Congress, state legislatures, the media, consumer groups and the general public continue to shine a spotlight on the strength of financial institution management. This same spotlight is shining on the strength of state and federal regulatory examination and supervision procedures. In the credit union system, growing compliance requirements and the increasing complexity of credit union operations have made the work of credit union executives and their examiners that much more challenging.
Lately, the credit union system has been publicly discussing the state of examinations and the supervisory processes of regulators, both state and federal. The downturn in housing and the job market has had a major impact on all financial institutions, including credit unions. With the assessments and premiums associated with the corporate situation, credit unions are facing a unique set of difficult economic circumstances.
State regulators, as well as the NCUA, share a commitment with credit unions to ensure safe and sound operations. At the same time, regulators want credit unions to continue providing the essential financial services that support the overall economy and help their members thrive. An integral part of ensuring a credit union’s safety and soundness is the regulatory examination, intended as a tool for both the credit union and the regulator.
As the professional association of state credit union regulators, NASCUS serves as a nationwide information sharing network for state agencies. Recently, we have been talking with state regulators about what they are looking for as they supervise their credit unions and what, if anything, has changed in their examination process over the last several years.
While examination frequency policies vary across the states and depend on the condition of the credit union, there has been a nationwide emphasis on strengthening offsite monitoring systems. State regulators have found ways to enhance their off-site monitoring systems to supplement their examination program and to address problem areas more quickly.
Further, state regulators and examiners are looking more closely at a number of issues, including new or growing service and product areas such as member business lending, corporate governance and board education, concentration and interest rate risk, due diligence and asset quality. Vendor contracts, third-party relationships and loan participations are also areas of interest for examiners. Lastly, with the creation of the Bureau of Consumer Financial Protection, credit unions will likely see examiners increase their scrutiny of consumer compliance areas in the future.
The "M" in CAMEL (management) has always been and continues to be a prominent area of focus for state regulators, as well as for the federal regulator. A recent report issued by the NCUA Inspector General revealed that credit union management actions were the most significant factor in the credit union failures reviewed in the report. The ability of a credit union’s management and board of directors to make sound business decisions is essential and will be reflected in the credit union’s examination.
State regulators are emphasizing to credit unions that management actions are directly related to the strategic direction of the board of directors. The credit union’s board of directors sets the tone. Regulators expect a strong board to be fully engaged in the examination as well as the continuing supervision process. For example, the board should ensure that past examiner findings are addressed by the time the next examination occurs.
Further, state regulators are encouraging ongoing training and education for directors. For several years now, NASCUS has partnered with state regulatory agencies to provide director training from the regulatory perspective. Directors must understand regulators’ expectations and their compliance and regulatory obligations. They must also set the policy direction, and encourage management to follow up with actions, document progress and maintain an open dialogue with the board. Regulators will look at all of these actions in the supervision process.
State agencies are focused on training for their own examiners, as well. State agencies set polices for minimum annual training requirements for examiners and often hold in-house training days on specialized topics and emerging issues. They also participate in the NCUA, NASCUS and other federal agency training (for instance, FDIC or FFIEC training for combined bank-credit union examiners). In some state agencies, examiner training is emphasized to the point where completed training is factored into individual performance evaluations and promotions.
State regulators encourage credit unions to maintain an open and productive dialogue with their examiners. If there is disagreement, processes and policies exist to dispute a finding and resolve the situation in the best interests of both parties. State regulators recommend credit unions and their boards continue to engage in the examination process to protect the safety and soundness of their individual institution, as well as the greater credit union system.
In closing, I assure you that state regulators are committed to continuing a fair, equitable and meaningful examination process. State regulators benefit from the open dialogue with the credit union system that makes the examination process better and will work to keep the credit union system safe and strong.
Mary Martha Fortney is president/CEO of NASCUS. Contact: 703-528-8351 or firstname.lastname@example.org