Document of Resolution & Examiner Findings: What You Need to Know

Examinations get harder, examination reports get harder, and specifically, credit unions start getting more examiner findings, supplementary facts, document of resolutions, perhaps regional director letters, informal type of communications, informal enforcement actions from NCUA that That can make credit unions life's more complicated. So we're here today to start talking about all of those things I just mentioned, and I've got Steve Farr and Todd Miller of my team with me here today.

Guys, how are you doing? Good morning. I'm doing great today. We have a day with no wind for a change. Glad to hear it. No wind. We'll try and wrap this up so you can go get out, get some yard work done there in the beautiful state of Montana. But guys, if Steve and Todd, let's go with Steve first.

If you could give a little bit of background, maybe there's some new listeners who haven't heard you on the podcast before, if you could give a little bit of your background at NCUA and that'd be great. So Steve, fire away. Hello everyone. Yeah, Steve Farr. I spent 30 plus years at NCUA. Most of 'em I would say really great. And the first half of my career was in heavily involved in the examination function, primarily as a problem case officer on the west coast.

But I was involved in Conservatorships throughout the nation. Then I moved into the central office. And I spent the last half of my career there working in the division of risk management. One of my accomplishments or duties that would particularly apply to this broadcast was. I wrote the enforcement manual, which was put out as an instruction and I just realized that was 20 years ago. 20 years ago, time flies, man. Yeah, it seemed like yesterday when I was looking back at it.

And then, spent my career there in the division of risk management and worked on the corporate resolution. And 1 of the last things worked on was the risk based capital role. Very good. Similar to Steve, I was around more than 30 years. Actually, I was just a couple short months, less than 35 years. I enjoyed my career a great deal too. And instead of breaking mine in two, like Steve, I could probably break mine in three. The first 10 years or so I was an examiner and problem case officer.

The second 10 years, I spent it as a capital market specialist from 2000 through 2010. I do have a last year there where I was involved with a conservatorship at West Corp. And then the last decade or 11 years of my career, so I was the director of special actions in the western region supervising problem case officers and capital market specialists just a little sideline. I also spent time on N. C. U. A. Supervisory Review Committee. I chaired a couple of appeals, sat on another appeal.

So that was an interesting little sidelight to my career, but like Steve, I enjoyed almost all my years with NCUA. COVID was a little less fun when you couldn't talk to people, but for the most part, I enjoyed working with credit unions a great deal. Very good. I would echo that remark in my 34 years. And now in this new This new thing that we're all doing I'm having even more fun helping credit union. So a lot of credit union conversations we've had has been based around.

The examination reports in the issue in the enforcement manual related items tied to the examination report. And whether it's, getting draft documents that they don't quite understand why it might be placed in a certain part of the examination report. A lot of questions around that arena. So I thought it would be good to just do a little bit of education on the particular parts of the examination report. Yeah, I'm thinking that maybe the first item to discuss would be the examiner findings.

So let's chat a little bit about examiner findings and or pivot, from that any which way you think based on your vast experience on exam reports and examiner findings. Go ahead, Todd. Examiners findings, they reflect problems that examiners find during the exam that they think credit union should address. But there are problems that don't threaten the viability of the credit union. They don't represent systemic violations for the most part.

They're treated as items that management can correct in the normal course of business. They don't require the timeliness that some of the other things do that we're going to talk about later. But they're just items that the examiners believe need to be corrected, but they can be corrected in the normal course of business. Examiners don't usually spend a lot of time documenting them in the report. The descriptions of them are fairly brief.

There's a short action deal with this over the course of the next year in general. And I think one of the important things on those is is, as a, if you were a board member looking at the exam report, that looking at the volume that you have of examiner findings, it may be that the NCOA is trying to send you a message. Because we've had cases where the problems weren't real horrible, horrible, and that it wasn't going to get to where it was.

It costs the insurance fund, something and not quite to level the door. There's just a lot of little, little things. And when you get a laundry list of just examiner findings covering multiple areas, the minor things that's that's a clear indication that he's trying to send to the board of directors that they need to pay attention to is what's the root cause of all those issues is that breakdowns at multiple levels? Is that a breakdown at the top?

Is a breakdown and internal controls, but pay attention to what could be. An overarching message. Great points guys. We'll probably get into this again in different discussions, but citation of a regulation citation of safety and soundness citation of. A letter to credit unions and an examiner finding anything you want to share relative to what I just said there, as opposed to contrasting it with a document resolution.

