Now is Not the Time for 18-Month Exam Cycle: Matz

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At an open forum hosted by the federal regulator on Friday, NCUA Chairman Debbie Matz again insisted that now is not the right time to revert to the 18-month examination cycle, despite continued pleas from industry stakeholders.

Still, credit union advocates expressed optimism that the agency really is committed to streamlining the examination process in some fashion.

The examination cycle, which came to the forefront in August, when both NAFCU and the Cooperative CU Association separately wrote letters to NCUA urging the regulator to go back to the pre-financial crisis schedule of every 18 months, instead of the current 12-month cycle. NCUA has steadfastly said it will not do so.

But immediately following the forum on Friday, where the topic was among the hottest that came up, several forum participants said they were optimistic about NCUA's plans for making the examination process less painful for credit unions.

At present, 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.

Back in the summer of 2001, the NCUA implemented 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 NCUA board to invoke a 12-month exam cycle in 2009 in order to help credit unions uncover minor problems before they escalated in scope.

Carrie Hunt, senior vice president of government affairs and general counsel at National Association of Federal Credit Unions (NAFCU), who attended NCUA's open forum, noted that the organization wrote to NCUA in August urging the agency to return to an 18-month examination cycle as compared with the current 12-month cycle for financially-sound, well-managed credit unions. Hunt also noted that NCUA did not rule out the 18-month examination cycle when they responded to NAFCU's letter.

"NCUA reverted to a 12-month cycle at the height of the financial crisis," she said. "The economic environment and credit unions have improved since the crisis. Changing to an 18-month exam cycle would allow NCUA more flexibility in balancing staff and reduce duplicative examination expenses without compromising the safety and soundness of the industry."

Andrew Price, CUNA's senior director of advocacy, who also attended Friday's NCUA open forum meeting, told Credit Union Journal that, as a former credit union executive and state regulator himself, he has seen the issue from both sides, but insists that a 12-month examination cycle poses too much of a regulatory and cost burden, particularly for smaller institutions.

"The exam process is brutal, painstaking and can occupy up to a full month of time at some credit unions," he said. "When I was the general counsel at First Commerce Credit Union in Tallahassee (Florida), our operations were almost entirely disrupted by the [presence of the] examiners. They (as well as state regulators) wanted to speak to compliance, mortgage department, IT, everyone, and it was a huge hassle for us."

Earlier this year, The Cooperative Credit Union Association (CCUA), which serves credit unions in Massachusetts, New Hampshire and Rhode Island, also asked Matz to return to the 18-month examination cycle, citing, among other things, that less frequent exams will help examiners concentrate on "problem areas."

"I believe that moving exams to an 18-month cycle does not threaten safety and soundness and will not add significant or systemic risk," wrote CCUA president and CEO Paul Gentile. "In reality, it will lower risk because an extended cycle allows examiners to spend resources in credit unions that need additional attention."

Gentile told Credit Union Journal that 12-month check-ups are simply unnecessary, given that the industry is now in excellent financial shape and that the NCUA could just as well evaluate the status of credit unions remotely through sophisticated data evaluation.

"For a low-risk, well-run, credit union, these annual examinations are too much of a disruption," he said. "They are also an excessive use of NCUA resources."

Price said that from the NCUA's perspective, they don't want to get "caught with their pants down" – i.e., if they examined credit unions less frequently, they might miss identifying some financial improprieties at some institutions.

While Price says he understands and even partly sympathizes with that concern, he asserts such worries are overblown now, seven years after the depths of the recession as the US economy grows ever stronger.

"I think they [NCUA] are being over-vigilant," he noted.

Former NCUA Chairman Dennis Dollar, now a credit union consultant in Alabama, also said the time may be right to re-examine the examination regime.

"While necessary to ensure regulatory compliance as well as adherence to safety and soundness standards, exams are very disruptive to a credit union's day-to-day operations while the examiners are on site," he told Credit Union Journal. "When combined with the extra work that it takes to fix any problems found in the exam, it is natural that credit unions should want to have exams as far apart as possible. Likewise, because of the deterrent and corrective value of exams, the regulatory agencies like to have them more often than less. It is a part of the natural tension between regulator and regulated."

But Price said he is encouraged by comments made at the open forum by both Matz and Larry Fazio, the director of the office of examination and insurance at NCUA. "They said that they are looking for ways to ease the examination process, and I believe they are committed to doing that," Price said.

Matz did however insist at the open forum that now "is not the right time" to lengthen the examination cycle.

While a 12-month cycle is too short, Dollar also cautioned that, say, a 24-month cycle would be too long a period from a safety and soundness perspective in most credit unions. Thus, he finds 18 months an optimum time-frame. "A lot can happen in two years. But annual [exams are] not necessary in many instances of credit unions with proven risk management abilities and sound capital levels," he said. "So eighteen months, with qualifying criteria as we established in RegFlex [Regulatory Flexibility Act], is probably the right mix -- and this is largely consistent, although some of the nuances are different, with the banking industry exam matrix."

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