NCUA Issues Tips on Starting an Exam Efficiently - What You Need to Know

Then, uh, I followed Mark to the central office and worked remotely in the office of examination and insurance and risk management for, uh, you know, at least another more than 10 years there. And that I really enjoyed that job 'cause got involved in so many of the kinda national issues affecting NCOA. And, and, uh, my duties were, were, were, were really great 'cause, uh, one of my calculations was dealing with how much should the NCA reserve for credit union potential failures and losses.

I got involved in the corporate resolution and then towards the end of my career I spent a lot of time on the, uh, risk-based capital regulation, but really diverse topics and, and, and a lot of interesting people and within the industry to work with. Then, uh, post-retirement, I've spent a stint as, uh, working in a conservatorship as a, as a CFO, and then we, we started with Mark, and then we've been able to.

You know, continue to take what we learned in all those years at NCA and help credit unions mainly with the, their communications with the examiners.

The next 10 years of my career, I spent it as a regional capital market specialist in the western region. Kind of one of the more complex regions. During that I kind of got involved in some of the corporate stuff too. Steve and I, I think we wrote one of the first reports for Mr. Fri about how much risk those corporates poses to the agency. And then you drug me into Westcorp for my last year. I call it my last year. 'cause I wasn't allowed to talk to anyone.

I spent a whole year at Westcorp working for you when you were the agent for the conservator and then the last 11 years of my career, I was a director of special actions in the western region. Supervising problem case officers. Um, regional capital market specialists. Some regional lending specialists unfortunately closed more than a few credit unions at that last recession.

Also I was involved in a couple conservatorships that were returned to the members, so those are kind of highlights of the career. It's always nice when you can conserve a credit union, give it back to the members, and know that those credit unions are still there today. I think I retired for maybe two, three months When you came through Billings and said, Hey. Wanna do something in your spare time. And so I've been helping you ever since.

That was in 2021, so we're coming up on four years of that mark.

I've worked for them for 32 years. I just recently retired about a year ago and in, I think in January I stayed in contact with Mark throughout the years. Good friends as well. Um, and he asked me to jump on a call here and there. And so that, that's where I, I got connected with Mark's group here. My, my 32 years at the credit union, uh, we were approximately about a hundred million in assets basically.

Then through our organic growth for the next 32 years, we worked our way up to about a 1.1 billion, um, retired there as the, um, uh, chief financial officer. Had a great career, was. It was fun. I loved my job throughout the, throughout my 38 or 32 years. So, worked in various aspects of the credit union. Started as a VP of operations, but basically grew as the CFO through that period of time.

Had risk management report to me, obviously finance, accounting and it, so, a bunch of different areas that reported into me throughout that timeframe.

And in that regard, you know, there's not a lot with only one board member and with the Trump administration saying, you know, we don't want new regulations and we don't want, uh, new guidance and things like that. There, there's not as much coming out from NCA at this time, but they did come out with, uh, via their nsu a express. And by the way, if you don't subscribe to NSU a Express, you can sign up an NNC a's website and they'll. They'll alert you when new things come out.

Some of it's mundane, like this person was prohibited. Uh, some of it's, uh, meaty when they come out with a new letter or a new regulation. And what they did recently was they came out with, uh, a reference to a, a new webpage called Tips on starting an exam efficiently. And it was interesting because, you know, we have had some conversations with some credit unions recently. Where there seemed to be a lack of efficiency. And Steve, you mentioned communication and how important that is.

Uh, but we've seen some signs that showed us that things might not have been working optimally. And it appears that some feedback has gotten to NCA through, um, through the reporting back system. The post exam exam survey. Yes. Thank you. The post exam survey, if you will, that things could be done better. So there is this page out there, tips on starting an exam efficiently that we thought it'd be good to chat with that. You know, there we, there's how we used to do it.

There's how they're saying it needs to be done now or recently. There's the things we've seen client-wise and Dennis from, from where you sit, there's things you probably did to prepare for an exam. But let, I'm just gonna throw it out there. Who wants to take first bite on this, uh, apple of how to start an exam efficiently?