I guess the ultimate question is if something's in the examiner findings, should the examiner be able to tie it to a written into a product as a reference point? Yes, yes. They're supposed to cite a regulation, for any of these informal administrative remedies, whether it's an examiner's finding a door, a preliminary warning letter, an LUA, regional director letter, those citations should be there. They should include regulations, your examiners findings and doors.

They, in addition to the regulations, they may include other guidance letters at the carding that is issued. So letters to credit unions and issue a supervisory guidance documents. It could cite 1 of those, it could cite the exam guide, but in general, all of these informal actions when examiners are asking you to take action, there should be citations to a regulation. Very good. Very good. Steve, anything else on that topic you would like to add on the examiner finding?

Yeah, just a reminder, our listeners and that it's easy to use the tools on the internet to look up the regulations. That I use the ECFR and you can negotiate and navigate around that really easily. And then just focus on that one area so that, that's the quick and easy. The other advantage on that is, It has the links to the kind of the history of that regulation.

You can go in and you can read the preamble if you're really want to get into the details of what happened with that regulation, what's its history, you can get to it that way. And when we are faced with something like that, we spend a great deal of time in those preambles to make sure that we understand what NCOA's intent was with certain regulations. That's a great point on the preamble actually always have enjoyed the preamble more than the actual regulation.

You can probably read that and know what you need to know. And I think in a previous podcast, I might have made a statement such as that. It's a regulation is almost a 3 act play. There's the preamble of the proposal. There's the preamble of the final and then there's the actual regulation and to really understand the entirety of what is trying to achieve. It's important to understand. I think all 3 of those documents.

So negotiating with NCUA, Todd, you mentioned in a perfect world, it would cite a regulation, right? And you could argue that any regulation. In and of itself if an NCWA examiner wanted to take a position that a regulation was violated, that that could rise to the level of document resolutions. Oftentimes, it doesn't. But let's say, for example, you've got a situation where there are a volume of examiner findings, and they decided maybe with negotiations with the credit union that they would it.

Put them in the examiner finding instead of a document resolution. Next exam comes around. What happens to the, what does the examiner do relative to the 10, 10 examiner findings that were out there coming into the next go round? What should the credit union expect to happen, particularly if maybe there is noncompliance? It's somewhat interesting because, I used to teach and Steve also taught a lot of examiners classes and examiners would ask questions like this.

And the answer to them was, it depends. There is no black and white answer to this, and it really depends on the nature of those examiners findings, to elevate them to a door. There has to be some evidence that if they're not corrected, it's going to cause financial or operational damage to the credit union or continued noncompliance with the regulation.

as Steve alluded to earlier, sometimes if there's a significant number of findings not being addressed, it represents a widespread problem throughout the credit union. Sometimes they get elevated to a door just to send a message to the board that there's significant numbers of internal control problems here that. Are not being addressed. So sometimes findings just get left as findings for a couple years. Sometimes the findings are not addressed.

And like I said, the examiner's judgment, those unaddressed findings can lead to operational problems or violations of regulation or internal control deficiencies. then they can rise to a document of resolution. For most credit unions, they should probably operate on the assumption that if they don't resolve findings in a material way, they probably will find their way to a document of resolution. I would agree. I would agree with that sentiment.

And I'm thinking of a quote, commit no minor blunders, right? You've been told this is an issue you can expect and see a way to look at it when you come back and the best way to make sure it doesn't go to a document resolution is to resolve the issue. And of course that that presumes that you're comfortable that the issue needs to be resolved and you can, have discussions with the court. The credit union around that topic.

So any last words on examiner findings before we pivot perhaps to supplementary facts? No, very good. Okay. So the supplementary facts portion of the examination, back in the day long time ago, back even before the 20 years ago, when Steve wrote the enforcement manual I remember utilizing the supplementary facts for compliance with a letter of understanding. And that was really where I, got my teeth wet as an examiner was the an LUA was outstanding.

We, as a problem case officer, you typically would have those. So you'd give an update in that form, but it over time, it's morphed into being utilized a lot more. And if you would like to describe the purpose of the super supplementary facts and maybe some advice for credit unions in that, on that top on that document. Thank you. Examiners use supplementary facts for a number of different ways, and sometimes they're tied to document a resolution. Sometimes they're tied to examiner's findings.

