The examination process at the NCUA went on trial last week. Notbefore a court but before Congress, though it could end up incourt, too, if legislation in Congress makes it through to law. TheFinancial Institution Examination Fairness and Reform Act (H.R.3461) would create an ombudsman within the Federal FinancialInstitutions Examination Council to help ensure the consistencyacross the regulators and financial institutions.

The legislation is none too late given that the regulators–notjust the NCUA–were a key piece that malfunctioned leading up to thefinancial crisis. With financial institutions receiving moreoversight from their regulators as well as the Consumer FinancialProtection Bureau, the federal regulators should be called upon tobear their own compliance burdens.

The credit union representatives who testified at a Househearing last week included words like “draconian supervision” and“rigid parameters.” They stated, “Credit unions have the right tomanage risk without being directed by examiners to eliminateit.”

This legislation would require the NCUA and other FFIEC members to document support for their findings duringcredit unions' examination and establish an appeals process beforean independent administration law judge. It has always seemed oddthat the NCUA, aside from Congress' oversight of the agency, wasthe be-all, end-all for credit union supervision.

The NCUA does have an appeals process, as the agency pointed outin its testimony, but it's still within the agency. To claim it'sunbiased would be a farce. To say an examiner won't retaliate ifthey're made to look bad by a credit union availing itself of thisprocess would be ludicrous. The NCUA tends to lean in favor ofprotecting the NCUSIF, which all federally insured credit unionswant to remain strong, but it also can mean less flexibility in anactivity that might pose a risk to the fund. Credit unions are inthe business of mitigating risk, yet in some instances it seems theagency wants to eliminate it.

If they weren't before, credit unions are well aware now afterthe corporate and financial crises that they are all tied intogether by the NCUSIF. They understand it's their checks to writein the end when there's a massive lapse.

That's not to say that credit unions don't require strictoversight; they certainly do. However, to quote Lord Acton,“Absolute power corrupts absolutely.” A balance needs to be broughtto the NCUA's check. Congressman Mel Watt told Dave Marquis, whowas testifying on behalf of the NCUA, that the agency was way outof bounds by slapping federally insured, state chartered creditunions in North Carolina with double examination just because SECUticked the agency off.

The irony is that the NCUA wants to look into CUSOs' financialbooks and issued its regulation on interest rate risk and yetdoesn't want its examination process to be subject to scrutiny.Certainly, as the agency stated in its testimony, there will besome frivolous challenges brought. The proposed FFIEC ombudsman cansort through that out before it gets any further. But there aremany legitimate claims that don't get aired because the creditunion board and management fear retaliation from the agency or itsexaminer.

The agency noted in its testimony that examiners often receivecriticism for being too tough. I've certainly heard that fromcredit union executives and board members. But also credit unionexecutives often tell me they're concerned that the agency isplacing emphasis on the wrong ratios or in a line of business thatdoesn't really deserve it. I've been told more than once thatthey're too easy.

Retaliation doesn't have to be overt. Sometimes it can bedecorated up in nuance and judgment calls that the NCUA decides itisn't legitimate, or those up the examiner's command chain are tooclose to the situation to see the problem.

The NCUA's testimony said direct communication with the examineris best. It's the same thing I tell people when they call up with aproblem about a story one of our reporters have written. Going tothe person directly involved and not over their heads is respectfuland often the quickest way to get an issue addressed.

But it's not always enough and that's when an appeals processmust be in place.

The NCUA also raised the issue of cost. Yes, it could cost morebut the agency had no trouble increasing its budget by 12% twoyears in a row and another 5% for 2012. I don't think this is alegitimate defense against the bill. Now that the financial crisisis subsiding, the agency should have some personnel who could bededicated to handling the documentation and appeals. CUNA and NAFCUboth pushed to ensure the NCUA's compliance with this legislationshould it come to fruition would be revenue neutral.

The NCUA and the two did agree on one thing: Credit unions needtreatment in accordance with their unique business and regulatorystructure. Given the Obama administration's move to consolidatesome agencies, this is a wise move to preserve the NCUA and creditunions' independence from the banking regulators.