ALEXANDRIA, Va. -- Will the National Credit Union Administration extend the CU examination schedule?
Citing rising compliance costs and regulatory burdens, some federally insured credit unions, state leagues and trade groups have been asking the NCUA to increase the time between credit union exams to 18 from 12 months.
The matter came to the forefront in August when NAFCU and the Cooperative Credit Union Association -- which serves credit unions in Massachusetts, New Hampshire and Rhode Island -- separately wrote letters to NCUA urging the regulator to re-establish its pre-financial crisis exam schedule of once every 18 months.
In response, NCUA Board Chairman Debbie Matz insisted that the current 12-month cycle should be maintained, though she said the regulator would consider an 18-month pilot program for some credit unions going forward.
At the November NCUA board meeting, Matz again broached the topic, saying the agency "is not locked into an annual exam cycle every year. In future years, we may consider moving back to an 18-month exam cycle for credit unions that pose less risk to the Share Insurance Fund."
She also indicated that beginning next year, the agency plans to rely more on state regulators to examine "healthy" state-chartered CUs with less than $250 million in assets.
"However, in 2016, we still plan to examine all federally insured credit unions with assets over $250 million, as well as all federally chartered credit unions," Matz noted at the meeting.
The chairman cited two main reasons for her reluctance to extend the exam cycle anytime soon.
"First, we need to determine the impact of all our regulatory relief on federal credit unions." Next year federal CUs will have the discretion to set their own limits on fixed assets, member business lending, and fields of membership, as long as they work within statutory limits. "So we provided all this regulatory relief and we need to see how it's working in the field before we move forward with fewer exams," Matz said.
"Second, before we can lengthen the cycle between exams, we need to strengthen our off-site monitoring systems," she added, citing, for example, plans to update the AIRES (Automated Integrated Regulatory Examination System) exam platform and the CU Online Call Report System.
"Updating these systems will provide examiners more effective tools to identify emerging risks off-site, with a goal to prevent credit unions from failing as a result of an 18-month exam cycle," she said, noting that NCUA plans to maintain an annual exam cycle "for at least one more year."
Currently, the NCUA examines all federally insured credit unions with assets of at least $250 million on an annual basis, without consideration for their CAMEL (Capital Adequacy-Assets-Management Capability-Earnings-Liquidity-Sensitivity) rating, risk profile or frequency of examination by state regulators.
In 2001, the NCUA enacted a risk-based examination program that allowed for well-run credit unions to be examined every 18 months, instead of every year. But the global financial crisis later in the decade prompted the board to invoke a 12-month exam cycle to help CUs uncover minor issues before they escalated.
Now that the economy had improved and the credit union industry is flourishing, some major voices are saying that the annual exam schedule is no longer necessary and would pose no danger to the system.
Paul Gentile, president and CEO of the Cooperative Credit Union Association wrote to NCUA that "moving exams to an 18-month cycle does not threaten safety and soundness and will not add significant or systemic risk. In reality, it will lower risk because an extended cycle allows examiners to spend resources in credit unions that need additional attention."
Alicia Nealon, director of regulatory affairs at NAFCU, said extending the exam cycle to 18 months would, among other things, reduce "duplicative examination expenses."
"NAFCU and our members urge NCUA allow federal credit unions determined to be 'low risk' to receive no more than two exams in a three-year period," Nealon said. "This approach would preserve the agency's ability to address risk through requisite supervision and monitoring, but would streamline NCUA's staff and resources for a more cost-effective budget."
Internal Dissension
One NCUA Board member doesn't agree with the chairman on when to extend the exam cycle.
Board member J. Mark McWatters said in November that it is "worthwhile" for the regulator to consider possibly lengthening the examination cycle from 12-months to 18-months for certain "low-risk" CUs. He also criticized NCUA for lagging on the matter.
"Regrettably, the NCUA seems to have forgotten that it is not 2008, but, 2015 and that the credit union community—in the NCUA's own assessment—is strong and resilient," McWatters said. "That the top-tier of credit unions require examination every 12-months at enormous cost to the community is worthy of challenge and rigorous debate. That the agency would back-burner this approach without discussion among the board offices also evidences the lack of transparency within the agency."
If NCUA was "serious" about decreasing its operating budget, the board "would immediately begin analyzing the feasibility of adopting an 18-month examination cycle for a well-articulated subset of low risk credit unions and developing a more collaborative approach with the [State Supervisory Authorities] to the examination process," according to McWatters.
Geoff Bacino, a former NCUA board member and now partner at Bacino & Associates, said that as agency cites the need to let the "dust settle" on the regulatory relief efforts, he finds it "disappointing that the regulator seems to have dismissed the option of an extended exam cycle."
Former NCUA Chairman Dennis Dollar, now a credit union consultant in Alabama, also does not believe NCUA will move to an 18-month cycle anytime soon, nor does he think it would be wise to do so – with some caveats.
"Some [CUs] have challenges that need more frequent supervision and attention," Dollar said. "However, it would seem that there could be some room for NCUA to consider extending the exam cycle on certain well-capitalized credit unions with CAMEL 1 and 2 ratings and perhaps having an off-site contact at the one-year point -- somewhat [in the style of] RegFlex [Regulatory Flexibility Act]."
With today's technology, Dollar added, it is possible to have an interim contact with a data dump from the credit union that NCUA could monitor to make sure there are no emerging problems in the interim of an 18-month cycle for those "higher performing" institutions.
"This would help both NCUA and credit unions to better manage their resources by extending the contacts with more interim off-site reviews on higher-performing credit unions, thus enabling NCUA to focus more resources on troubled credit unions and those that are not performing as well," he added.
Ryan Donovan, chief advocacy officer at CUNA, said he does not think NCUA will move to the 18-month exam cycle next year, but he is "encouraged" by recent statements made by Matz suggesting she might be open in the future to consider such an extension for some credit unions.
"Anecdotally, the fairness, efficiency and frequency of examinations are some of the top concerns we always hear from credit unions, so it is clearly a very important issue for them, and for us," he added.
But CCUA's Gentile, which was the first organization to ask NCUA to extend the exam cycle, said he's optimistic that the regulator will follow through on the measure.
"I think Ms. Matz was quite sincere in comments she made about looking into this," he said. "But these changes take time, they can't be done overnight."
Gentile cited, among other things, the strong health of the credit union system – as underscored by the recent robust third-quarter financial report from NCUA. "The financial state of the credit union industry has never been better," he noted.
And Gentile mentioned something else that might spark some optimism – the recent highway bill passed by the US. Senate allows the Federal Deposit Insurance Corp. to perform 18-month exam cycles for well-run community banks.