Sometimes they're just general information. But in general, it gives criteans alternatives to address the problem. Here's some deficiencies. In your commercial lending program. Here's options. A, B, C, D, E suggestions that might address that. So it gives credit unions a broader explanation of what the examiner sees an issue and perhaps alternatives to address it. They put a lot of suggestions in supplementary facts nowadays.

Because the overview is supposed to be condensed, but maybe there's an issue that doesn't rise to an exam finding, but could in the future, and examiners will use supplementary facts to explain that and some of these issues, especially with information security some of the consumer compliance type regs. Some of the intricate credit risk management type things. There are long discussion items that really don't belong in the overview. The overview is tied to the officials. Here's the main things.

The supplementary facts can be used. Here's other important things that management needs to pay attention to. It doesn't rise to the board level. So that supplementary facts has become a multiple use document. Yeah, in many different ways, and examiners have a lot of discretion as to when they choose to use the supplementary facts. Nowadays, NCUA has so many specialists. They have the information security specialist, the payment systems specialist, the regional lending specialist.

The regional capital market specialists. A lot of times you'll see those specialists will use that supplementary fax to convey information to the credeans. And here's how you can mature your program in these respective areas. So you see the specialists use the supplementary fax quite often. No, that makes sense. Do you have any thing to add on supplementary fax and the use of them in the exam report? No, that was just to add written down to make sure we cover the specialist thing.

And Todd just covered it really well. Todd hit another grand slam. So we'll I didn't even have that in my notes. You mentioned supplementary facts. You don't comply with it or something maybe deteriorates. And this is, I think your answer is depends. You're going to give me the lawyer answer, but it could then rise to an examiner finding.

So really, in the hierarchy of pain for a credit union, the lowest pain to have something discussed in his supplementary facts, the next highest level of pain would probably be the examiner finding. Which we've discussed so let's pivot to see, I even turned it. I'm not going to give you the opportunity to say it depends. I'm just going to paraphrase that. Let's pivot to the document resolution. And, we've. We had a conversation.

All of us were had some conversations with the credit union recently that had a substantial volume of document resolutions, north of a really big number and to the point of prioritization becomes an issue. But before we maybe dive into that particular nuance of a document resolution, what's the purpose? What's your. Your vast experience about with document resolutions would you like to communicate here with the operator?

Audience today, I think this one, maybe we will just read from N. C. U. A. 's national supervision policy. So you understand exactly what examiners are how they're supposed to be using document a resolutions, from their own national supervision policy. Items that elevate themselves to a document or resolution must be significant enough that an examiner would recommend escalating to the next level of elevated enforcement actions. That being an RDL, an LUA, preliminary warning letter.

One of the things the examiners are supposed to consider when they decide they're going to write a door is if left unresolved, could the violation or problem cause a pretty serious financial or operating damage? Does the problem result in fundamental noncompliance with laws or regulations? Is the problem something that would need to be escalated to the next level of enforcement if unresolved?

And is the problem a result of management's inability or unwillingness to properly identify, measure, monitor, control risk? And then Steve talked about this earlier, the last item is is the problem widespread throughout the credit union? So that's one of those if you have, 30 minor findings, is it really an indication of a widespread problem with internal control? So those are words specifically straight out of the National Supervision Policy Manual.

Documents of resolution should be significant issues. That if left uncovered presents a risk to the insurance fund or the reputation of the credit union. That's a good summary right from the words of NCUA and of course the NSPM, the National Supervision Policy Manual. There is a redacted version of that out live for credit unions.

There is what appears to be an increasing tendency of NCUA to redact more and more of that and It's something I haven't really talked about a lot here, but it's something that I. I have on my list to potentially talk with NCOA down the road, especially if it keeps getting worse. But Steve, anything relative to what Todd said, I'm sure that document resolutions, you've got a lot of experience on these both at NCOA and recently, what are your thoughts on the document resolution process?

Oh, one of the things that crossed my mind is that. You talked about the volume of them. We've had some of our recent clients that were getting like their first document or resolution. And, that one was a really big deal. And then we have some of those that have pages and pages of document or resolution. And it's so they can run the whole gambit. And, the thing is, how you react is, is everything to do with it. One of the things Todd has wanted to talk about while we're on that subject is.

