15 board members. Let's say 8 of them vote yes, and 7 of them vote no, and they sign it, and it gets published. All 15 are subject to that anyway, because it was the board decision. Even if you voted no, even if you abstained, your organization voted, and you have that corresponding fiduciary responsibility, et cetera, et cetera, as a board member. And I saw some eyes open up wide relative to, to that. So the board needs to know a lot of board governance discussions.
And a board governess really hits home when you have them signing a letter of understanding and agreement. You made a good point there, Mark. Over my career, there's different times I've had board members who have refused to sign, even though the majority of the board did, thinking it shielded them in some way, shape, or form, but it really does not. They're conscientious objectors, essentially, because they're still on the hook. This is Mark with a special Archive episode of With Flying Colors.
I hope you enjoy. Do you want to maximize your success with NCUA? Join Mark Treichel as he shares with you the insider's view on passing your exam with Flying Colors. The With Flying Colors podcast is sponsored by Credit Union Exam Solutions by Mark Treichel. If you would like to work directly with the Credit Union Exam Solutions team and receive support to optimize NCUA so you save time and money. Visit us at marctreichel. com to find out more. Hey everyone.
This is Marc Treichel with another episode of With Flying Colors. I'm back here today with Steve Farr and Todd Miller of my team. How are you two doing this fine morning? It's a beautiful day. It's a beautiful day in Billings, Montana as well. Doing well. Very good. Glad to hear it. We chatted recently about informal administrative actions. And today we're going to talk about some of the most materially used Formal administrative actions.
Before we do that, uh, let's get a little bit of your background in case somebody's listening for the first time today. And Steve, you're going to go first. Okay. Yep. My 30 year plus career at NCO has really broke into two parts. The first 15 years I was out in the field primarily as a problem case officer, where in regard to, to the day's topic, I was involved in working with credit unions on many. LUAs, cease and desist, actually just a few of those, and conservatorships.
Then the last half of my career, the other 15 years, I was in the central office and involved in such things as I wrote the enforcement manual for NCOA and was involved in assisting regions as they were considering enforcement actions against the credit unions. Good in time. I spent just a few months short of 35 years with NCUA.
I can break my career out, maybe three pieces, the first decade or so as an examiner, problem case officer, that second decade or so as a regional capital market specialist, and that third decade or so as a director of special actions where I supervise problem case officers, capital market specialist. Uh, one of the things we're going to talk about today is conservatorships. I actually did one of those as a PCO and one as a DSA, where we returned the crediting to the members.
Did a lot of them that didn't go back to the members as well, but I did return a couple creditings to the members, um, as part of conservatorship actions. I counted those as wins, the ones that didn't go back to the members. I counted those as failures, so I didn't keep good track of how many of those there were. I did a couple like that. I think Steve did as well. It is nice when it ends with a rising from the phoenix like that as opposed to a liquidation or a merger. Okay, very good guys.
So let's 1st, uh, walk through letters of understanding and agreement and, you know, what they are, why they use them, when they use them. And we can maybe get into some a little bit finer details beyond that. But either either of you prefer to. Chat first about letters of understanding and agreement.
Go ahead, Todd. So a letter of understanding and agreement, and we talked a little bit about this on our last podcast, they can be informal or formal depending on whether NCUA publishes them or not. But at this point, the agency considers the problem severe. You're probably going to be classified as a troubled credit union, although there can be an LUA for compliance reasons where you might not have a code for, we expect that to be very rare though. Thank you.
In most cases, this is a troubled credit union. You've had some persistent problems. The NCUA wants a commitment from the Board of Directors to address these problems, and they want that commitment to be a formal commitment. In the case of a formal LUA, NCUA is probably going to publish it. And there are certain state regulators, if there is You're a state charter. Um, you're going to end up with a published letter of understanding and agreement.
Um, but these are usually generally cases where it's a severe number of problems. NCUA wants that commitment from the Board of Directors to address this problem. And a published LUA is the first step in other more severe actions where it opens that door for them.
To take other administrative type of actions, if the credit union is unable or unwilling to address the problems by getting a board to sign, they're trying to ensure that this party, at least is willing to address these issues and Steve, anything relative to LA ways that Todd said, or you want to add on letters of understanding and agreement, just that the, that the LA way, and the way it's written up the first part of it, this describes, uh, The problems that are supposed to be addressed in the
corrective actions in the LEA way. So those would, those should be those major issues of what you're dealing with. Then when you get down to the actions that are being called for in that, it's real important that the credit union understand what they all mean and that they understand the time frames that are put on those. Because that's like when you're putting together a budget.
