While industry representatives said new legislation on financial institution exams is sorely needed, an NCUA executive more than begged to differ.
Feb. 10, 2012 - NCUA Says Dual Exams Over, For Now
Revamping the examination process and allowing appeals to an administrative law judge could increase costs to the NCUSIF and decrease examiner flexibility, NCUA Executive Director David Marquis told a House subcommittee.
At the same Feb. 1 hearing, representatives of the credit union industry said the changes were needed to reduce mixed signals from the NCUA and ensure that there was an independent entity to act as a check on the regulator.
The arguments were conveyed at a hearing House Financial Services Committee’s subcommittee on financial institutions and consumer credit.
Under the legislation, the NCUA and other regulators would have to do a more thorough job of explaining the reasons behind their examination findings and give financial institutions more latitude on certain transactions. The bill requires federal financial regulators to produce examination reports within 60 days of an examination’s completion. In addition, if the financial institution wants it, the agency must include an appendix to the report listing all the facts that were used as a basis for the conclusions.
Marquis predicted that the measure would create more regulatory layers and “increase costs without any assurance of greater effectiveness. Again, this change would cause examiners to fully document each and every finding, and examination costs would increase.”
In addition, Marquis said the measure could be “disruptive to our existing internal consultation process and possibly stimulate greater appeals of examination filings, both increasing the risk to the NCUSIF and costs to the industry.”
He said the expanded appeal would cause the agency’s examiners to “document each and every finding with specific references to NCUA rules and regulations.”
Rep. Don Manzullo (R-Ill.) criticized that attitude as “arrogant” and said credit unions should know exactly what rules and laws they are violating.
Marquis explained that that isn’t always possible because “all operational 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 said the bill is needed because examinations are often “based on policy guidance and examiners’ views of best practices rather than regulation and the law.”
Watts, who testified on behalf of CUNA, added that credit unions “have the right to manage risk without being directed by examiners to eliminate it.”
JetStream FCU President/CEO Jeanne Kucey said the current examination 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 are evaluated shouldn’t change from examination to examination. She testified on behalf of NAFCU.
Some lawmakers on the panel said the bill is needed because financial institution executives fear retaliation by their regulator if they file an appeal within the agency.
The bill would allow a financial institution that is unhappy with the results of its examination the right to appeal it to an administrative law judge who would submit his or her findings to the ombudsman of the Federal Financial Institutions Examination Council, which is made up of representatives of federal and state regulatory entities. NCUA Chairman Debbie Matz is the council’s current chairman.
Caputo asked the witnesses if they had ever heard of instances of retaliation.
Watts said when CUNA has collected information from credit unions about the NCUA’s examination practices, some people have been reluctant to respond, even anonymously, because they fear retaliation.
Kucey responded that “if you are a CEO and have a contentious relationship with your regulator, just the fear of retaliation is enough to make you concerned.”
Marquis said his agency has a strong appeals process and there are strict rules against retaliating against credit union executives who file complaints and appeals. In addition, he said the agency plans to issue a revamped manual for its examiners later this year.
The bill would also mandate that the NCUA and other agencies cannot put a commercial loan in nonaccrual status just because the collateral has decreased in value. It also requires the regulator to remove a modified or restructured commercial loan from nonaccrual status if the borrower demonstrates that it can regularly repay the loan.
Marquis said that this provision may “create bright lines that may permit financial institutions to ignore other available information about the borrower that should be properly factored into evaluations of a commercial loan’s collectability, there is a risk that some institutions may game the system by structuring loans in a way to make it more difficult to properly provision for losses.”
During the hearing, Rep. Mel Watt (D-N.C.) asked Marquis why the agency was conducting a “witch hunt” in North Carolina because State Employees’ Credit Union had released its CAMEL rating, with the permission of its state regulator.
“You are way beyond the authority you have at the federal level to do it,” Watt told Marquis.
In response, Marquis said that federal law and regulations forbid the release of CAMEL ratings, even those issued by state regulators that are used by the NCUA.
Watt said although he opposes the measure, he might try to amend it to prevent the NCUA from taking such actions in the future.
North Carolina’s 52 state-chartered credit unions (all of which are federally insured) will have to pay for an additional examination because the NCUA will no longer perform joint exams with the state regulator.
In October, after receiving permission from its state regulator, State Employees’ CU announced that it had received a CAMEL score.