I can't recall if it's inside supervision and, what would you call a well, written document of resolution? I know that we used to is, do they have still the smart principle in there? I know the uses a thing that called the 5 C's format is used to communicate. What essentially is there, they call it matters requiring attention. We call them doors, but there's was he had to address concern cause consequence. Mainly of inaction corrective action and commitment.

I think ncaa within we used to is it in the regulation, but we used to teach the smart principle Todd, you want to touch on it still in the supervision manual the smart principle it's more the smart is geared to that corrective action piece Not those other pieces that the occ uses and see where they do have to describe the problem But the smart principle is The actions that they ask the credit union to do, or that the credit union agrees to do, and we'll talk about negotiating doors, I think,

before we're done, but the SMART principle is those actions that we're asking of the credit union, or NCUA is asking of the credit union, they should be specific in nature. They should be measurable. So are they achieving the results intended in a very concrete, measurable way? They should be achievable. And sometimes this is where examiners run afoul and why people hire us is because they're given doors that are perhaps not achievable in the manner that the examiners request.

They should be result oriented. So they should address the root causes of the problems. And That's a difficult one, especially for newer examiners who like to address symptoms of problems rather than the actual problem and root causes, and they should be timely. So to reiterate that just in the SMART letters, specific, measurable, achievable, results oriented, and timely is how those corrective actions should fit in that box.

When you walk through the SMART principle to pop out at me, achievable, because we've had some situations. Where NCUA's expectations we're, I want to say not in touch with reality, but that's a little harsh. We're a little aggressive. And the other one that pops into my head is timely. And, I've been, we've been experiencing, credit unions have been experiencing, and NCUA's board members have actually talked about it, that the timeliness of reports Can complicate the ability to achieve it.

For example, if when the examiner is on site, they're saying I want something done by September and then August 15th. They actually give me the final report where they go through all the nuances and they talk about it in the overview. And I see some things in there that I don't really like. And then by the way, they, depending on code, they might be coming back pretty quickly. So you can see some of these things colliding where the smart principle.

Isn't necessarily followed whether it's because of staffing issues or just having an expectation of what, what can be achieved in a, a time period. I remember when we were all out on the West Coast, there was a guy that worked in the office named Eric Jacobson. And I remember him saying, Mark, only so much water is going to go down the sink at one point in time, right? There's only so much that can be done with the resources that you have.

Any thoughts on achievable or timely and any advice to credit unions in that regard? I think when we see those doors that you are perhaps not achievable, perhaps not timely, perhaps not really. results oriented.

I think it comes down to how examiners negotiate those doors because what should happen throughout the exam process is that if examiner has an issue and they feel it's a material issue like this, they should sit down with management, discuss the issue, get management's agreement that it is an issue and that management actually understands the issue, and then it becomes a negotiation. Management should say, this is what we're able to do with our resources to address this problem.

And I think a lot of the ones where we run into problems with our clients, or where they run into issues with DOORS not being smart, it's because that whole negotiation discussion process hasn't occurred, the examiners are under time pressure, they write the door, they throw it in front of management space without management having time to say that this is what we're able or unable to do. There hasn't been this whole agreement that this is even a problem.

And there is a lot of disagreements out there, especially around interest rate and liquidity in this environment. So when examiners shortcut the process, that's when you start ending up with doors that are not achievable results oriented or timely. And this is really important that when accrediting gets a door, especially at the board and management level, that they truly understand the examiner's concern. There's always more than one way to address a problem.

And I think what we're seeing quite often with our clients is. There hasn't been a discussion of these multiple ways to address a problem and the examiner is just, here's my solution, credit you can follow it, and they're not given that opportunity to say, wait, here's other ways we can address this. That's not always the case.

A lot of examiners are really good about writing open ended doors that examiner or credit you can give us a plan to address this issue by the state and we'll assess it there. But. In many instances, we do see this where they're given a door by Fiat. They're given goals and timelines, and there hasn't been that upfront discussion with management or that agreement that this is a significant problem that jeopardizes the credit union's future. Great point, Steve.

Yeah, 1 of the items I know that we've been dealing with our clients on is, the timeliness of when they get the exam report and it has the door in there and then when they start looking at what it'll take to fix it, the cost of some of these door items is a really great in some cases, and probably not much of a consideration than when it was put together. And I think, my, that's where I think when you get into 1 of these, and it's going to be really, really costly.