And in some years you make it or not, and this one becomes, if you put together this budget that's under an LUA, you're gonna have to make all of the requirements in it, so there's that kind of big step up in difference, uh, versus a document or resolution, you should make all those time frames. But then if you don't, as long as you have reasonable reason why you didn't, it's documented in the exam program.
But with an LUA, not making the timeframes can be really troublesome, and it's important that you understand those. Especially if it's a problem, a public one. Go ahead, Todd. I think there's another side to this, too, as well. Just the language used in LUAs that are published. It's very draconian and very one sided. Yeah. Yeah. NCUA reserves the right to remove officials, assess civil money penalties, do some other things.
And when you get to a point where NCUA is talking about publishing the LUA, it's probably best credit unions to actually seek some outside advice on this, whether it's an attorney or higher credit union exam solutions. We can take a look at it with you as well. These are pretty serious actions at this point. NCUA is exhausted what it considers its informal actions. These are fairly serious matters, and the boilerplate language in that is very Dracodian for the Crottyians.
It's intended to be serious. Crottyian boards, if you get one of these, make sure you understand them and don't be scared to seek assistance from an attorney or from us. Excellent point. Yeah, your reputation risk gets really high really quickly there because we talked about that there, the trades and stuff are looking for how NCUA publishes those and that gives them something to write about and they will.
Yeah, on publication, it's not like NCUA when they release their NCUA Express that says that they've conserved a credit union or they release an NCUA Express that says we're having a training class, why don't you sign up? They don't use NCUA Express. As by recollection, when they publish an LUA, rather they are required to publish it to make it enforceable. And I don't want to say they bury it, but they don't, and now they don't scream it from the, from the mountaintops.
That being said, people know it's there. Papers, the trades, without naming which news organization might go look, they do go look. And then it becomes far more public, and that's for the, the reputation. Side of it, uh, can come into play. How about the word agreement? Letter of understanding and agreement. There are situations.
Yeah. I've said in calls with clients and on the podcast, and actually it was a, a client from my first year that said every time NCUI opens their mouth, I have to decide if I'm going to go along to get along.
And I've turned that into, NCOA has got a really good idea, NCOA has a kind of good idea, and NCOA has a bad idea, and how do you push back, or don't you push back, obviously on a good idea you're not going to, but a mediocre idea, what will you do, and on a bad idea, what will you do, and all of a sudden, you have the arc of those types of things being thrown into a letter of understanding.
An agreement you're, when you sign it, you're saying you agree, which makes in my mind, a very important that a, you can get it done and B that it's in the best interest of the credit union and the members, any wisdom you can share on agreeing to the LUA. Hopefully by the time you get to this point, your management team has had a chance to negotiate these items with your PCO, our examiner.
Uh, most of the time, if we're talking about a published LUA or Probably dealing with a problem case officer as opposed to an examiner, but there should be some give and take on these agreed upon actions. Um, hopefully they are going to be challenging and stretch goals like you said, sometimes it's best to if the cost isn't significant to go ahead and deal with these issues.
Usually, by the time you get to a published LUA, though, they're pretty significant issues, and there's usually not cheap ones in there that are easy to accomplish. For the most part, usually these are big stretch goals that you're being asked to achieve by the time you get to a published LUA, but it's a toughie. But appealing them in your actions, NCUA will take other actions if you don't agree to a published LUA, and the consequences to those might be just as severe.
Yeah, what the items that we are hearing about is Koreans are going through the process of they've been informed that because of the nature of the problems and the extent of them. That they're going to pursue the LUA and then you have, it goes with the exam report, some credit unions can feel pressure in terms of timeliness that occurs between when they're provided with maybe the first draft of the LUA and when the meeting is scheduled, when they would want it signed.
And I think the credit union has every right to, on that, to request that timeframe be reasonable in terms of, Well, credit union has to kind of, you know, address that they can make those items and they want to probably discuss that with their board prior to that meeting on signing. So, I think it's important to have that communication that says, we understand that you got to do this action for us to really accept it.
We need that reasonable amount of time to digest it, make sure that the timelines are good and make sure our board understands what we're getting into. But I had a conversation with the credit union board. Last week, and the discussion was this is a scenario where they may reserve the right to publish. They don't actually have the language yet, but they know they're getting 1. so they were trying to educate themselves.
And there was, there were, I think, board members who are going to sign it and are comfortable with it. And there were board members who aren't comfortable signing it. There were board members that appeared weren't comfortable if it was going to be publishable.
