CEOs Share Ways To Prepare For The Next Exam

Register now

ANAHEIM, Calif.-Preparing for an exam from NCUA or a state regulator?

You should be, even if one isn't in the near future, according to two credit unions at opposite ends of the asset size spectrum who say steps they have taken have significantly improved their regulatory examination experiences.

Indeed, Shruti Miyashiro, CEO of the $948-million Orange County's Credit Union in Santa Ana, Calif., said that after her CU's most recent examination, both NCUA and the Department of Financial Institutions remarked that they had not "seen or written an exam this well in a long time."

The outcome was no accident. During a session at the California and Nevada Credit Union Leagues' annual meeting here, Miyashiro and Eric Bruen, CEO of the $21-million Desert Valley FCU, led a session titled, "Best Practices in Preparing for a Regulatory Exam." Prior to the session, they interviewed 20 different examiners for their input.

Both Bruen and Miyashiro said the process goes much more smoothly when the credit union looks at the exam process from the regulators' point of view. "It's about sound practices. Do we offer a sound business model to someone who is insuring us?" said Bruen. "This is not a personal inquisition, but rather a careful examination of risks."

Miyashiro noted one outcome from the corporate CU crisis has been examiners who don't want anything similar happening again on their watch. "There are a lot of examiners now who do not want to be the examiner in charge of an organization in trouble," she noted. "Many are taking more defensive positions. Just as we're concerned about our reputations, they are concerned about their reputations."

Miyashiro added that to date in 2010, approximately 44% of credit unions have posted net losses.

According to Bruen and Miyashiro, the following steps are the keys to success when going through an exam:

1) Defined chain of command. Credit unions need to know who in the organization is helping to run the exam. Bruen said the keys include having a list of exam items, calling the examiner, defining responsible parties at your CU, and defining areas of conversation.

2) Strategy and leadership matter most. There is no rule of thumb that says you can't call them and ask them point blank about what they are expecting," said Bruen. "Know what the expectations are. You want the right people talking about the right subjects. Make sure your security officer, for instance, knows he or she is responsible for BSA. Make sure that examiner has a list of who is responsible for what. Make sure your people know what they are not to talk about, that the examiner needs to talk to so-and-so. The last thing you want to do is give the examiner to have doubts."

Miyashiro said a credit union the size of Orange County's frequently has a handful of examiners on site at one time. Prior to its last exam it was careful to define the scope of the exam and who would address which points. "One thing that helped was having various huddles with people about what they were hearing so we knew what was happening. A lot of examiners will say they don't often hear from the CEO, because the staff was competent. But they are frustrated not to have heard from the CEO. What the examiner is looking for is proactive leadership. They need to know the conversations they are having are honest conversations. There is nothing worse than being caught off guard and making up an answer. It's much better to say 'That is a good question, let me look to my notes and get back to you.'"

3) Transparency and Documentation. "Successful exams do not occur at the time of the exam, but rather in the transparency before the exam," Miyashiro said.

4) Resources, Tools and Access. Despite the small size of his CU, Bruen said the board packet averages 80 to 100 pages per month. " I know you're saying, 'That's ridiculous.' But it's about transparency."

With auditors, it's critical to know the tools he or she will need and to provide them. Desert Valley even has an introductory package waiting for the examiner upon arrival. "Access is important," he stressed, noting it's unacceptable to have systems that can't be accessed because the IT person is absent. "For smaller CUs, there's nothing worse than getting frustrated and feeling that you are losing time. Keep those red flags off the table. Get access passes, log-ins to the examiner. Really consider digital records. Give them an encrypted flash drive. It's $10, people. No easier way to let them be happier than to give them the records they need."

5) Examination Awareness. "Know the 'hot-button issues of the moment and what the newest, prevailing risks are to the credit union and the regulator," said Miyashiro. "We ask what will you be focusing on during this exam. Network with colleagues before your exam. Find out what they've been through and what they've heard."

6) Communication and Mutual Respect. This, according to the two CEOs, is the number-one reason examiners cite for whether an exam goes well or goes poorly. "It's not just about communicating with your examiner, said Bruen. "It's about communicating with your staff. Do not forget for a moment that the NCUA examiner is a paid employee of a government regulator ensuring a lot of, lot of money. No matter how often your exams, why not talk to them more regularly. Give them a call. Tell them in advance that half your mortgages are underwater. We spend too much time worrying about the exam and about what might be said that will hurt your institution, rather than learning.

For reprint and licensing requests for this article, click here.