Before you really tie into that, make sure that you're you and your examiner are on the same boat, because it'd be terrible to put a bunch of resources into something that you thought had marginal benefit to you, but you thought was going to take care of the door. That might not be a good decision that could have been taken care of a communication. The other thing that can happen. And I used to see this a lot when I came into cases as a problem case officer was doors that were inconsistent.

One part of it would say reduce operating expenses. And the timeframe was that kind of immediately. And then on the other parts of the door where all of these items that we're going to acquire more resources and people and be like, well, that's inconsistent there. So you guys have any thoughts on how to deal with those issues. The one thing that jumps into my head and it related to the priority, but the cost is prioritizing.

We'll, we'll often advise credit unions to, you got, you've got six I. T. findings. Which one does NCUA think is the most important?

Typically, when you were training examiners, presumably there was discussions about, putting document resolutions in priority order, putting examiner findings in priority order to the extent you can, and, we've advised credit unions to try and establish that point so that then they could maybe have some discussions about if there's five that are saying I need to add expenses, And you're at the meantime, you're saying I'm, my, my profitability isn't enough for my, for where I want my capital to

be. That's one way to approach it. But Todd, what are you, what are your thoughts on that? The NSPM still says DOORS should be issued to the credit union in priority order. I don't think it says that about exam findings anymore. A lot of the exam findings, examiners tend to organize those around subject areas, and it's which examiner turned in their work first. That, that capital market specialist or that regional lending specialist.

But those are items correctable in the normal course of business and don't rise to the priority level. Doors do. Doors should be in priority order and cost should be a consideration of that. I remember back in the 90s, we used to look at credit operating expenses and then we had a board that came in and said, examiners, you don't get to look at operating expenses. Stay away from them. That's the credit decision.

So it goes back to Steve's thing, when Examiner says, improve your risk management program, hire a chief risk officer, develop an ERM program. I don't think examiners quite understand that those asks are potentially millions of dollars. They're not something you do in the normal course of business, like an exam finding. Those are significant. Resources and you start asking people for third party consultants.

Those things are not cheap and examiners don't dig into expenses and I haven't for a couple decades. Those are then maybe some of the problem case officers. So a lot of times I don't think examiners like Steve said they don't understand what these things cost. And the cost is maybe a bigger problem than. Problem they're trying to fix. So parties need to push back and examiners with that is wait, this is the resources this is going to take. And is it really going to achieve the results intended?

That's why you should be given the opportunity. Is there another way we can address this issue? So I took some notes during this conversation and I want to circle back to The NSPM portion where you talked about the purpose of the document resolution. And I wrote down a circle, three things, inability or unwillingness, fundamental noncompliance in widespread. So what caught my attention on inability or unwillingness was it linked in my head that the definition.

Of a code three is the management may be unwilling or unable and the operative word. There is may oftentimes and we're we'll do some podcasts coming up here on camel. But it really caught my ear that. When they're talking about if you need a door, it's because you're in a management's inability or unwillingness. And that's very similar to language about the code. Any thoughts relative to document resolutions and how they. Relate how they should relate to the camel code.

I had that written down as a question also. So I guess I'll throw it to Todd. What? Why do I get picked on here? There is a feedback loop between the 2, for instance, in a code 1, you're almost never going to see a document or resolution code twos. You might see 1 or 2. usually, they're going to be compliance or BSA related.

There are certain regulatory things that Might not be significant, but because there are violations of the law they rise to a document of resolution when otherwise they would be a finding. You can correct these in the normal course of business. And you see a lot of those with BSA issues and FinCEN related issues, because we have agreements with other agencies that these items will be a document of resolution. Our NCUA has agreements. I keep throwing we in there. I'm not with NCUA anymore.

Just seems like it. Yeah it's after 35 years of being with an organization and probably working for them. There's a little bit of, it feels like an old family. But there is feedback related to the doors and the camel rating should be congruent with each other. And, there's a three camel rating. Those are crediting that, they're not in imminent danger of failure today, but if they don't address things, they could be.

You expect more doors there to address those root causes to make sure that the direction that credit moves is to a two not down to a four. So there should be some relationship between camel codes and Your exam reports and doors and findings. It's very rare that you're going to see a camel three that doesn't have a door unless it used to be a four and addressed everything.