And I pointed out to them, if you abstain or if you vote no, and as a collective, the board agrees to, and let's say it's a publishable one, so let's say there's 15 board members, I'm going to give a big number, they don't want to pick a number, but 15 board members, let's say 8 of them vote yes, and 7 of them vote no, and they sign it, and it gets published, all 15 are subject to that anyway, because it was a board decision, even if you voted no, even if you abstained, Your organization voted
and you have that corresponding fiduciary responsibility, et cetera, et cetera, as a board member and I saw some eyes open up wide relative to to that. So the board needs to know a lot of board governance discussions. And a board governess really hits home when you have them signing a letter of understanding and agreement. You made a good point there, Mark. Over my career, there's different times I've had board members who have refused to sign, even though the majority of the board did.
Thinking it shielded them in some way, shape, or form, but it really does not. They're conscientious objectors, essentially, because they're still on the hook. I know. All three of us believe in the concept of an LUA should have the material items that are in a document or resolution and not necessarily all the items that are in a document or resolution.
And it seems under merit because merit Going down a little bit of a rabbit hole, because Merit seems to, they now have the ability to track and say, okay, this door is done, this door is done, and this door is done. They tend to maybe separate doors into something that might have been one door in the past might be three doors, and we're seeing a little bit, and then you throw the economy like it is right now, you start seeing really long document resolution.
Um, and as we've said here before, if everything's a priority, nothing's a priority. In a perfect world, you agree with the concept that an LUA should be skinnier than the door and should focus on the main thing. In concept, yes. We're not necessarily seeing that in reality, but it, uh, in concept, yes, that's how you would do it if you were still at NCUA. Is that a fair statement? Yes, that's how we always did it. The LUAs only addressed mainly the, what we would refer to as the root.
Causes of the problem, the root causes of the problem. Very good. And Steve, you trained in CUA staff and pod. You did, you train your staff to do it that way. And with turnover, not saying because we left, but with turnover, they've got a lot of new people and things change. And then you can get, you can get. You can get pockets of the country that do it different. You can get redirection from the top. As, as you mentioned, we're seeing. Publishable potential LUAs.
And we're seeing that a little bit. We're seeing LUAs more than recently. And we're seeing the publishable often more. And I've said here before, a dear friend who passed away, who used to be the general counsel at SUA, when he consulted, he would advise clients not to sign them and just send them a preliminary warning letter.
And I really, when he first started telling me that I really wasn't in that camp, I'm starting to move a little bit closer to that camp on a publishable one, especially if it's publishable in ad infinitum and it doesn't have any deadlines, etc, etc. If you find yourself with an LUA. Feel free to reach out to discuss it and, or reach out to a legal counsel to make sure you understand the ramifications of the LUA. Anything else on LUAs, guys? Just something you mentioned, dates there.
Other than new credeans, new credeans can get an LUA that has a termination date. For the most part, LUAs, whether they're unpublished or published formal ones, they're not going to have termination dates. Those things are open ended. It's will you complete what you've agreed to do and NCUA gets to decide did the actions, were the actions completed and did they achieve the results intended is the way Steve used to phrase it when he was still teaching me how to do this.
And that's how you determine, has this LUA been satisfied? Did you do what you said you were going to do and did it achieve the results intended? And I think we're seeing these really long LUAs at the side of that COVID a little bit. They missed things when they were off site. Things built up because credit unions had stuff off site. Then you had the bank failures. You have an inverted yield curve. You got delinquencies creeping up.
Just as an insurer, NCUA probably is a little bit stressed of what might occur in the future, and they're trying to get things resolved before they get costly. Great. Agreed. And you just triggered something in my mind that, uh, we had a situation where we had a client conversation where someone said, We messed up. We didn't give you an LUA last time, and we should have. And I believe the reality Is that's not the case.
The policy believe their current policy reads as if you're a 4, you're going to get an unless a higher level says you don't need to have an anyway. So somebody in that other situation said. We don't need the way, and then they came back and decided, no, we do need it. And in an environment where. You got the SUA board talking about their concerns. You have staff going to be a little less likely to go out on a limb for a credit union.
And so I think the correlation between if you're a four troubled status, you are going to get an LUA. People opting to go a different path, I think is going to be rare, very rare. It's always been rare by definition and code for by their own policy, generally involved in LUA or a preliminary warning letter. One of the two. Yes, it's always been rare, but I have recently seen where it wasn't, uh, but yeah, it's, I think it's going to give a rare. It has been rare.
It's going to be rare and maybe even rarer. That's a wrap on Letters of Understanding and Agreement with Todd and Steve. We also went on to record a discussion on cease and desist orders, prohibitions, conservatorships, and a couple other topics, but I'm splitting those into separate topics for later release. I want to for listening. I hope you'll listen again soon. This is Mark Treichel, signing off.
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