The National Credit Union Administration is proposing changes to its appeals process that could make bankers green with envy.
The agency wants to streamline procedures for appealing decisions involving critical issues such as loan-loss reserves, Camels ratings, chartering, fields of membership, conversions and mergers. In a big departure from current practice, the proposal would let aggrieved credit unions plead cases directly to the agency’s governing board in an on-the-record, face-to-face hearing.
The regulations, which now enter a 60-day comment period, represent a major feat for J. Mark McWatters, the NCUA’s acting chairman, who has advocated for an expanded appeals process since joining the board in August 2014.
“I think that there is much to be gained through due process; for people who have an issue with respect to an NCUA determination to come before the board, to be represented by counsel, to be represented by their advisers and to state their positions on the record,” McWatters said.
Bankers would relish having a similar process. The industry’s top lobbying groups have spent recent years pressing for changes to how appeals are handled.
The Federal Deposit Insurance Corp. and Federal Reserve have panels that can hear testimony tied to an appeal, while the Office of the Comptroller of the Currency requires that appeals go through a deputy comptroller and ombudsman. None allow banks to have in-person hearings with their top-level official.
“What the NCUA has proposed is a lot better than what we have now at the banking agencies,” said Christopher Cole, senior regulatory counsel at the Independent Community Bankers of America. “At FDIC, you’re not appearing before [Chairman Martin Gruenberg] or the board."
The American Bankers Association has also been vocal about reforming how appeals are handled, especially when dealing with Camels ratings. The ABA has taken issue with processes it views as “time-consuming, expensive and rarely result in a reversal of the matter being appealed.”
The FDIC and Fed have been open to face-to-face meetings in the case of appeals, said Scott Polakoff, a consultant at FinPro and former acting director at the now-defunct Office of Thrift Supervision. Another big concerns is retaliation, Polakoff said, suggesting that bankers should have some anonymity when filing appeals.
“The fear or retaliation exists” despite agencies’ efforts to prevent it from happening, Polakoff said. “Indeed, the fear of retaliation is so great that many institutions won’t even consider filing appeals.”
The NCUA, for its part, is looking to provide more transparency.
Its first proposed change involves appealing decisions tied to non-supervisory issues, such as chartering and field of membership, severance pay for senior-level executives, personnel decisions at new or troubled credit unions and conversions and mergers. It gives affected institutions a chance to argue a case before the board, provided at least one board member agrees to hold a hearing.
A second proposed rule governing supervisory decisions involving loan-loss reserves, classifications of different loans, Camels ratings and other exam-related issues allows for an oral hearing before the board. For now, board appeals of supervisory decisions are handled entirely in writing.
“This oral hearing possibility … puts us ahead of the other federal financial regulators in terms of the amount and kinds of due process we provide,” said Frank Kressman, the NCUA’s associate general counsel. “We think the results of these enhancements provide greater procedural certainty and increased flexibility, along with the additional due process that we seek.”
McWatters was the driving force behind the revisions, said Rick Metsger, another member of the NCUA board.
“While we’ve been very happy to work with his office on these proposed rules, he is the inspiration for them and we could not be considering them today without his energy and dedication,” Metsger said.
Credit unions generally welcomed the possible changes to the appeals process, but they were more reserved about proposed alterations to rules governing mergers of federal credit unions.
In broad terms, the proposed changes to rules governing voluntary mergers require significantly enhanced disclosure of financial incentives paid to board members and senior executives. They also establish procedures to allow for member-to-member communication in advance of a merger vote. They also require notices to be mailed to members at least 90 days in advance of a vote.
About 80% of the recent mergers reviewed by NCUA staff included provisions granting “significant merger-related compensation,” Kressman said, adding that disclosure has been lacking in many of them.
Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions, expressed concern that the proposed rules might create roadblocks for merging institutions.
"NAFCU will seek feedback from our members on this proposal," Berger said in a statement. "We support transparency, but we want to ensure that the voluntary merger process is not unintentionally impeded."
The rule should be thought of as a “member disclosure and transparency rule,” Metsger said.
“Its underlying principle is simple,” Metsger said. “It provides due process and transparency so that when a federal credit union merges into another credit union, the member owners of the merging credit union understand the terms and conditions.”
Transparency “cuts both ways,” McWatters said.
“Since I’ve been around here, there’s been a hue and cry within the credit union community about enhanced transparency within this building, within the board,” McWatters said. “I totally agree with that. I’ve worked towards it, Mr. Metsger worked towards it and we’ve made much progress. There’s also transparency within the credit union industry itself. It’s a bit disheartening to think that there would be some obfuscation with respect to compensation packages.”