That's maybe the one exception, but it's a very rare situation as you get down into that camel four rating you're almost always going to have the next topic of discussion for us and An LUA or a preliminary warning letter type of action. There is a step in between there The unwillingness and inability to address problems, if that is truly a foundational issue, it's almost always going to get beyond a door.

Eventually, what good point fundamental noncompliance when I see that the word I key in on is fundamental and, violating the loans to 1 member violating a commercial loan. A principal tenant of a commercial loan rule. I think you mentioned BSA. Because of the agreements they have fund, anything on BSA is going to, would fit into fundamental noncompliance almost. And then widespread we've had lots of conversations.

Thought on the podcast about situations where it almost appears as if corporate governance is is rising in importance in credit unions from an NCUA perspective. And when I think widespread, I don't know why I'm linking that to this topic in my mind, but I am where maybe an NCUA has. eight examiner findings, and they have a few things in the document resolution. We're seeing document resolutions being grouped into corporate governance.

Any thoughts and I know this is a little off topic, but based on our recent conversations we've had, any thoughts on document resolutions? Being widespread and corporate governance and how NCOA is doing that right now. I think it's NCOA catching up and maturing their own level of knowledge about root causes of issues. Before they dealt with the symptoms of it, I was always a proponent that we should have specific training classes at N. C. U. A. Just on risk management and corporate governance.

N. C. U. A. Really doesn't do that. Based on what we're seeing with our clients, maybe they are starting to do that because we're starting to see a lot of doors and findings that are under that guise of corporate governance. But realistically, corporate governance is important. I think MCUA over the decades have left it alone because they didn't want to scare volunteer board members away from serving. Now it's become somewhat critical to the safe and sound operation of organizations.

So I think just as an agency, their understanding of corporate governance has improved and that's why we're seeing those types of language in these documents of resolution and findings today is they're getting better at identifying root causes. Now sometimes it does go astray, but overall I would see it as a positive and something that perhaps needed to happen a long time ago. Just one person's take. Yeah, I agree.

I'm a big proponent of corporate governance because it takes care of all those little issues that used to, Todd drive us crazy when it would be a matter of ethics and those types of things. It would just infuriate us and they were hard to overcome. 1 thing I'm seeing, though is there's this creeping that's occurring in the levels of corporate governance is out there because there's a lot of guidance out there for institutions, not just credit unions above the 10Billion dollar.

Mark all of which is good advice, but I think I'm seeing, that's requirement is like, creeping down to apply it in more than an intended level to the smaller institutions. It's something that. be wary of and know that, this is the appropriate corporate governance for our size. But if we're shooting to be much bigger, what does our corporate governance need to look like? Going forward, go ahead, Todd. NCUA's knowledge is maturing in this process and rightfully they're still stumbling blocks.

We still see examiners Perhaps putting burdens on boards of directors to get involved in daily operations and daily committees, which is very much misplaced in larger credit unions. There's clear separations of what is boards responsibility versus management's responsibility and how management demonstrates compliance with things, five, 10 years ago, you would never see an exam report that talked about risk appetite statements.

We're starting to see those and rightfully but I also think sometimes examiners don't have their hands around what that all means yet. From my perspective, so I think NCOA is still taking baby steps down the right path, but their knowledge level still needs to mature along the way, and they have a lot of employees to get up to speed. Credence, you can hire us. We'll help you out with that. If you got an examiner, that is misplaced along their journey. You're very good.

And Todd, the catching up concept. It was a conversation. The three of us were involved in, I think, last week. It might have been an after conversation, but you said something that resonated with me. It was like back 20 years ago, 15 years ago, whenever capital market specialists came into existence and NCUA elevated the expectations on liquidity and asset liability management and income simulation and all those things, it was much needed.

And we, the agency and credit unions were behind where banks were. And there was this This maturity process within the agency and then within the credit unions, I think we're at the beginning stages of that in corporate governance. And then I'll pivot to say, the office of national exam and supervision has highlighted as corporate governance and a lot of the initiatives that came out in their guidance.

And then, Ones used to be over 10 billion, then they shifted it to 15 billion, yet they have the capital planning for the 10 billion. And then Steve, you alluded to other guidance sets out there, which there's this great document that you've pointed out to some of our clients and to me, the FDIC proposed guidance on corporate governance, which, quite frankly, is fantastic.

