The Examiner as the Examined: Editor's Column
The examination process at the NCUA went on trial last week. Not before a court but before Congress, though it could end up in court, too, if legislation in Congress makes it through to law. The Financial Institution Examination Fairness and Reform Act (H.R. 3461) would create an ombudsman within the Federal Financial Institutions Examination Council to help ensure the consistency across the regulators and financial institutions.
The legislation is none too late given that the regulators–not just the NCUA–were a key piece that malfunctioned leading up to the financial crisis. With financial institutions receiving more oversight from their regulators as well as the Consumer Financial Protection Bureau, the federal regulators should be called upon to bear their own compliance burdens.
The credit union representatives who testified at a House hearing last week included words like “draconian supervision” and “rigid parameters.” They stated, “Credit unions have the right to manage risk without being directed by examiners to eliminate it.”
This legislation would require the NCUA and other FFIEC members to document support for their findings during credit unions' examination and establish an appeals process before an independent administration law judge. It has always seemed odd that the NCUA, aside from Congress’ oversight of the agency, was the be-all, end-all for credit union supervision.
The NCUA does have an appeals process, as the agency pointed out in its testimony, but it’s still within the agency. To claim it’s unbiased would be a farce. To say an examiner won’t retaliate if they’re made to look bad by a credit union availing itself of this process would be ludicrous. The NCUA tends to lean in favor of protecting the NCUSIF, which all federally insured credit unions want to remain strong, but it also can mean less flexibility in an activity that might pose a risk to the fund. Credit unions are in the business of mitigating risk, yet in some instances it seems the agency wants to eliminate it.
If they weren’t before, credit unions are well aware now after the corporate and financial crises that they are all tied in together by the NCUSIF. They understand it’s their checks to write in the end when there’s a massive lapse.
That’s not to say that credit unions don’t require strict oversight; they certainly do. However, to quote Lord Acton, “Absolute power corrupts absolutely.” A balance needs to be brought to the NCUA’s check. Congressman Mel Watt told Dave Marquis, who was testifying on behalf of the NCUA, that the agency was way out of bounds by slapping federally insured, state chartered credit unions in North Carolina with double examination just because SECU ticked the agency off.
The irony is that the NCUA wants to look into CUSOs’ financial books and issued its regulation on interest rate risk and yet doesn’t want its examination process to be subject to scrutiny. Certainly, as the agency stated in its testimony, there will be some frivolous challenges brought. The proposed FFIEC ombudsman can sort through that out before it gets any further. But there are many legitimate claims that don’t get aired because the credit union board and management fear retaliation from the agency or its examiner.
The agency noted in its testimony that examiners often receive criticism for being too tough. I’ve certainly heard that from credit union executives and board members. But also credit union executives often tell me they’re concerned that the agency is placing emphasis on the wrong ratios or in a line of business that doesn’t really deserve it. I’ve been told more than once that they’re too easy.
Retaliation doesn’t have to be overt. Sometimes it can be decorated up in nuance and judgment calls that the NCUA decides it isn’t legitimate, or those up the examiner’s command chain are too close to the situation to see the problem.
The NCUA’s testimony said direct communication with the examiner is best. It’s the same thing I tell people when they call up with a problem about a story one of our reporters have written. Going to the person directly involved and not over their heads is respectful and often the quickest way to get an issue addressed.
But it’s not always enough and that’s when an appeals process must be in place.
The NCUA also raised the issue of cost. Yes, it could cost more but the agency had no trouble increasing its budget by 12% two years in a row and another 5% for 2012. I don’t think this is a legitimate defense against the bill. Now that the financial crisis is subsiding, the agency should have some personnel who could be dedicated to handling the documentation and appeals. CUNA and NAFCU both pushed to ensure the NCUA’s compliance with this legislation should it come to fruition would be revenue neutral.
The NCUA and the two did agree on one thing: Credit unions need treatment in accordance with their unique business and regulatory structure. Given the Obama administration’s move to consolidate some agencies, this is a wise move to preserve the NCUA and credit unions’ independence from the banking regulators.