that would help ease the cost and time dedicated to compliance."
Meanwhile, Tim Smith, CFO at Workers’ Credit Union ($1.4B, Fitchburg, MA), says the move is “probably a little overdue, but I’m not going to complain. It will certainly help and hopefully reduce the overall time spent on the examination process.”
A Matter Of Size
However, the largest credit unions probably can’t expect to get such relief. “We understand that credit unions over $10 billion in assets will still probably undergo annual NCUA examinations,” says Parker Cann, general counsel at BECU ($15.1B, Tukwila, WA).
“We’re still waiting to see the exact parameters of the program and how it plays out in the hands of the NCUA’s regional directors.”
The head man at the nation’s second-largest federally chartered credit union says he wouldn’t expect such a pass from the regulators. “PenFed is larger than the entire Share Insurance Fund. So we would neither expect nor seek an exam cycle longer than a year for an institution of our size,” says James Schenck, president and CEO of Pentagon Federal Credit Union ($19.9B, Alexandria, VA).
That said, Schenck says he welcomes the news. “The NCUA’s move to a more flexible examination cycle while maintaining focus on safety and soundness risks in the credit union system is a welcome change for our nation’s small and mid-sized credit unions,” he says.
“Many of these credit unions are healthy and well-run yet struggling to keep up with increasing regulatory requirements from multiple agencies,” Schenck says. “PenFed applauds the NCUA for providing tangible examination relief to the credit unions that need it most.”
Cann at BECU adds, “Of course, the NCUA’s Exam Flexibility Initiative is about more than exam cycles and there could be other benefits to the largest credit unions in terms of improved exam efficiency.”
That includes paving the way for more efficient examinations themselves, along with more-specialized, better-trained examiners, and expanding the use of remote examinations in some cases, says CUNA’s chief advocacy officer, Ryan Donovan.
That would be music to the ears of Terry Gresswell, a consultant with Your Credit Union Partner. He notes that his firm’s small and mid-size clients spend many hours preparing for exams, and that the costs go beyond the credit unions'. “We recently heard of a small credit union of under $35 million hosting 11 examiners. That to me is a waste of time and money for everyone,” he says.
“Credit unions were created to help underserved segments of the population. This change will allow credit unions to serve our members better knowing that if they’re performing well, the examiners won’t be constantly at their door,” Gresswell says.
Credit unions were created to help underserved segments of the population. This change will allow credit unions to serve our members better knowing that if they're performing well, the examiners won't be constantly at their door.
But Would It Be Prudent?
“Personally, I would be troubled about an exam cycle that goes out two years. I also simply don’t think that the regulators should rely on off-site monitoring for a two-year period,” says John Bley, a former director of the Washington State Department of Financial Institutions who now practices with the Seattle-based law firm of Foster Pepper.
That said, Bley does see the wisdom of moving away from an arbitrary 12-month exam cycle for credit unions that have a proven track record of responsible management. “It’s prudent public policy to promote the business plan of a well-run financial institution,” he says, “and sometimes the best way to promote that is to get out of the way.”
DeLoach also sees this as part of a wider approach to managing risk at the NCUA. He points to the changes in member business lending rules announced earlier this year as an example. “The new commercial loan regulation replaced many ‘hard’ regulations with risk-based requirements designed to reward those credit unions who are properly managing risk, but keep the pressure on those credit unions failing to manage such risks,” the Florida-based attorney says.
Meanwhile, the new exam cycles could soon be replaced by an 18-month cycle that could come out of a staff report the board expects to receive later this year. “All signs indicate a more permanent move to an extended exam cycle for those well-capitalized, non-troubled credit unions,” says Donovan at CUNA.
As a state charter, Debora Almirall’s credit union — Minnesota Power Employees Credit Union ($92.7M, Duluth, MN) — already is on an 18-month examination cycle but she says she likes the idea of extending that to her federally chartered peers. The NCUA already receives quarterly 5300 reports and should be able to spot when a credit union is showing signs of deterioration, says the Minnesota credit union’s president and CEO.
And maybe the regulator can save some money in the process and pass that on in the form of not raising fees to all the credit unions it insures, including hers, Almirall says. She says she does think an 18-month exam cycle from the NCUA would be a reward for well-performing credit unions.
“So many times there are only penalties for negative behavior,” Almirall says. “Positive reinforcement is a good thing.”
But those longer exam cycles for nearly all federal charters don’t mean it’s nap time at the wheel.
“While this is good news, credit unions must be careful to continue with existing processes so that they don’t become complacent and ill-prepared for exams,” says Cindy Williams, vice president of regulatory compliance at PolicyWorks in Des Moines, IA.