But it's for 10 billion credit unions, but that creeping effect is, we see that we pointed out to clients, NCUA sees it, they look at it and go, wow, this is better than anything we've got in our NSPM. And we don't have a letter to credit unions on it. And you can start to see examiners taking on some of those tenants, which is a good thing. But you can have, depending on who gets assigned to, you can have the expectations of a 10 billion.

Guidance that's not even final for banks that ends up being part of a discussion for a 1 billion or a 500 million credit union. Same thing being said, if you're at a billion dollars and you get corporate governance brought up, what you want to do is look at what's out there, what, how you can mature your systems and there might be some things there that do make sense for you at your asset size. Any, anything I triggered there or should we move on to regional director letters?

Go ahead, Todd. I spent two decades dealing with troubled credit unions. I spent, a couple, a decade as an examiner problem case officer and then call it another decade as a director of special actions. And even my time as a regional capital market specialist, there was dealing with a lot of troubled credit unions. When you go through the whole process of resolving issues in troubled credit unions, there's almost always was corporate governance at the root.

It's a failure of corporate governance that got them into trouble. Most of the time, not all the time, but most of the time it was never in writing. And CUA said, Hey, credit unions don't need ERM programs.

When I was the director of special actions for a billion dollar credit union, if they got The code for rating came into special actions I wasn't letting them out until they were well down the path with a fully established erm program Because those are the things to make sure they don't ever come back into special actions again And I found over my career over the 2000s like even you go through the last recession in 2008 and stuff The credit unions in california and on the west coast washington,

oregon that had erm programs in place before that recession You None of those guys ended up as code fours or troubled credit unions. Those programs are successful at mitigating and managing risk. They're almost essential in this competitive environment. Once credit unions start hitting that 1, 2, 3, 5 billion. I don't think they're optional anymore. I think of accrediting wants to survive and compete those risk management processes in governance processes.

They have to be in place if you're going to survive long term. Great. Great point. I had one more topic on, on the document of resolution because it is an item that at the end of the exam and the joint conference, the the regulator usually asks for the board to accept or approve the document or resolution. Sometimes there's an uneasiness there. I thought maybe we should discuss, what is the board's options when they're faced with that decision, at the joint conference. It's a great point.

I think we're both going to look to Todd for his take on that. And then we'll have had some comments. I think it comes back 1st from a board level perspective is do you really understand the examiner's concerns and. A lot of times board members are reluctant to ask the examiners questions, when they get a document or resolution, they're supposed to get that exam report ahead of time.

They should be discussing things with management, even lay out the questions that they might have with the examiners and make sure they truly understand what the examiners concerns and issues are. And you get that examiner quite often their supervisor is there well at that joint conference. Don't be scared to ask them questions and make sure you have an understanding of the issues.

At the end of the day, the examiners are actually trying to do what's best for the credit union, even if some of their suggestions and guidance might be a little bit misplaced, or there's alternatives to ways to address it. But That's the root piece right there is board members. Make sure you understand what the examiners are really asking. There is provisions. The examiners are always going to ask you to approve that document or resolution and agree to it.

And most of the time it's in creating his best interest to do sometimes it's not. And if it's not crediting, they're allowed 30 days to respond to it. We disagree with this. Here's what we're willing to do. Here's what we're able to do. There's a whole appeal process. If they think the examiners have gone astray to a great deal, there's a lot of costs and time and energy involved in appeals, so it's not always your best path.

But having an open door and a two way communication so you truly understand each other, that's step one in the whole thing for board members, is make sure you understand what the examiners are really telling you. And this is another thing to the timeliness and some of the issues we're seeing the examiners are taking. Two, three months to get a report finalized after they're done with field work. And then the board members are getting, 24 hours or less notice to digest it.

And that's not a timely way to address the problem. These are volunteers. They need a little bit of time to adjust, especially complex doors that are asking a lot. I think NCOA is sometimes not giving them the time they need to do that. And I think it's perfectly fine for management to say, We need another five days to think about this and truly understand it and digest it. So credit unions shouldn't be scared to ask for that additional time.

We had a client the other day that the examiners wanted to meet with the board with no documentation at all, no agenda, nothing. And of course that management team was right in saying we're uncomfortable doing that. And, we even told them don't do it until they give you something. And it's just not necessarily a good idea. We did indeed, the. That issue of the reports coming in late and getting dropped on the board. It's a real issue out there. It's, we're seeing it too much.