Very informally in some respect. Their exams have always had a standardized exam request, but you've always had specialists. I know even when I was a capital market specialist, you know, my list was a little different than other specialists. Sometimes I almost always sent them to the EIC would, sometimes the EIC would say, Hey, go ahead, send it right to this person at the credit union. So there was different.

Protocols being followed by different people, even though it was always the EICs responsibility. And you know, we heard it from our clients. They refer to it in this letter that, you know,

They can do it through the merit survey, um, they can do it through NCUA secure transfer portal. They can do it through their own. Facility or secure file transfer portal. And you know, it's pretty clear this letter makes it clear to you that it's so credit union's choice on how they do that, you know, so two of these tools are NCOs, credit Union can use their own tool. It's interesting when you go through the. Their national supervision policy manual.

You know, some of the things that the card union have to provide CTR sars, things with personal information. They're not supposed to send those through merit. They're actually supposed to use the secure file transfer portal. Or their own. So you've got some differing standards for different types of data, but it's always the credit union's choice.

And I think you read through, and we just had a client go through this, if you use NCUA secure file transfer portal, um, and we have clients that like to do it 'cause they can see what's been downloaded by the examiners. And this probably came out in their exam survey. We've seen this where clients, they've provided thousands of documents and the examiners don't even download and look at all of 'em.

I'm gonna defend the examiners and maybe asking for documents they can't always get to or don't always get to a little bit. NCUA, they recently, in February, they changed their exam schedule. They made that public. What they didn't make public is they changed their NSPM two for code threes, fours, fives. Those guys are no longer under 90 days. They're under one contact between exams. For three, four fives, that's brand new. And they put that in the NSPM and they didn't really make that public.

And I didn't notice it till I was looking at the NSPM as part of this letter. So when I was a problem case officer, and when I was a director of special actions, you know, you'd lay out, you'd have these three, four contacts for credit unions. You have this many resources for this contact. It wasn't uncommon for us to ask for extra things and if we had time to look through those and roll those steps over to the next contact.

So we would do that occasionally, you know, if resources are available, we could look at more stuff. So sometimes we would ask for more stuff, then we knew we could get through with the idea that, hey, if the exam goes smoothly, we can look at more stuff. It's less to look at next time we come. So there is the MCUA side of that. Now with our clients, I don't think that's happening in all cases. I think they're just going overboard because everything is offsite nowadays. You're not on site.

There is a fourth way for, examiners to get stuff from the credit unions, and that's to use the credit unions VPN, that requires extra step through NCUA's help desk or one stop, I guess what they call it now. I don't think NCUA really just encourages that. I've done it personally in times when we're like going through an entire commercial loan portfolio to price it for. A p and a action or something of that nature. There's a whole bunch of rules the examiners have to follow.

If they get on the credit union's, VPN, they have to get off of ncua, and I don't think that happens very often, that fourth way. Most of it, it's the secure transfer portal, or it's the merit surveys are, it's the credit unions portal and, it doesn't talk about this in the letter, but I do know with a lot of state contacts, a lot of the states have portals and NCUA will use the state's portals for documents when the state is in charge.

So there is a. A couple other ways not mentioned in this document. It, it's just interesting nowadays with the PII, how they have to formalize all this, before there was ever even a formal process. Steve, you and I, we were getting documents from credit unions electronically way back in the 1990s. Before NCA even envisioned it formally, so it's been going on for a long time. I just think now as NCA, we see this with our clients.

There's more and more stuff offsite, so those electronic lists are getting longer and longer and obviously there's issues in the process along the way that's happened more than once, or this letter would not have been issued.

Um, but where it gets to be a challenge is just the pure number of examiners that are involved today, particularly with all the specialists. So I think on the last exam we had, we had like 16 or 17 different exams. We're a state charter credit union, so that might be added to the, the total, but that's a lot of different individuals to. Be able to manage. So you gotta have a pretty solid process in place in order to try to make it as efficient as you possibly can.

Um, so our approach was to have a single point of contact on our end, and that's where everything, everything went through. So any request went to that, our VP of risk, and then from there, um, she distributed those requests out to the subject matter experts at the credit union. And that, that seemed to work pretty good. Um, where it gets really challenging is right. The we, NCA provides the list up front, generally about four weeks. We'd like to have it earlier if possible, but Right.

