Approaching the Two-year Mark, it's Time to Evaluate NCUA's Risk-based Exam Process

WASHINGTON-NCUA’s risk-focused examination process has been in effect nearly two years now, and CUNA has decided it is time for the industry to step back and take a look at what it has accomplished. “When NCUA first initiated the risk-focused examination, they indicated that it was going to be a management tool for credit unions as well as a new way of looking at how credit unions operate and we want to assess that at this point in time,” CUNA Associate General Counsel Mary Dunn said. The agency also said it could “marshal resources away from areas that weren’t problems toward areas that cause concern,” she added. To find out what both credit unions and NCUA actually think of the process, CUNA has scheduled a conference call Dec. 10 to review the risk-focused examination process and look into changes planned for the upcoming year as well as key examination issues. NCUA Director of Examination and Insurance David Marquis, National Association of State Credit Union Supervisors Chairman Roger Little, and CUNA Chief Economist Bill Hampel will be on the call moderated by Dunn. “It is particularly pertinent for us to do it now because we’ve had underway about two years now the risk-focused [examination] from NCUA and it’s time to really take stock of that and see how it’s affecting credit union operations,” she said. “Right now, I think the feedback we’ve been getting is really positive,” NAFCU Director of Regulatory Affairs Gwen Baker commented. “The credit unions I’ve spoken to have said they’ve been really pleased with the process. They’ve commented on the fact that it is much shorter and in terms of what the examiners are asking for they used to have to pull out all of their loan files and now they’re really targeting on specific areas.” NAFCU Director of Research and Analysis Tun Wai chimed in, “[Examiners] are more into processes. They’re more into policies. They’re more into how the institution actually goes about making decisions.” “Even the GAO report, in its review of the risk-based approach to examinations, acknowledges that NCUA has been able to do that to some extent because the low-risk credit unions are now having two exams in a three-year period,” Dunn said. She said the recent U.S. General Accounting Office study of credit unions has been very useful and that report generally gave NCUA high marks. Dunn pointed out that GAO did recommend that NCUA focus more on internal risk factors and that credit unions over $500 million in assets should be required to have internal controls and outside auditor attestation, which is consistent with what other regulators require under the Gramm-Leach-Bliley Act. “The examination is an incredibly important event to the credit union,” CUNA Chief Economist Bill Hampel explained. “It’s the one time of the year, or (every) 18 months now, when this external authority comes in and looks at the credit union-and for management it can be quite stressful-because this external authority that has a lot of power and influence, rightfully so because of the federal deposit insurance and all that stuff, can come in, look at what’s going on in the credit union, and in essence meet with the board and say we think your management’s doing well or not doing well on all these things.” During CUNA’s audioconference, Hampel will be exploring risk factors with credit unions, which may prove to be a short conversation. “I know we have to have risk management,” he acknowledged. “I know we have to have examinations and supervision and we’ve got this federal deposit insurance system, but credit unions by their very nature are so incredibly risk averse that most of the time when I’m talking to credit unions about risk, I’m saying `please take more as opposed to watch out for it.’ ” As credit unions become more complicated, such as becoming more involved in mortgage lending and business services, more opportunities are created for things to go bad. In the current environment, credit unions are going to have to begin thinking about how and when to unload all the low-interest mortgage loans they have made over the last couple years. “ Having the management techniques to deal with those risks is really important,” Hampel stressed. “However, because of the cooperative structure of credit unions, credit unions tend not to really lurch out there and expose themselves to lots of new risks.” The risk-based approach promises all sorts of improvements by focusing on what matters. While NCUA performs a follow up survey on the examinations, Hampel said, it is only multiple choice. “The feedback that we’ll have in this audioconference will allow for some essay questions,” he said, adding that it would benefit NCUA and credit unions. CUNA’s Examination and Supervision Subcommittee will be reporting back to the agency on the results. According to Baker, if there have been any complaints about examinations lately, they are concerning examiners’ experience level, which is nothing new. But as more credit unions are getting involved in business lending, examiners need to be up to speed. However, Hampel pointed out that it would not be efficient to have all examiners know all about business loans since some might never see one. He also said that it’s new for many credit unions and only about 15% are participating, which is why NCUA is moving toward having a core of specialists. The recent GAO report suggested that some NCUA examiners could use additional training. NCUA Chairman Dennis Dollar has put together a working group to determine which of the GAO’s recommendations should be followed up on. Of the GAO findings, NAFCU Communications Director John Zimmerman said, “The safety and soundness record of NCUA and credit unions is fairly unparalleled for the other financial institutions and their regulators through decades of time.” Even if they are inexperienced now, NCUA has demonstrated that the agency is good at catching them up. “The test of any examination process is how well do you perform,” NAFCU’s Wai said. “Remember this is a change in the agency’s process and they have made a tremendous effort in terms of trying to train them and get them up to speed.” Dunn pointed to NCUA’s track record also. Over the last 10 years, she quoted from the GAO report, the number of CAMEL 4/5 credit unions has dropped 63% to just 211. Hampel added that nearly all insurance losses come from that small number of troubled credit unions; now, with the risk-focused examination process, NCUA can spend more time whipping those problem credit unions into shape. [email protected]