For it not to be and I know NCUA is trying to deal with it because of some statements from the NCUA board vice chairman, but that that's been frustrating recently for credit unions, and I think there's pressures on the examiners to get it done, which is why they end up, dropping on them and they want to write in the closed section of the report, by the way, the closed section, Is what the credit union doesn't see. It's a little summary of, things that aren't worthy of going in the report.

Here's the hotel you should stay at, those kind of internal items where NCA will say yes, they voted on doing the document resolution in the perfect world. That's what the examiner Wants to have happen. The other thing, the other word that you mentioned that I had written down and Steve had said it and you said it and I want to say it here communication. Everything we're talking about here comes back to communication on both sides.

All the documents we've talked about will be better in final form if communication is working optimally on both sides. Regional director letter. Anybody want to chat about our, also known as an RDL, any thoughts on a regional director letter from where you sit today versus where you sat at NCUA? Steve's nodding. I think he's waiting for me to talk first again.

Regional director letters, they're quite often seen in when you get that code three, they sit in that slot somewhat in between a document or resolution and before. in a letter of understanding and agreement. It's usually a way for the regional director, because they're personal, the regional director signs them to tell the credit union's board that I have concerns about these doors here. These are the items you need to fix. They tend to mirror the doors that the credit union has been given.

Quite often they're tied to issues that have been persistent. And have not been resolved for a period of time that's typically where they occur. So you've got a repeat type door a longstanding code three that doesn't seem to improve to a code two. It's just the regional director's way to tell the board of directors.

You need to pay a little bit more attention here because issues are not being addressed in a timely manner and the real directors will say, I expect you to address these issues in a timely manner. Credit unions should take them pretty serious because they're a prelude to a higher level of informal action if you're not addressing these issues. Excellent, excellent points.

You alluded to a higher level of informal which would be preliminary warning letters and letters of understandings that are not published. You can argue that's a gray area where you're starting to get more formal because when a board member is asked to put their signature on it, something, it seems formal, but it might not meet the definition of a legal formal.

I think what we'll do here today is leave those discussions to to record another day and that those might be a good primer to the more draconian formal formal actions such as cease and desist orders. Which are rare removal of officials, which are not existent. It's a, as I've said to a lot of people in conversation, they it's something that's never done unless they're all done unless it's a conservatorship. So N. C. U. A. doesn't go halfway into removing officials.

They either conserve or they don't remove officials. And we'll talk about those another day. Any last thoughts here before we before we wrap on a discussion of Most of the informal actions that NCWA has. You hit it in so much of the issues that we deal with, they all come down to communication and people slotting in the time that it takes to do communications and that's always seems to be the root cause of a lot of the problems that we end up dealing with. Good point. Todd, any last thoughts?

The communication breakdowns can happen on both sides, too. Freddie is you need to make some efforts to communicate with their your examiners on an ongoing basis, get to know them and let them get to know you. And I think maybe the code years were examiners were totally off site has led to some of this. There's no face to face conversations. Even today, a lot of the staff are remote.

Some credit unions are choosing to be remote and not sit down and meet with their examiners, because that's the model that they've developed coming out of COVID. But communication needs to be intentional on both sides. I know NCA Historically, has spent a lot of time on examiner training with communications. But like Steve said, quite often there is a breakdown and quite often it's on both sides.

So credit unions, you need to make a conscious effort to make sure your under your examiners understand you and what you're doing and why. And sometimes a short conversation is better than the examiner spending, three days looking at your ELCO and board minutes. Sit down and talk to them. Tell them what's behind this business plan and your challenges. Very good. You gave me the opportunity to end with that quote that you guys have heard far too much. Familiarity breeds consent.

The more familiar you are with them and the more familiar they are with you, you start to understand each other. When you understand each other, It's because of the communications have been better. This has been a lot of fun guys, as always. I want to thank you for your time, Steve and Todd. Have a great day, Mark Steve and listeners. I want to thank you for listening. I hope you'll listen again soon.

We've got we've written down a lot of topics that we want to record podcasts on here coming up the rest of 2024. So stay tuned for those. I think you'll enjoy them. Perhaps as much as you'll enjoy this one. This is Mark Treichel signing off with flying colors.