It just allows us to spread out that workload. 'cause the, usually the initial list, there's like a hundred over a hundred different types of requests that they're asking for. So it takes time. So we, you know, our credit union folks might be going through another. Like our year end audit or there's other things obviously going on. So the more right upfront that EIC can scope out that exam and provide that information as to what they need, the better. Right.

That just gives us more time to, to formulate and put that all together. But then where it gets to be a challenge. So for example, I think the last exam, I think there were well over a hundred pre-exam items, but then during the exam, like that two week period that there wa that we have. An exam, then there was probably another 60 or 70 items that were requested. And again, during that process, we always ask those examiners to go through at one point of contact and then we we distribute it out.

So that's where it gets to be a challenge. And then a lot of times, I think it was mentioned that the the examiner said, well, I, we don't have that, but it's, so then we're wondering, are you actually looking at what we uploaded to the. To the portal. But generally that, that didn't happen that often.

It was just the, that two week period where all of a sudden you thought you provided most of the information, but then during the exam, then all of a sudden you get this big request list that is, and that may be coming from, you know, 13 or 14 different examiners at the same time.

It's just, yeah, that two week period of time, our VP of risk, I mean, that's pretty much her, her full-time job during that period of time is, is just dealing with you know, the exam, the examiners. Establishing meetings, right? There's meetings that need to happen. So we had this individual make sure everything was coordinated. There wasn't any duplicate going on, so we just had one person I think that works the best on for us anyway, worked the best.

That one person sort of quarterback that process for us.

I do not need credit union approval to schedule an exam, but whenever possible, the NOA should reach agreement to minimize disruption to the credit union and to ensure critical staff members are available while examiners are on site. And I, I think the exam, it seems like the scheduling is, is not as flexible as it used to be. And we're, we do hit that in that, when they're scheduling exam during some of the holidays, like the recently, one on the 4th of July.

Certainly you, it could have critical staff members that have long planned vacations during that, that period way before there were no ancy way. And I think that's something that might come up and the credit union just needs to be, you know, upfront in that with, uh, here's staff that we, that's had long-term thing and they're critical. They won't be here. You know. Okay. Let's, let's make arrangements to do what we can for that. I'll ask for Todd and Dennis.

Any, you guys, any other statements on that?

But I think that is hopefully flexibility on the part of NCOA that yeah, if there are some key people that are gonna be gone during that time that can work with, uh, NSU a to try to reschedule so that that critical person can be part of that examination.

So as you're trying to figure out how your people are gonna be there, but NCA and in NCA staff defense, there's a lot of chaos because you've got people who have left from the buyout. You've got people who are going to be leaving because of the buyout, and you have the mayhem that causes to any form of scheduling. So they're in chaos, which makes having that gatekeeper.

In total control that much more important because more than ever, the good communication is falling on the hands of the credit union to be communicative or over communicative because NCUA again, has resource challenges that, that are driving a lot of, some of the things probably driving why this thing had to be reissued as a webpage, if you will. And Todd, something you said, uh. Perked up my ears about about 120 days contacts. Uh, how they seem to have slipped that into the NSP.

They made it public without making it public. Makes me wanna go and scour. You know what else has been changed, but that reminds me of a quote, uh, that I used a lot when I was at NCUA, which is before you take down a fence, you should understand why that fence was put up. And the fence was put up to have 30, 90 day contacts for Code Fives, 120 day contacts for Code Fours, 180 day contacts for code threes. You know, we talked about how we've all been involved in credit Union for 40 years.

Well, either around that time we started or before that time. Uh, NC a's staffed up so that they could do follow ups, uh, on credit unions that were having more challenges. And the reason links back to what Steve was talking about, how, you know, being involved in how you determine how solvent the insurance fund is and what the losses are. It won't happen today and it won't happen tomorrow, but if code fives and code fours only need one contact instead of three or four.

Because they're wanting to comply with their own internal policies. And oh, by the way, and I, we halman two Januarys ago said, Hey, we need to do better in, in complying with our own policies on code threes and code fours. Then they watered that down so that they could comply. And I've talked here a lot about how that's the equivalent of airlines adding a half hour to their flight times to show, wow, look, it we're 95% on time now.

