ALEXANDRIA, Va.-A top NCUA official told Congress last week 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.
But both CUNA and NAFCU told Congress they disagree with the agency and support the proposed legislation, with CUNA's witness stating that the bill "will lead the NCUA and the other regulators to take steps to ensure that examiners treat credit unions fairly and that they acknowledge credit unions should have the flexibility to manage risk, consistent with legal and supervisory requirements."
NCUA's David Marquis, however, told members of the House Financial Services Committee, "Although well intentioned, the bill in its current form could produce a number of unintended consequences."
Marquis said NCUA believes the bill will increase costs for the agency that will be passed on to credit unions, and that bank regulators will now be pressed to prove their examiners' competence in disputed cases. Moreover, he suggested, the bill 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.
Just 3 CUs Have Appealed
Marquis told lawmakers that credit unions are already entitled to appeal findings in their examinations to a Supervisory Appeals Committee, but only three credit unions chose to do so in 2011.
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 testified 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% downpayments or inappropriately large mortgages, he or she will warn of over-concentration 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.
'Appeals On Virtually All Issues'
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."
