Hey, everyone. This is Mark Treichel with another episode of With Flying Colors. I'm back today with my, my two most frequent guests and team members Todd Miller and Steve Farr. Guys, how are you doing this morning?
I'm good.
Doing well. Doing good. You got, you need a little bit more enthusiasm with that. Doing good. Good there, Steve. All right. Today we are going to be chatting about who reviews your NCUA report before you see it as a credit union, the examination period, and related parts of that. But before we jump into that topic, this topic why don't you guys introduce yourselves for those listeners who may not, who may be listening for the first time. Todd, we'll start with you today.
Okay good morning everyone. I'm Todd Miller. I was with N. C. U. A. about 34 years from 1987 through 2021. can break my career and do about 3 different pieces over that 34 years about a 3rd of it. I spent as an examiner problem case officer about a 3rd of it. I spent as. Regional capital market specialist and about a 3rd of it. I spent as a director of special actions in the Western region.
Supervising problem case officers, regional capital market specialist, some regional ending specialists in there as well. Enjoyed my time with a great deal. I think what credit unions are doing in their mission is a really positive for our country and our economy. I'm in favor of the whole industry and I enjoyed my career a great deal.
Very good. Good. Said and agreed. And Steve, a little bit of your background while you were at N. C. U. A.
Yeah, I can break my 30 plus year career into 2 separate parts. The 1st, 15 years were in the field primarily as a problem case officer. We're got to work with credit, the most severely troubled credit unions throughout the nation involving conservatorships and multiple LUAs and negotiated mergers and all those types of items really a fun experience. It, and that one, when you're working with the people at the credit unions, actually trying to fix items, that's a self rewarding job.
Then the last 15 years. I joined you when you went into the central office and during that 15 years, I got to be involved in many aspects of in terms of policy generation. I drafted the enforcement manual that was put in place, but probably the thing that I enjoyed most.
During that part of my career was I was in charge of the problem resolution training that was provided to examiners where we try to help them with mainly the dealing with the personalities and communications when they're dealing with troubled credit union. So that in a nutshell is is what it will apply for today. Great
great great summary from both you guys. As I was thinking this morning, a little bit about the topic that we have, Todd, you mentioned you started in 1987. I started in 1986 and I remember, going to my new examiner training classes and then, when you're released from training and you're going to joint conferences and you're writing reports and you're on the job trainer is reviewing those along the way and then at some point in time, they push you out of the nest.
Like a little baby bird and you're meeting with boards and you're writing reports and I just remember it hitting me, early on. It's wow, a year ago, I was in college wrapping up my accounting degree. And now here I am meeting with boards, writing reports and no one's looking at them, and they gave a lot of power to me. An authority and, obviously smaller credit unions, right?
Cause they start the new examiners with less, less complex credit unions, which can be frustrating for the small credit unions sometimes, but they basically allow you to fail forward, which is great. You get a lot of opportunities early. Sometimes you, the credit unions teach you a little bit more than you teach them.
But That one of the main topics we're hitting here is that policy changed right before Steve, I think it changed right after you left and a little bit and we launched it when I was still there. And Todd, you were there when we came up with the new process of every examination had to be reviewed by a higher level of some sort at N. C. U. A. Before. It went out to the credit union and, we had done a review of looking at how the other banking regulators did it.
We knew how the different states did it, and based upon that review we realized NCA was the only U. S. financial regulator that did not require some level of higher review. And I remember briefing the board on, the possibility of going in this direction and, When they heard that, they didn't need to be briefed a second time. They heard once that NCUA was flying solo on this and they said, you know what? We really need to step up our game here. And so the agency did.
And with that, why don't we tiptoe into that. We can talk about the exam period and any related, how the exam process works and what the cycles are and everything. But Why don't we first touch on the report review and how that works, who looks at it, when, et cetera. All right, I'm going to, I'm going to stop rambling and Todd, I think you might be the guy leading the way on this part of this discussion.
Sure we'll go back and talk about contacts in a little bit and exam cycles, but in general, on every exam and expects them to be finished within 90 days of completion and what we're finding a lot of times that isn't done. And I think a lot of that is due to their review process that started when you were executive director. There's even a name for it. The free release secondary review. Thank you.