So they took that and now they're saying you only have to have one contact for a code four, which goes to the chaos that they're under. Uh, meaning it becomes that much more important for the credit union to be humming on all cylinders because quite frankly, NCUA has all these challenges. Any, anything you'd like to add to that nuance, uh, of this discussion?

Are you getting this stuff? 'Cause we recently had one where the union uploaded everything and, you know, the, the examiner said, Hey, you uploaded it to a file we can't see. So it sat there for three, couple weeks, and the examiners couldn't access it. They never checked until the first day of the exam. And you know, then you got a person staying up till four in the morning trying to get caught back up. So be a little over communicative if you're the one responsible.

Send that message to the examiners. Are you getting things? It's somewhat interesting. You know, they did away with those follow up contacts in the late nineties, early two thousands per a year. They left it up to supervisors and regions and as they were short on. Staff, those follow ups didn't happen and ended up costing the insurance fund money. And you can kind of see that maybe happening again this time around. Because out of those 20% of people that left NCOA, a lot of them were there.

Most experienced people too. The people that were probably best able to manage, uh. A flexible schedule and had the most experience in, in reading those risk reports and understanding warning signs. So it will be interesting to see how this plays out over time.

We normally would've gone in here three times. We went in here once we went there for 40 hours and we didn't catch the problem. Uh, um. Yeah. So, uh, you know, the history will repeat itself here for sure.

So I think that will be somewhat interesting. I often wonder, you know, the industry doesn't know it, and we don't see this, but each year when NCA issues their supervision priorities, they issue that minimum exam scope document. That's never been public. I haven't seen one since I retired. But you know, they're reducing these timeframes, they're reducing the need for follow-ups, and it just makes you wonder, okay, what in that minimum exam scope document has changed too.

I can sort of, you know, see Yep, all this information's here. Then you got the specialist working on one area and another. And it might be, there might be some crossover, but then they're asking for the same thing. So it just seems, it, it seems that, and I understand why there are specialists, but that seems to have, have maybe created a little bit more work on the part of the credit union to make sure. Then, right. You're providing information to two people rather than one or whatever.

So that's what I have observed over the years. Well,

It's very difficult for EICs to monitor all these specialists. 'cause all the specialists are higher grades than the EICs. Most of the time. And I'll be honest, some of these specialists, they're like little primadonnas. They don't like to follow instructions. They all want to do things their own way. It creates a huge challenge for the EICs to manage all of that. And you know, I don't know. I suspect with the 20% of the staff that left NCUA, a lot of them probably were specialists.

And maybe they will rebalance this because I think they just got to the point where there was too many, especially lending specialist you know, you should expect a principal examiner to. Do most of it, especially the loan reviews. Um, but yeah, the number of specialists creates challenges. It's hard for EICs and ESS to manage them because, like I said, they are higher pay grades.

EICs are expected to listen to 'em, other than when the specialists get carried away than the EICs are not supposed to listen to 'em, you know, and it creates lots of back and forth with the specialist supervisors and the ses. It's just a dynamic that is somewhat interesting in and hard to manage. And like I said, there's a lot of 'em out there and in my experience, a lot of those specialists.

Are somewhat prima don is they want to do things their way and some of them can be somewhat difficult to guide and direct and it's a real challenge for EIC CS a grade 12 having to reign in a grade 14 specialist who wants to do things their way.

The specialist system creates opportunities, and if left unchecked, it can create some challenges. And then if you think about Todd, you touched on, you know, maybe they're gonna kinda rethink what's going on, and I do believe they're in a, in a big mode of, of reinventing NCUA. I I've heard that from good sources. I've heard that. They're not necessarily as inclusive as you might think they should be on how they're doing that. So I'm curious to see you know, what does come out relative to that?

And I'm thinking about you know, originally having come from Minnesota the Minnesota Twins are in a, in a rough season right now. Uh, and I, you know, we're recording a podcast. I listen to sports podcast. And there the twins at the deadline traded 10 of their 26 major league players. They traded their five best relief pitchers. They traded their starting shortstop by eating part of his contract. And so they've got 38% new staff.

