How the coronavirus is changing credit union exams

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The coronavirus could permanently change credit union examinations.

Prior to the pandemic, the National Credit Union Administration and some state regulators were piloting programs to complete at least part of their exams remotely. Some agencies are now doing virtual exams on a wider scale in an effort to practice social distancing to halt the spread of the disease while also fulfilling their oversight duties.

The industry expects this change to be lasting.

“I think without a doubt, more and more we are headed to remote examinations across the entire financial services industry,” said Marci Kawski, a partner at the law firm Husch Blackwell. “There are tools that are out there that will allow that to occur. The coronavirus will force people to get comfortable with remote much more quickly than they may be would have otherwise.”

The industry has long complained about the onerous nature of regulatory exams. Last year, the average exam lasted 13.1 days and included 6.8 onsite examiners, according to a report from the National Association of Federally-Insured Credit Unions. Those numbers are both up slightly from 2018.

There’s hope that changes to NCUA’s exams, including completing at least some work offsite, will help reduce disruptions while also cutting down on costs and improving the work-life balance of examiners. At least 10 states were working on remote exam programs prior to the outbreak, according to Lucy Ito, president and CEO of the National Association of State Credit Union Supervisors.

Now circumstances have forced regulators to tweak and possibly expand those programs. Ito said virtually every state was either postponing exams or completing them remotely.

For instance, Washington state began piloting virtual exams in 2018 and regulators there had pegged increasing those as a strategic initiative for the year ahead in a January bulletin. Under that program, some examiners were still physically at the credit union while others remained back at the office for certain parts of the process.

That experience helped the agency move quickly when the coronavirus struck. Washington was the original epicenter of the outbreak in the U.S. with many of the first cases and deaths being reported there.

So far the regulator has completed seven credit union exams in three weeks entirely remotely — with no examiners setting foot inside a credit union — and plans are in place to continue that practice until at least May 4, said Amy Hunter, director of credit unions for the Washington State Department of Financial Institutions.

“We would not have gone to 100% virtual exams for 100% of our exams had it not been for these unusual circumstances,” Hunter said. “It has accelerated the learning curve for us and for the credit unions. We have learned that we can do more parts of the exam remotely than we thought before. I am certain that will result in us decreasing our footprint in the credit unions in the future, a move that is positive for credit unions and for examiners.”

NCUA has also piloted a remote exam program. Last year the agency adopted best practice guidelines based on results from that effort. This will allow “examiners to remotely perform portions of an examination for well-run credit unions that have the technology and platforms to provide electronic data securely,” according to NCUA’s 2019 annual report.

But these guidelines “reduce, but [do] not eliminate, onsite presence during exams,” according to the annual report.

In the wake of the coronavirus, the regulator has its employees, including examiners, working from home. The agency is attempting to keep up with its examination duties so that when onsite work resumes credit unions and the agency will both be ready, according to guidance that NCUA issued in March.

However, it is prioritizing “credit unions experiencing significant financial or operational problems,” while institutions “occupied with addressing the impact of the COVID-19 pandemic on their operations, employees, and members … should not be required to address an offsite examination request unless it is a serious or time-sensitive matter,” the agency said.

NCUA did not respond to a request for comment for this story.

Many aspects of a credit union exam are conducive to an offsite review since technology allows institutions to securely share information, such as board and supervisory committee minutes and risk reports, Ito said. Exam scope meetings and exit meetings for well-run institutions could also potentially be done through videoconference, she added.

University of Nebraska Federal Credit Union in Lincoln got a taste of remote exams in September 2018 and again last month when the asset-liability management portion of its exam was conducted offsite. But its most recent exam still included multiple examiners inside the $107 million-asset shop along with another working remotely, and the entire process took about two weeks, reported President and CEO Keith Kauffeld. In fact, the March exam wrapped up just one day before NCUA implemented its work-from-home policy for all employees.

“For me, it worked out just fine,” Kauffeld said. “It took more time on my part but I don’t think it was any more challenging. … I do think remote exams are positive. It’s keeping employees safe right now so they don’t have to get on a plane. It’s also an expense reduction.”

Learning curve during coronavirus

Despite the prospect of fewer disruptions, remote exams don’t appear to be a high priority for many in the industry.

“I haven’t heard a big clamor for this,” said Dustin DeVore, who is the chair of the credit union team at the law firm Kaufman & Canoles. “I don’t hear people say, ‘Our life would be better if we had this.’ They would like to be able to explain things. Not everything fits into a nice cookie cutter.”

That could be at least in part because credit unions are more interested in other aspects of NCUA’s plans to modernize and streamline the process, such as going to an 18-month exam cycle.

“We don’t want this to overtake that,” said Carrie Hunt, executive vice president of government affairs and general counsel for NAFCU. “Some credit unions are still looking for that relief.”

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The biggest challenge so far seems to be communication. Hunter, Washington’s regulator, noted that without a person onsite the agency loses the ability to “walk down the hall” to chat with a credit union official. Now an email or phone call is necessary for all requests. Because of that, communication has become more time-consuming, she added.

University of Nebraska FCU’s Kauffield echoed that, explaining that he recently had to outline a technical aspect of the credit union’s operations over the phone without looking at the same documents as the examiner. In the future, he said, using programs like Zoom that allow participants to review the same information by sharing a computer screen could fix this issue.

“It did require me to hone my communication skills, especially when discussing something of a technical nature,” said Kauffield, who added he had to make himself available whenever the examiner called.

There are also concerns that some parts of the exam may be more difficult to complete virtually. NAFCU’s Hunt believes fraud may be harder to detect during offsite work. Part of the process requires the examiner to interview key individuals and an onsite discussion allows more opportunities for credit union employees to raise potential concerns.

Hunter said that it is more difficult to conduct offsite exams for areas that require more documentation, such as real estate or member business loans, since the institution may not be able to easily upload that information to the regulator's portal. Other higher risk areas are also better suited to onsite visits. For instance, ensuring Bank Secrecy Act compliance is better for in-person oversight since the regulator isn’t able to review samples of an institution’s CTR and SAR filings offsite.

“I would say both regulators and credit unions would agree even though some parts of the exam should be offsite, both sides welcome the value of looking someone in the eye,” Ito said.

Because of that, it’s likely that once the coronavirus threat passes onsite portions of exams will be reinstituted. But experts still expect more of the process to be done virtually.

“I don’t know the internal dynamics of a regulatory agency and how they communicate, but from the credit union perspective, this is the way of the future,” Kauffeld said. “There may be still some aspects that they are required to come onsite. But now you can share a screen and are able to point to a line item. Being able to use that technology is just required.”

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Coronavirus Exams NCUA State-chartered credit unions Washington NASCUS Regulatory reform Regulatory relief