The NCUA's second Listening Session, which attracted approximately 100participants to the Westin Hotel in Alexandria, Va., was intendedto address exam issues and the regulatory burden. The event didaddress exams, but questions also revealed two potential regulatorychanges.

The most exciting news is the scrapping of the proposed 25%participation loan cap, which would limit credit unions toinvesting 25% of their net worth in one participation loanoriginator. Chairman Debbie Matz said the NCUA has heard “loud andclear” that credit unions do not want that limit.

As a result, Matz said the NCUA is planning to make changesbefore issuing the final loan participation rule; however, she didnot say what the final cap would be.

Credit unions financial managers unable to invest in TreasuryInflation-Protected Securities may see a change the next time theNCUA opens up Part 703 for proposed reforms, said Office ofExamination and Insurance Director Larry Fazio.

Currently, credit unions are prohibited by regulation frominvesting in TIPS, which protect against inflation and interestrate risk because the rate isn't tied to a U.S.-based rate, Faziosaid.

Earlier in the session, Fazio opened with remarks about how tocreate a productive examination environment.

“If there's just one thing you walk away with today, it's theimportance of investing in the relationship with your examiner,”Fazio said. “It should be an ongoing process and include regularcommunication during the year…so when things do come up, youalready have that relationship established, and things are easierto work though.”

Fazio said he's received feedback that credit unions would likeexaminers to differentiate between credit union performance andmanagement performance. If a credit union is experiencingdifficulties with a bad local economy or SEG issues, “it doesn'thave to be a negative reflection on management,” he said.

On the other side of the boardroom table, credit union managersshould refrain from using exams as an opportunity to vent about theNCUA.

“It's understandable, the NCUA isn't perfect, but there's not alot an examiner can do about it, and it puts them on the defensiveand makes things difficult,” Fazio said.

Joan Moran, president/CEO of the $68 million Department of LaborFCU in Washington, said her table wanted to know what a creditunion executive should do if an examiner insists upon implementingsomething that isn't required by regulation.

NCUA Executive Director David Marquis responded, saying a lot ofissues the examiner encounters have nothing to do with aregulation.

“If you look at the history of how we've lost credit unions,they didn't violate a reg, they violated basic policies andprocedures, their due diligence was lacking, they had poormanagement or insufficient underwriting standards or too muchconcentration risk,” he said. “That's how we lose credit unionsthat cost the most money to the share insurance fund, and if wetried to write regulations on all of those things, we'd kill youbecause there would be too many, and it would create a one sizefits all regulatory environment.”

Currently, examiners are looking at two systemic threats tocredit unions: interest rate risk and concentration risk. Faziosaid both involve credit unions taking a big position on long-termmortgage loans at low rates and offsetting them with short-term,volatile deposits like money markets and certificates.

Examiners are also concerned about the rate of mergers, whichoften involve small credit unions, Marquis said. The NCUA has beenmerging an average of one credit union per day for the past threeyears, and examiners worry mergers will prevent them from having afull career at the NCUA.

Currently, the NCUA considers a credit union with $10 million inassets or less to be a small credit union; however, Marquis said ifthat number were adjusted for today's numbers, it would be closerto $18 or $20 million.

Ricardo Pineres, vice president of advocacy and legislativeaffairs for the Maryland and D.C. Credit Union Association, askedwhat effect bank charter conversions would have on the corporateassessment rate for remaining credit unions.

Fazio said the NCUA has modeled the scenario and discoveredthat, based on what's left to be paid after this year, it wouldtake “a huge chunk of conversions” to change the basis point-basedassessment rate.

The next listening session will be June 5 in St. Louis.