Hey everyone, this is Mark with a special Archive episode of With Flying Colors. I hope you enjoy. One of the first episodes I did back when the podcast started was on the appeal process within the region. And I had one of my team members, Todd Miller, on that podcast and Todd is very, was very experienced while he was at NCUA on appeals and then also serving on the supervisory review committee.
And recently Todd and I had a conversation with the credit union relative to the formal appeal process and how that works at NCUA. And that's what this episode is about, the formal appeal process. So obviously when you get your exam report. The examination talks about how the appeal process works and that you should first work through your examiner and you should then work through your supervisory examiner.
on up through the chain and that you can appeal to the regional director and beyond that you can appeal all the way to the NCUA board on certain things. So the exam cover letter walks through that and I wholeheartedly agree that the best place to start is with your examiner. The lowest level you can resolve something is the most time efficient.
effective and with good communications on your side and good communications on their side in the perfect scenario, things can get fixed at the lowest level. Encourage that.
However, you're going to find sometimes That might not be the case, and I've seen situations where credit unions pointed out factual errors to credit, to examiners were not fixed, where NCUA has made camel code conclusions, say a downgrade from a two to a three or a three to a four, or where a credit union is being asked to do things that is going to impact their positive ability to serve their members or build capital or build earnings. Or mitigate and control their liquidity.
And so I've seen many different combinations of situations where credit unions have been faced with a fork in the road early on. One of my clients indicated that every time NCOA makes a recommendation or a comment, the credit union has to look at that comment and say, Does it make sense? Is it a great idea that I want to adopt? Is it a mediocre idea or is it a bad idea that's going to hurt me and my members?
And when you get into the mediocre idea to bad idea, they have to weigh whether or not they want to push it. And I quite frankly, when I was at NCUA, I didn't realize the magnitude of how many things NCUA says falls into this category. And the client said, You have to weigh whether or not you want to go along to get along. Is it worth pushing or is it not worth pushing? And there's always the fear of retaliation that credit unions feel deep down in their hearts. Sometimes that might happen.
And I think it's rare that the retaliation actually does happen quite rare, but that doesn't mean because NCUA is in the position of power. Theoretically that that credit unions don't feel like, Hey, maybe I shouldn't push on this because I just don't want to tick off the examiner or the supervisory examiner or above that level. So it's a constant ever present situation. A lot of credit unions have to deal with.
When you get to the point where you have talked to the examiner, you've talked to the supervisory examiner. You've gotten a draft report. You've gotten a final report. And you don't like the camel code, or you don't like some of the things that NCUA is telling you, you need to do in a document resolution. And by the way, those document resolutions are negotiable, and sometimes it appears like they're not.
So you have the ability to push back on those, push back on dates, push back on language, come up with, approaches to the document resolution that can create a win win for the credit union and a win win for NCUA. But sometimes you can't achieve that and sometimes you get to the point where you're at that fork in the road and you have to decide if you do want to consider appealing. The appeal process, it's detailed in regulation.
By the way, and in regulation, I've said this before, when you're dealing with an NCUA regulation, it's always good to read the preamble of the proposed rule. The preamble of the final rule and the final rule, because you get, it's like a three chapter play. Here's what they propose. Here's why they're proposing it. Here's what staff thinks. Here's what the board thinks in the proposal.
They get comment and then it's becomes final, but there's the preamble explains why they're doing what they're doing in the final rule or what they changed from the proposed rule. And it really is the arc of all three of those things that you need to look at to best understand why NCUA operates. What's a rule being replaced? I will have links to the preamble of the final rule and the final rule in, in the show notes.
But when you want to appeal to NCUA, you can appeal certain things and the regulation defines it. But before I go into that definition, like I said, you can appeal to the regional director. Some things you can appeal just to the regional director. The regulation defines what you can appeal to the higher levels, but you can appeal or complain about anything to the NCOA regional director, and they can act on that.
So. If, if you want a change in examiners, for example, that's not something that's a formal appeal, but you can do that by approaching the chain of command and then ultimately writing additional director. The example I'm talking about for this example would be someone being downgraded from either a 2 to a 3 or a 3 to a 4 and having document resolution items that you didn't agree to and that you don't agree to and want to get changed.
So, the appeal process and the regulation states that credit unions may appeal material supervisory determinations as outlined in Part 746, Subpart A of the NCUA regulations. Find which a material supervisory determination is defined as a written decision by a program office. So, program office would be the region or the Office of National Exam and Supervision, for example.
that may significantly affect capital earnings operating flexibility or may otherwise affect the nature or level of supervisory oversight of an insured credit union. The nature or level, when you hear the word level, that means How frequently are they going to come see you, right? So if you're downgraded from a two to a three, they're going to come every 180 days. If you're downgraded from a two or a three to a four, they're going to come see you every 90 days, excuse me, every 90 days.