Coming up from their AA club, who we know some of 'em are, and by the way, they traded all these guys, but only one of the people they got was ready to come to the major leagues theoretically right now. So they're taking nine guys from the minor leagues, moving them up to the big leagues. One of those guys was named player of the, of the week last week. Another guy's 31 years old. He's he can play all the infield positions. He hit his first home run.

Two days ago, and it's creating these opportunities for these folks from the lower levels to come up. And that's what's gonna happen at NCUA. You know, there's a lot of talent leaving. They're gonna have some hiccups in the road because there's gonna be some corporate knowledge that was left, but they were also married to some old ways of doing things, because that's how we've always done it. So that, you know, it's gonna be kind of two steps forward, one step back, in my opinion, at NCA.

But there will be, you know, stars and superstars and new leaders from every level of NCUA people who, who may have only been there a couple years, who are now being tasked with doing more things. And they're gonna grow, they're gonna make mistakes. You need to have the freedom to make some mistakes. But when that pendulum does swing, maybe they'll get, uh, a little bit better control under some things. And maybe that will be a little bit better control under the specialist.

But something good will come out of all this chaos. It always does. There'll be some losses that will come out of this, this, uh, newly revealed change to their exam cycle. But yeah. Interesting times for sure.

Like I said, it will be interesting, you know, NSU A doesn't release regional org charts. It'd be nice to see one before all the retirements and then see like next one on January one, you know where all the people are. It would be interesting thing to compare. None of that stuff is ever public, so we won't get a chance to do it, or it's historically never been public, but it would certainly be interesting to see how they.

Play out this reorganization because they lost a lot of executives and supervisor. Oh, well, some regions lost a lot of supervisors, some regions didn't. You know, so it's different in each region too, the way the impact is. And you know, the NSPM was set up, so all the regions are run uniformly.

And now the way they have to triage this, it's gonna have to be some slight variations amongst the regions, you know, unless they make people move around, because the people that left are different in each region.

It was one guy, Leon Hendrick, who had been forced to move under the Callahan administration from Denver to DC and he said, no, I'll take a principal examiner job in South Dakota. Uh, he trained Dennis and he essentially was the trainer and the leader of all of us young folks coming up, dealing with code fours and code fives far sooner than the policies allowed. And, uh, we learned a lot. We learned a lot quick. It was like, uh, drinking from a fire hose at times.

But that's what's happening right now at NCA with these changes. It'll be happening this year. It'll be happening next year. And they'll, um, they'll come away stronger in some ways, but there will be some hiccups, which gets back to it's incumbent upon the credit unions to communicate well with NCOA while they're in this, um, being reborn like the Phoenix.

It's not necessarily fine tuned. Um, and then when the specialists show up, they then request their own information. Is that generally how it. The specialists

Each of the specialists, they had a request list that they created. So like the capital market specialist had a uniform one. It was in our regional instructions, so the EIC could just pull that out, ask the capital market specialist. Anything you need to add to this one? Same with the regional lending specialists.

I think the information securities officers, they may, they had a couple different ones, but that's incumbent on the specialists to get that list to, um, that EIC well ahead of time, depending on the region. Some of these specialists, their schedules were filled out. 6, 7, 9 months, a whole year in advance. As a supervisor, I typically only kept it at three months. 'cause I wanted spaces if problem cases came up and I didn't wanna have to go to an SE and say, oh, you lost your specialist.

I'd just rather delay for two or three months before I'd assigned them one. So there is little differences on how supervisors handle it, but in all cases, the EIC should have the specialist request list long before they send their thing to you and they should be. Putting that in.

So that. So that in and of itself creates a lot of inefficiency for, for the crediting because there's a lot of information it is gonna provide. And if you don't know, it's probably can be predictable as to what's gonna be asked. But it'd be great that a little bit more coordination upfront with that EIC and the specialist to try to get as much of that information in advance of the exam as possible rather than just. All of a sudden they show up and we need this, and this.

So then that, that, and then that, right. That creates, that, those 70, 80 other items that I was talking about that just fills up that two week period. And that's all, you know, that's all that's going on. Is communication. Then between the subject matter expert are quarterback in charge, our, our individual, our VP of risk, and then the potential examiner. So

So some of 'em have a. Really deep background in payment systems. So they tend to wait, you know, that information security towards payment systems where others are, you know, got a deeper background within their network security and things of that nature. And that flavors their request list a little bit and they play to their strengths. And then, like I said, they do have. Rotating exam or they used to have a rotating exam scope for the information specialists.

