NCUA examiners didn't follow up on many documents of resolution and as a result gave better CAMEL ratings to some credit unions than they deserved, according to a report by the agency's Office of Inspector General.

The report concluded that as a result of inadequate actions by examiners and regional officials, 45% of the 74 credit unions that failed or were part of an assisted merger from 2008 through 2010 were regularly given CAMEL 1 and 2 ratings.

The NCUA's Office of Examination and Insurance "performed limited DOR monitoring and that monitoring in each region varied based on their individual policy," according to the report. 

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As a result, of the 74 failed credit unions, five regularly received CAMEL 1 and 2 ratings despite having had "repeat DOR items that examiners did not properly follow up on through stronger supervisory actions, which we believe helped contribute to the credit unions' failure."

The report also found that 18 of these credit unions had problems so severe that they were closed or merged within a year after being downgraded. Also, 14 of those credit unions had a total of 55 unresolved DORs during the last examination in which they received a CAMEL 1 or 2 rating.

According to the report, as of last Dec. 31, the agency had more than 26,000 unresolved DOR items, encompassing 63% of all federally insured credit unions. And 23% of the unresolved items related to management issues that had been cited as a cause of the failure of many credit unions.

The report's findings weren't all bad.

As of last Dec. 31, the agency's examiners had reduced "unacceptable risk" by resolving over 106,000 DOR items. Of those, 86% were resolved in two years or less. 

The reported noted that the failures of two credit unions, the $98 million Ensign FCU of Henderson, Nev., and the $102 million High Desert FCU of Victorville, Calif., were caused by problems that the NCUA cited in DORs but didn't follow through on.

Ensign FCU failed because its board didn't implement adequate risk management practices and this was a repeated DOR item, according to the report.

The report also noted that examiners "issued repeated DORs related to High Desert Federal Credit Union's construction loan portfolio. Alaska USA FCU eventually purchased and assumed High Desert FCU's assets.

The agency's Office of Examination and Insurance said that some of the inconsistencies in following up on DORs were the result of changes in credit union's financial conditions over several examinations.

To avoid a recurrence of these problems, the inspector general recommended developing a standard DOR monitoring process; requiring a written response from credit unions on how they are resolving problems spelled out in a DOR; and ensuring  the agency's regional staff takes stronger actions when problems aren't corrected.

NCUA Executive Director David Marquis wrote in response that the agency is developing a National Supervision Policy Manual to replace regional standards with national ones and the requirement to get a written response from credit unions on DORs is included in the manual.

He also noted that since the financial crisis, the agency has increased the frequency of examinations, and this allows the agency's examiners to "significantly mitigate risks in credit unions on a continuing basis."

Examiners will receive training in the new manual at next year's annual meeting of examiners. 

But Marquis noted that it isn't feasible to require examiners to establish time limits to resolve and close DOR items. 

The inspector general's report said the office has deferred to the agency's decision on that but urged the NCUA's management to "look for ways to reduce the time to close DORs during any future reviews or changes to the program." 

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