So those codes impact the level of supervisory oversight that they have. And so because of that, you have the ability to appeal that. Now, there's some key language here in this next sentence, this includes, and I underline these next words, but is not limited to the following. You can appeal a composite examination rating of 3, 4, or 5. You can appeal a determination relating to the adequacy of loan loss reserves.
And with CECL right now, you might have some situations where, uh, NCOA is pushing a little too hard on that, although, uh, I've seen that in a couple instances, but they were able to resolve it.
The classification of loans and other assets that are significant to the credit union, a determination relating to compliance with federal consumer financial law, and a determination relating to a waiver request or application for additional authority where independent appeals procedures have not been specified in other and CUA regulations. So it would be an application for something, field of membership.
So coordinated that something that doesn't have another way to appeal identified in that particular regulation, you can appeal under part seven, four, six, eight. So it seems like those examples are pretty tight, but this includes, but is not limited to let me go back and talk about the camel three, four, and five. So if you were downgraded from a two to a three. You notice that the language says composite examination ratings of three, four, or five.
That means you can't appeal that you've got a three in capital or earnings or liquidity. However, of course. If you got a three overall, you got there because they downgraded some other things down to, from a, they downgraded capital, for example, or they downgraded liquidity, which is, by the way, something that's getting downgraded left and right by NCUA right now. Are you worried about an NCUA exam in process or looming on the horizon? Don't face it alone.
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We're here to ensure your credit union passes your exam with flying colors. Contact Credit Union Exam Solutions today to learn more about our services and how we can help your credit union succeed. So let's say it's capital and it's liquidity and sensitivity that got downgraded to a three and that drives your overall rating down. Oftentimes you'll, if you're a three overall, you'll get a three in a management that's not always required and sometimes there'll be a differentiating point there.
My point is You cannot appeal by definition the components and you cannot appeal if you're a two and want to be a one. If you're going to be making an argument of the facts and persuading NCUA's regional director or NCUA's supervisory committee or NCUA's office of examination or ultimately NCUA's NCUA board to, to say why you're not a three, you have to explain how you're better than the components. So while it says you can't appeal it.
You indirectly can because your argument is going to be made on that. Now, NCUA's regional director come back and say, well, I'm not changing the components because you can't, you can't appeal that. But then if they wanted to change the overall component, quite frankly, they would have to change the components. So you get into this little circular approach as it relates to CAMEL. Now, the other thing, but is not limited to, I want to go back to the definition of supervisory determination.
So, let's say, and that is a written decision by a program office that may significantly affect the capital earnings and operating flexibility or may otherwise affect the nature of level of supervisory oversight.
So if you have a document resolution and or examination findings that you don't agree with that have the ability to significantly affect the capital earnings and operating flexibility, that would be something that you could make an argument that you want to appeal, and it would be appealable.
And again, an overzealous examiner puts in a document resolution, liquidity or sensitivity or earnings or asset quality or capital that restricts your ability and significantly affects your ability to achieve cap, to, to affect capital earnings and operating flexibility. Quite frankly, you can drive a truck through that definition. So while they frame it up, like it's only these things as examples, it's really very broad what you can appeal. Now, if you appeal.
You still have to, that doesn't stay what you have to do. So you still have to comply with the examination. Now, another nuance to that is if you didn't agree to the document resolution, you can communicate that to them and you can say what you're willing to do in your letters versus what they've asked you to do. And you get into this no man, or again, no man's land where you're, you're kind of complying or you're complying with what you're agreeing to.
Okay. And in so you, you write to the regional director, they're going to reply saying, yes, we agree, or we don't agree, but they're going to have to take in consideration what it is you write to them about, right? And so that creates an administrative record, by the way, NCWA's examination process is when they want to ratchet things up, and I'll have a separate video.
Podcast on this, but you know, when they go from an examiner finding to a document resolution, to a letter of understanding, to a cease and desist order, to a preliminary warning letter, to the draconian actions of, of conservatorship, they have to build a record to get to that point. So they can't. Unless there's fraud involved, quite frankly, they can't go from zero to 60 without taking those interim steps.
And you need to look at your record, whether it's emails or whether it's a letter appealing, you have to look at what you're doing is building the administration straight of record from your side of it, because you can use that as you go on to the next level. All right. So what levels are they and how does that work? So I'm going to give you an example of how long an appeal can take. So the example I'm giving you.
