'Bill of Rights' Proposed For CUs During Examinations
HOLLYWOOD, Calif.-The relationship between credit unions and NCUA examiners has become more strained than usual in the wake of a recession that has led to numerous CU failures and forced mergers.
Many credit unions have complained about a lack of respect being displayed by examiners. And what makes matters worse, CUs feel they have no outlet or recourse for their complaints.
Cliff Rosenthal, president and CEO of the National Federation of Community Development Credit Unions, said the organization has fought the examination process for years.
"Especially the disrespectful attitude many examiners bring," he declared. "It disturbs us that credit unions are so intimidated by the process and fear retaliation if they complain. CUNA shares our view and is working on it with a task force."
Stacy Augustine, SVP of policy and public advocacy for the Northwest CU Association, also is general counsel for the trade group that represents Oregon and Washington credit unions. Augustine is a member of the CUNA Supervisory Issues Working Group, which she said has drafted a white paper known as the "CU Bill of Rights."
How To Work With Regulators
"We wanted to help develop guidelines for working with regulators," she told attendees of the Federation's 37th Annual Conference on serving the underserved. "We wanted to let credit unions know what their rights are during examinations."
According to Augustine, the 24 examination rights can be grouped into five categories:
• Right to "reasonable" exam personnel.
• Right to fair presentation of examination findings.
• Right to objective and transparent findings.
• Right to individual and realistic exam criteria.
• Right to an appeals process.
Examiners are "very risk-averse people," she reminded CUs. "They don't like making those Friday afternoon calls to a state's regulator and even the governor saying they are going to take over a credit union or bank."
Biased By Bad Behavior
Examiners have seen plenty of "bad behavior" on the part of financial institutions of all types, she noted, meaning sometimes they might carry preconceived notions into the next exam. "And the poor economy and slow recovery are not helping," she said.
A recent CUNA survey found medium-to-large credit unions are the most dissatisfied with their examinations. Among the top complaints: CU execs said examiners were reluctant to consider alternative approaches to problem solving, they did not provide guidance on solving problems, and in some cases examiners relied on old or inaccurate data.
Augustine said the first category of rights, the right to "reasonable" examination personnel, includes an assertion that examiners should understand the unique characteristics of CUs.
"A good exam is based on mutual respect, and an examiner not knowing important things about credit unions shows a lack of respect," she said. "One of the most highlighted complaints expressed in response to the survey is solutions that worked at other credit unions do not always work elsewhere. Examiners have to be willing to listen and show respect."
The right to a fair presentation of examination findings includes an opportunity to meet and discuss the findings, Augustine continued. She said this includes the opportunity to address incorrect findings.
An oft-repeated complaint was examiners holding post-examination meetings with a CU's board of directors, but excluding the CEO. Augustine said such a step should only be taken if the regulator has serious concerns about embezzlement. Otherwise, the board is hampered in any assessment of the findings without the operational element represented.
Regardless of who attends the meeting, consistency is needed in conclusions and directions, she said.
The Need For More Consistency
"The issues a credit union is told to concentrate on should not change every year," Augustine said. "In some cases credit unions were told to address three things before the next examination, and when that came, they were told to forget about the first two and were given new directions."
Under the category of the right to objective and transparent findings, Augustine said examiners have to realize credit unions can only manage risk, not eliminate risk. Moreover, published orders should be strictly factual, not contain speculation and not simply be lists of best practices at other credit unions.
The right to individual and realistic exam criteria, as the name suggests, means CUs should be judged on their own strengths and weaknesses, not on industry trends and/or the overall condition of the economy. Also included in this category is the right to be evaluated on realistic progress since the last examination, proportionate to risk, Augustine said.
The right to an appeals process, she said, means CUs should feel they can initiate an appeal without fear of retaliation. Only 3% of credit unions have ever appealed, which Augustine asserted seems to demonstrate, "Credit unions don't want to rock the boat or make waves because they are afraid it will be held against them in the future."