With state chartered credit unions, there's a document and secondary review of CAMEL when the state's in charge and CUA still has supervisors looking at that. A lot of this kind of depends on size of your credit union and CAMEL codes, but in general, every credit union, your exam, especially in a federal, the supervisory is in charge for reviewing that exam report. The examiner is supposed to finish up their field work.
They're supposed to get that report to their supervisor within five business days. The supervisor then has 10 days to review 10 business days. I actually use that term business days and then SPM to review that report for appropriateness as the camel rating supported has the examiner done everything that they were supposed to do and issues and instruction every year on examination scope. The SE is basically qualit quality, controlling that exam with that instruction on examination scope.
So for credit unions under $50 million and a Camel 1, 2, 3, it's just that supervisor and that's as far as it goes. For smaller credit unions, you get a Camel four or five. It involves the division of supervision in each region. That adds another 15 business days to the process. And for. I think that are under 50 million and they have a camel 4 5, it goes to the division of supervision. Everything over from 50 to 250 million. That's a camel 4 or 5 that goes to the division of supervision.
Anything over 250 million to 1 billion, goes to the division of supervision. So you're looking like a 25 day review process in all these cases. And then everything that's over 1 billion, it actually goes to an associate regional director for review as well. And that review is supposed to happen in the same 15 days that the division of supervision does, but that assumes everything goes right.
If you've got an SCE, he wants changes, or DOS thinks something needs to be changed, or more work needs to be done, or an ARD that thinks there needs to be a little bit more work on this, it can extend this process out because the whole thing goes back to the examiner and the SCE to fix this whatever the case may be. And a lot of times those fixes just can occur in a day or two, and other times they don't occur in a day or two. They require a little bit more time.
Substantive reviews and then it comes back through the review process again. There's also a loan concentration risk evaluation process that goes on behind the scenes that tends to follow the. Free release secondary review with 1 exception. For credit unions that are over 500Million dollars, if there's one of these loan concentration risk evaluations an LCRE, it adds another 15 days to the process for the regional director to look at the report in the form.
And if the credit is over 1 billion, it adds another 15 business days as it goes to the director of examination insurance in Washington. So when you add all that up, if you're a complex credit union, you have a specific loan concentration that meets NCUA's triggers. You can end up with 30, 45. Almost 55 days in that review process. And they're supposed to get an exam done within 90 days, start to finish. Not quite going to work when you have a 55 day review process.
So NCOAs set themselves some deadlines that they can't possibly hit on these larger complex credit unions. And for whatever reason, what we're seeing amongst our clients, they are going out much longer in certain cases.
That's a great summary, a lot to unpack there. Before I add a few questions and comments, Steve, any thoughts or comments you have that you'd like to hit on here based on what Todd said or anything else?
No, I like what Todd was able to do that because just in preparing for this, I was going through the NSPM and I was like. Having a real problem being able to summarize that down to something that was like that. And ideally, it'd be nice to have some sort of a table on that could be produced, but that was a great summary. And it took me a lot of time just to figure out half of that. So yeah, there is
a table that exists. At one time it was public in the latest version of the NSPM, that quality review chapter is all redacted. So you don't get to see that table anymore.
We have that topic come up more and more as, as we, we have these podcasts where NCUA once had something public. And now doesn't, and it's something that I think I'll be highlighting here in more of these podcasts because it's frustrating. It would be great to have that chart. It could help explain to a credit union why things are moving so slowly because they'll hear from their examiners. Yeah, I should get you the report back in about a month and then I can't guys.
I can't remember the last time we had a client say, said we'd have it by this date and we actually got it by that date. Right? It's universally things are taking longer. And as Todd, as you laid out, Those timelines that's like you said, 55 days, and that's if everything's going perfect.
And when you have something that has to go to the supervisory examiner, and it has to go to the ARD, it's also going to flow through DOS, because the report's going to get processed through DOS in case perhaps it's a code 3, or has these concentrations that are going to go up onto E& I. And everywhere along the way It's a little bit of sometimes it could be that everybody's, you've got a lot of chefs contributing to it.