We'll, we'll be losing at every level until you ultimately go to the end to a board. So for sake of discussion, I'm recording this February 24th. Let's assume that on the last day of March, you get an examination. They meet with your board. It's a final examination. You're downgraded from a two to a three, and you've got. Three document resolutions, pick three categories, asset quality, liquidity, and sensitivity.
And you disagree with one or all of those document resolutions and you want to appeal. Once you get that examination, you have 30 days to appeal it to the NCUA regional director. Now I've also, as an aside, I've also seen NCUA take the position that once you get the draft, the clock starts ticking. So. Once you know what your code is, the day you find that out, I would view that as the day your 30 days starts.
And I think they need to fix their regulation relative to that because they're basing it on insue's internal legal guidance that once they know that the clock starts. But so I've framed this up as you didn't find out until March 31st. To keep this simple, that gives you 30 days to appeal. To the regional director or the office director. So that would be the three regions plus the office of national examination and supervision.
And I often get this question, can you skip that step because the office. That office already has given you the examination. No, you must take it to that level. So you can't automatically pass, go collect 200. You got to go to the office, the regional director, the ones director. Now, NCUA by other law, I think it's the regal act is required to be. expeditious in responding to you. And so their regulation, the law says they have to be expeditious.
And then when they put it in a regulation, that determines what expeditious is. And as you see, when I walk through these timelines, expeditious means different things, depending on what stage of the appeal you are. So. The office director, and in this instance, we'll say it's a regional director, has 30 days to reply. So March, you get the, the examination report. You have to appeal by the end of April. So that's 30 days.
That gives the regional director until the end of May to heal, to reply to your appeal. So now we're 60 days in, we're at the end of May. Let's assume they say, nope. Okay. We agree with our examination staff and you'll get a letter from them and should you want to appeal it further, they'll explain how to do that. And the how to do that is that that gives you another 30 days. So expeditious to go to the regional director means 30 days.
Every time the ball gets put back in your court, you have 30 days. So that gives you 30 days to go. One of two directions. You can go to the Office of Examination and Insurance, or you can go to the Supervisory Review Committee. Now, quite frankly, more often than not, it makes sense to just go to the Supervisory Review Committee, because this is a step you have an option. If your goal is to ultimately get to the NSUA Board, I would, I would go to the Supervisory Review Committee.
Now, another caveat to that is the regions have their own quality control, which is their division of supervision. The ones credit unions, office of national examination and supervision. And as a reminder, that's over 15 billion in assets. Those credit unions have, have their own ones division, excuse me, their own division of supervision, but because they're significantly important to the insurance fund, they have to have their reports reviewed by the office of examination and insurance.
So I would argue in no circumstances or very rarely would a ones Credit union, a credit union over 15 billion in assets will want to take it to E& I because they've already reviewed the report. This is a way to keep things moving. So let's assume by the, by on June 30th, excuse me, June 30th, you reply to the regional director. You reply to NCUA and you take it to the supervisory review committee.
The supervisory review committee There's a lot of information relative to that in the preamble and the regulation, but it's a group, it's a committee of senior leaders and executives at NCUA and staff members at NCUA. I believe they have, now they have a rotating group of eight people that can serve on the supervisory review committee and they have to be independent. Of the chain of command in the region.
So in this example, let's say your credit union in region one that has appealed the region one director did not side with you and then you went to the supervisory review committee. So they would pick from this pool of aid. And they would pick people that are not in any way connected to region one. So that could be someone from one, someone from the office of examination of insurance, someone from the two regions, the other regions, two or three.
And that group of three, they would pick a chair and they would be able to, that would be the, the people who would decide your appeal now expeditious. What does expeditious mean in when it's either gone to the office of examination of insurance. For the supervisory review committee, those two steps in the appeal, they have 60 days to decide. But in my example here, I'm going to say, let's say they got it done in 30 days.
And the other thing is you can ask for an oral hearing with the supervisory review committee. You cannot do that at the regional director level, and you cannot do that at the office of examination of insurance level. And if you ask the supervisory review committee for that, you, they must grant that opportunity.
Now, that leads into an elongation of the process because when you're wanting to do something face to face, you have your schedules you have to work in, you have your legal counsel that you probably hired schedules, you have the NCUA staff member schedules and that can elongate it. Ultimately, in the end, if you have orals in the two steps that you can, that can add a quarter to it.
