ALEXANDRIA, Va. – A top NCUA official told Congress this afternoon that proposed legislation to establish a new appeals process for credit union and bank examinations could prove unnecessarily costly and slow down the resolution of troubled credit unions, in some cases long enough to preclude NCUA from saving them.
“Although well intentioned, the bill in its current form could produce a number of unintended consequences,” David Marquis, NCUA’s executive director, told members of the House Financial Services Committee. He said NCUA believes the bill will increase costs for NCUA-- which will be passed on to credit unions—and bank regulators who will now be pressed to prove their examiners’ competence in disputed cases. And it will drag out the examinations process for troubled institutions—at a time when congressional panels are pressing NCUA to resolve problem cases faster in order to minimize ultimate losses.
Marquis told lawmakers that credit unions are alreday entitled to appeal findings in their examinations to a Supervisory Appeals Committee but only three credit unions chose to do so all last year.
Industry representatives have endorsed the Financial Institutions Examination Fairness and Reform Act, which would require regulators to provide final exam reports faster; set uniform exam standards; and create an office of financial institutions exams appeal. Representatives of both CUNA and of NAFCU were testifying in favor of the bill after Marquis.
But Marquis, the long-time director of NCUA’s Office of Examinations and Insurance, insisted that NCUA already has several outlets for credit unions to appeal their examinations. “Moreover, the legislation’s provisions to create additional appeals processes would add more regulatory layers that would increase costs without any assurance of greater effectiveness,” he said. “Again, this would cause examiners to fully document each and every finding, and examination costs would increase.”
Marquis noted that examiners’ finding are currently based on individual judgment and sound industry practice and the proposals in the bill would require NCUA and the bank regulators to develop standard measurements and other regulations to provide examiners with sufficient support for their judgments.
“For example,” he said, “there is no hard-and-true formula about the proper asset diversification. Today, if an examiner looks at a credit union’s books and sees too many mortgages with only 3% down payment or inappropriately large mortgages, he or she will warn of overconcentration in the exam report. “
NCUA would have to spend more on legal staff, as well as outside experts to respond to exam appeals under the bill, said Marquis.
Marquis said Congress set specific limits in 1994 on the issues credit unions and banks can appeal, including examination ratings, allowance for loan losses and classifications on loans, but the proposed bill would vastly expand the issues open to appeal.”This change would encourage appeals on virtually any and all issues because there would be no limitations on such actions,” he said.
The potential slowdown in some examinations also comes after the General Accountability Office, the congressional auditors, told NCUA in a recent report that it needs to speed up the resolution of troubled credit unions. The increased time it would take to settle disputes, said Marquis, “runs counter to a recent GAO recommendation that NCUA “require early and forceful regulatory action” well before capital deterioration triggers prompte corrective action.”