So this year you get this form filled out. This year it's this exam scope, a different kind of scope that they use. So, you know, there's more variability with the information systems officers than there others. And then of course the compliance exams change, but those are usually telegraphed with the. Supervision priorities.

As I usually tell the whole industry, this is where our focus on compliance is gonna be, but even then, the examiners have a little bit of flexibility to follow up on prior issues. Yeah, the lending stuff, there's not really a lot of reason for those lendings specialists request list to be varied from year to year the way they are. And certainly with the. Regional capital market specialists. Those shouldn't change very much.

Like I said, in the Western region, we had a standard one that all the capital market specialists use the same request list. Um, the states really wanted that. The state supervisors, they get frustrated when NCUA specialists provide different lists, though in our region, in the western region with a lot of the states, we had agreed upon specialist lists that were given to the state supervisors ahead of time.

So if the state supervisors know we're getting capital market specialists, we have this list. If they're getting a regional lending specialist, we have this list. But I don't know how other regions and other supervisors handle that. I assume they had similar things, but don't hold me to it. And I retired in 2021, so I don't really know if that same stuff is going on today in 20 20, 25.

I would assume to the credit union, the extent to which they relied on these in arriving at any exam or nation conclusions. So I ne I mean, I, I know that went, I know that's being probably done, but I never heard that being communicated back to me as the credit union. I'm just curious, is that actually being done or, or not out there? It should be. I think it would be great if that actually was being done. Um, I'm just curious if it is.

Okay. Would they say you did a good job with that external audit or not? No. Usually it would just be an exception type thing where they might say something to use A CFO if they found exceptions with that. Yeah, yeah. They were supposed to be looking at 'em all along for years.

Go through minutes, look at reports they had, have a five minute conversation with them on their scoping other places, and I did this with newer people that when I was training people, I'd make them dig deeper into that whole internal audit and risk management process just for learning. And sharpening their own saws, what is going on here? But it becomes a time and resource thing.

And now here with NCUA losing 20% of their staff, you might have the initial reaction, they should spend more time with internal audit. I think the reality is, is they're gonna spend less time with internal audit because you know you need to get that loan. What's going on with credit risk? What's going on with interest rate risk and liquidity risk? I mean, credit risk is always gonna be their biggest one. They can't really leave that unattended. That causes most of the losses to the fund.

Fraud creeps in there from time to time. But in general, most of the credit unions that NCUA suffers a loss on. It's because of credit risk, you know, and high credit risk. It creates liquidity risk problems. So while you might think, Dennis, it's like examiners could be more efficient if they spent more time with internal audit. I think with the shortages and staff, the reality is, is they're gonna spend less time with internal audit.

There was a focus on making sure that they did look at it, and internally you build that and then you ask in the survey that it is being done, and then they can kind of measure over time. In 20 21, 90 9% of people said, yes, it was done. Then it goes to 98, 96, 94. They can kind of see internally there's a trend that maybe that's an issue, hopefully that there could be some. Some of that behind all this, but it's a point well taken that, that's a great resource for NCA to rely on.

But will they be able to now with everything that's going on,

Three months or six months and sent the results out to the regions, but it was actual NCUA people were looking at 'em, you know, now they've hired a third party to collate that, and will you get the same flavor and will they learn the same amount? Looking through those surveys. I mean, I'd learned a lot.

I'd be on detail in e and I and I'd pick up, like I said, I'd pick up the stack of our regions that hadn't been compiled yet, and I'd flip through them and I'd look at the questions and comments and you know, you're losing that now that they're moving that whole survey process to an external third party. You know, it might be more independent, but you know, if you're not seeing the actual documents, will you learn as much? And I. Don't know the answer to that question.

I suppose it depends on the quality of that third party. Um, but I mean, NCA, not a couple frauds that way. We fired a couple examiners that were making up exam reports. I, I know one

So, it's external which create, which makes it more independent, but it creates, it creates other issues. Okay? So I got to do an NBA lottery draft reference, uh, Minnesota twins trading 38% of their team members to create new opportunities for the youth in the twins farm system.