But in this example, the Supervisory Review Committee responds to you and says, no, we still agree with the region. We still agree with the office director. And so now we're to the end of July. Okay. So you got the exam in March, four months have gone by. You were just told, no, we don't agree with you. That gives you another 30 days to appeal to the national credit union administration board. Okay. So that gets you to the end of August. You send in your appeal.
Uh, at this time you can request an oral hearing, but the board does not have to grant that now. In, in examples of the past. I've seen situations where there were, the case brought before them was a similar thing that they'd already appealed. And in that instance, the board says, no, we're not going to grant oral face to face appeal. In that scenario, they said, no, we have enough information. We can make our decision.
But they will and I have seen that they've allowed this and then that ends up being a closed item at the NCUA board meeting with the board they're listening and you have the opportunity to make your statement and the office that you're appealing has the opportunity and then the board has time to decide and that time to decide is 90 days so the NCUA board gives themselves 90 days so the definition of In summary, the definition of expeditious as it relates to the board stage is 90 days.
The definition of expeditious, if it's the SRC, Supervisory Review Committee, or E& I, the Office of Examination of Insurance, is 60 days. The office director has 30 days, and in every step of the way, you only have 30 days. But you know the facts, so I guess the argument for giving you a shorter time period is that you have the facts at hand.
Although you could argue that Uh, maybe you should get a little bit more time if they're giving themselves the longer time, but in the same token, you want it done. So moving quickly probably isn't your best interest. So you get your feel into them by August 2024, that gives them 90 days. So now we're at the end of November. So you've had the report now six, eight months. And again, if you decide you want to do oral at either stage, that can add about 45 days either way.
You can end up getting close to a year by the time that you have your appeal. And this has happened sometimes NCUA comes in and they do another exam and they upgrade you before the appeal process ever gets done. And if you do some research, you can see that that's happened on some of the decisions that have been made. And then you have to weigh ultimately, do you want to appeal or do you not want to appeal? What's the definition of victory, right?
If you are looking to get your camel code upgraded, or you're looking to get a document resolution, totally eliminated or changed or tweaked. You can have partial victories along the way. You could have them say, we'll take this piece out. And let's say in this example, let's say the regional director said, you know what? You were given five document resolutions. I'm going to eliminate one of them, but I'm keeping the camel codes the same. You could go, Nope, that's not good enough.
You could take it to the supervisory review committee and they could say, you know what? They moved it from, Five to four, we're not changing the camel code, but we're going to change the language of this document resolution. And you don't like that. And then you could appeal that on up to the NCUA board. So you can get partial victories. You can get full victories. But I've had credit unions say to me that they don't feel like they were free to prayer. Barely.
They think that the powers that be need to know more information about how they were treated and or handled. And they want to bring things into the sunshine. And sometimes there are credit unions that will view victory as just having the opportunity to be heard, right? Because that can provide a sense of closure, but that can also. allow you to have your feelings heard on how the examination process in your view went awry. So that can be a victory, just having the opportunity to be heard.
So that's it in a nutshell. Again, definition of success. And where you might succeed, I think the further along, when you get to the point where you're dealing with the board that's political, that may not like how you were treated, I've seen situations where the board has said, because staff said X, I can't support staff on this, right? So the higher up the hierarchy you get.
The more political it gets and the different view that they have, maybe that's a better way to say than political, but there have been things overturned at the board level. I think your Kansas success is greatest there, second greatest at the supervisory review committee level, and then E& I and then the office director. And quite frankly, tie goes to the runners. So think of this when someone walks into your office complaining about your, a member complaining about your staff member.
You look at the facts and you may see a situation where, again, it could be gray or black and white, you see a situation where the member clearly is wrong or that it's close, that the staff is right, here's the policy, you tend to want to support your staff because that has morale. ramifications, but you also want to treat your member fairly. The same thing works at NCUA.
A regional director is just not going to willy nilly go changing things because they lose the, they can lose some of their staff if they start doing that too much. In the same token, and what I'm saying there is sometimes tie goes to the runner, so they're not going to just overturn to overturn. And so you have that burden of showing that it's not tied to go with the runner. You were clearly safe at first base. And here's why that's a good sports analogy relative to this.
In any event, this podcast, I got a little bit more into details. I went down a couple of rabbit holes. Uh, that's a show that's out there that I want to start watching. Someone recommended I give that a watch with Kiefer Sutherland. And so went down some rabbit holes, but this is my take on the formal appeal process. If you or your credit union are considering that and would like to talk about it, give me a call you or track me down on LinkedIn.
And as always listeners, I appreciate you listening. I hope you listen again soon. And this is Mark Treichel signing off with Flying Colors.