While industry representatives said new legislation on financialinstitution exams is sorely needed, an NCUA executive more thanbegged to differ.

News Update:
Feb.10, 2012 - NCUA Says Dual Exams Over, For Now

Revamping the examination process and allowing appeals to anadministrative law judge could increase costs to the NCUSIF anddecrease examiner flexibility, NCUA Executive Director David Marquis told a House subcommittee.

At the same Feb. 1 hearing, representatives of the credit unionindustry said the changes were needed to reduce mixed signals fromthe NCUA and ensure that there was an independent entity to act asa check on the regulator.

The arguments were conveyed at a hearing House FinancialServices Committee’s subcommittee on financial institutions andconsumer credit.

Under the legislation, the NCUA and other regulators would haveto do a more thorough job of explaining the reasons behind theirexamination findings and give financial institutions more latitudeon certain transactions. The bill requires federal financialregulators to produce examination reports within 60 days of anexamination’s completion. In addition, if the financial institutionwants it, the agency must include an appendix to the report listingall the facts that were used as a basis for the conclusions.

Marquis predicted that the measure would create more regulatorylayers and “increase costs without any assurance of greatereffectiveness. Again, this change would cause examiners to fullydocument each and every finding, and examination costs wouldincrease.”

In addition, Marquis said the measure could be “disruptive toour existing internal consultation process and possibly stimulategreater appeals of examination filings, both increasing the risk tothe NCUSIF and costs to the industry.”

He said the expanded appeal would cause the agency’s examinersto “document each and every finding with specific references toNCUA rules and regulations.”

Rep. Don Manzullo (R-Ill.) criticized that attitude as “arrogant”and said credit unions should know exactly what rules and laws theyare violating.

Marquis explained that that isn’t always possible because “alloperational risks aren’t documented in regulations.”

The measure, which has 80 co-sponsors in the 434-member House,is sponsored by subcommittee Chairman Shelley Moore Caputo (R-W.Va.) and the panel’s top Democrat, Rep. Carolyn Maloney (D-N.Y.).No companion measure has been introduced in the Senate.

West Virginia Credit Union League President/CEO Ken Watts saidthe bill is needed because examinations are often “based on policyguidance and examiners’ views of best practices rather thanregulation and the law.”

Watts, who testified on behalf of CUNA, added that credit unions“have the right to manage risk without being directed by examinersto eliminate it.”

JetStream FCU President/CEO Jeanne Kucey said the currentexamination process “by its very nature, can be inconsistent.”

Kucey, whose Miami Lakes, Fla.-based credit union has assets of$126 million, added that the standards by which credit unions areevaluated shouldn’t change from examination to examination. Shetestified on behalf of NAFCU.

Some lawmakers on the panel said the bill is needed becausefinancial institution executives fear retaliation by theirregulator if they file an appeal within the agency.

The bill would allow a financial institution that is unhappywith the results of its examination the right to appeal it toan administrative law judge who would submit his or her findings tothe ombudsman of the Federal Financial Institutions ExaminationCouncil, which is made up of representatives of federal and stateregulatory entities. NCUA Chairman Debbie Matz is the council’scurrent chairman.

Caputo asked the witnesses if they had ever heard of instancesof retaliation.

Watts said when CUNA has collected information from credit unions about theNCUA’s examination practices, some people have been reluctant torespond, even anonymously, because they fear retaliation.

Kucey responded that “if you are a CEO and have a contentiousrelationship with your regulator, just the fear of retaliation isenough to make you concerned.”

Marquis said his agency has a strong appeals process and thereare strict rules against retaliating against credit unionexecutives who file complaints and appeals. In addition, he saidthe agency plans to issue a revamped manual for its examiners laterthis year.

The bill would also mandate that the NCUA and other agenciescannot put a commercial loan in nonaccrual status just because thecollateral has decreased in value. It also requires the regulatorto remove a modified or restructured commercial loan fromnonaccrual status if the borrower demonstrates that it canregularly repay the loan.

Marquis said that this provision may “create bright lines thatmay permit financial institutions to ignore other availableinformation about the borrower that should be properly factoredinto evaluations of a commercial loan’s collectability, there is arisk that some institutions may game the system by structuringloans in a way to make it more difficult to properly provision forlosses.”

During the hearing, Rep. Mel Watt (D-N.C.) asked Marquis why theagency was conducting a “witch hunt” in North Carolina becauseState Employees’ Credit Union had released its CAMEL rating, withthe permission of its state regulator.

“You are way beyond the authority you have at the federal levelto do it,” Watt told Marquis.

In response, Marquis said that federal law and regulationsforbid the release of CAMEL ratings, even those issued by stateregulators that are used by the NCUA.

Watt said although he opposes the measure, he might try to amendit to prevent the NCUA from taking such actions in the future.

North Carolina’s 52 state-chartered credit unions (all of whichare federally insured) will have to pay for an additionalexamination because the NCUA will no longer perform joint examswith the state regulator.

In October, after receiving permission from its state regulator,State Employees’ CU announced that it had received a CAMELscore.