How to Deal With NCUA's Stronger, Proactive Enforcement
With a sharp increase in CAMEL 3, 4 and 5 credit unions, the NCUA has said it will ask its examiners to redouble their efforts to detect problems early on.
NCUA Chairman Debbie Matz recently said she was "very concerned" about the increase. The agency has ordered examiners to be proactive in trying to work with credit unions to solve problems and wants them to "step up their administrative actions."
Matz said she is especially concerned about losses from bad loans that were made because the credit union failed to do sufficient due diligence.
For some, that could mean a document of resolution or letter of understanding and agreement.
The NCUA is concerned because it is responsible for ensuring the safety and soundness of individual credit unions and the entire credit union system, and because the NCUSIF has been taking many hits lately as the financial crisis and the problems of corporate credit unions cause an increasing number of credit unions to close. By being more proactive, the agency hopes to minimize additional losses and reduce the amount of additional premiums.
But credit unions that are facing the possibility of such an action by the NCUA have options.
According to several compliance experts, the NCUA often takes these actions when the examiner is concerned by a credit union's poor decisions, such as the choice of a problematic vendor, capital issues or an unexplained increase in the loan delinquency rate.
"These sometimes start as a minor item and grow quickly," said Michael Lozoff, chair of the Financial Institutions, Credit Union Law Group of the law firm Adorno & Yoss.
To prepare for an examination, a credit union should rigorously assess its loan portfolio, including obtaining automated valuation model assessments of property values and the credit scores of borrowers, according to a newsletter from the law firm of Styskal, Wiese & Melchione.
The law firm also suggested that the credit union review lending and collections policies. It also advised that the NCUA will likely insist on limits of the concentration of a particular loan type.
At the height of recession in August 2008, the NCUA spelled out its criteria for risk-based examinations in a supervisory letter.
It said that examiners would focus on items such as whether a credit union's growth rate is excessive, how the credit union is funding loan growth, and whether earnings and liquidity levels are consistent with the credit union's plans and strategies.
Also, the agency noted that "there does not have to be an imminent risk of loss to be a safety and soundness concern."
Lozoff described the document of resolution as an "attention getter" that focuses on specific areas and spells out a specific tracking mechanism for monitoring the progress in remedying the situation. The letter of understanding and agreement is a more severe instrument that is often a prelude to more severe action.
But he advises credit unions to not automatically sign a DOR or LUA.
"You have a fiduciary responsibility not to sign something harmful to your credit union, so examine the document carefully and exercise your right to negotiate. The NCUA has encouraged examiners to be flexible," he said.
Lozoff also advised credit unions to bring in an outside counsel to review documents. A credit union should agree to everything it's comfortable with, but should not agree to anything it knows from the outset it cannot comply with.
Credit unions that breach an LUA could face penalties such as having the NCUA issue a cease and desist order, being placed into conservatorship or being the subject of an assisted merger.
"There is more vigilance than ever before by the NCUA and state regulators and you will see increased use of supervisory tools. Regulators see these tools [DOR and LUA] as useful and not obnoxiously intrusive," Lozoff said. "But with proper preparation and if you come back with the right counterproposal, there's a reasonably good chance that the regulator may modify the agreement."