And then the further away you get from being the actual person who was there with the credit union. I had a conversation with a client yesterday who just said, Hey, we just heard from NCUA that we're going to get a new document resolution added to the draft we've seen. You can probably guess what topic it was. Yes. The topic was corporate governance. They were going to add something from corporate governance.
That got dropped into the exam somewhere along the way, either from the supervisor or DOS or the A. R. D. And there's that whole dynamic to this. I'm going down a rabbit hole here, too. There's the associate regional director of operations who runs the office for the regional director. And there's the associate regional director of program who runs the field. Typically, those exams are coming through the, if they have to be reviewed, they're being reviewed by the A. R. D. P. program.
The. Division of special actions reports to the and so they get involved. They get involved as having to be the higher level review for certain sizes and codes, just as you described, but the division of supervision reports to them. So you can have. Some dynamics here, where maybe it was even reviewed by the associate regional director of program, but it still also came through. DOS, especially if it had that concentration limit that might have to go to a higher level.
So it can get a lot of fingerprints on a report and sometimes it can be, we've seen some situations where it, somebody far away thought dropping something it made sense, but it really had no rhythm or rhyme with what else had been done in the report. So I think all in all the process is a good one, which is why, NCUA went, decided to move forward to having a higher level review.
They probably need to relax their timelines and be a little bit more communicative on what the real expectation should be. Because when you set high expectations of turning it around and then it doesn't happen, it frustrates everybody.
Yeah and see, they put themselves between a rock and a hard place because the other side of it is when you take 3 months to get an exam report out and a lot of these credit unions, it can get stale hard to convey to the board when you're in, June of 2024 and you're talking about something that happened in September of 2023 and they're under a whole new business plan that gets frustrating.
And you mentioned it, this doesn't happen very often, but I think what frustrates our clients the most is at the end of field work. They get a draft document a resolution. They get draft findings from the examiners. They start working on that. The report goes through that review process and all of a sudden, here's a new door that wasn't even spoken about during the field and that creates a little frustration and communication challenges. But overall, I agree with you.
It was, a good process to put this review thing in place. I know as a supervisor, even before this existed, I still made my staff like supervise problem case officers, but I still made them share their reports with me before they went to the credit union, even when it wasn't required. And I think there was probably lots of supervisors did that at least for the larger credit unions.
Great point. No, that great point. I did that at times in certain situations back when I was a supervisory examiner and a director of special actions a lot ago. So it definitely happened. It happened in some instances, but standardizing it was good policy. The procedures and the timelines are a little bit I use a technical term here, a little bit wonky sometimes.
And you talked about, communications and they're in people have gotten used to that. That they can track, like when you're, when you have an order from Amazon coming to you, you can track where it is in the process. Here in the, as your exam starts going off going up in the, and it starts taking more on, you don't know exactly where it is. And a lot of times the examiner might not be able to respond back to you.
I think that might be part of the frustration is there's no kind of mechanism for following. That the credit union can use to, here's where the exam is in this process that it's, gone to E and I, because of the concentration thing. It would be nice for you to do that, but it would be probably pretty difficult to implement.
Yeah, that's a good point. It's a bit of a black box. The credit union just has to sit there and wait. They can reach out to their examiner. They can reach out their supervisor examiner. But they might not necessarily be in control if it's getting reviewed at one of those higher levels. So great point. Great point. So Todd and Steve two other things related to this are the how contacts work and what the exam period is for different credit unions.
And as long as we've talked about how the report flows through who touches it. Why don't we either talk about how contacts work or how the exam period works. Pick one of those two and we can finish with the other.
We can talk about exam periods in The exam period and exam program in general, that is still all publicly available in the national supervision policy manual. People can pull down, look it up. They haven't redacted that for the most part. As we go through this discussion, we'll just say this is for federal credit unions.
In general, the rules for the state charter critegians are very similar with the exception being that regions have different program agreements with each of their state supervisory authorities. And some of this can change with specific state supervisory authorities. A lot of it is depending on the state supervisory resources. Some states don't have the staffing and people to meet these timelines. So they have some agreements with NCUA to extend them out.
In some cases, NCUA does single and sole exams if those periods get stretched out. Most of what we're going to talk about is for federal credit unions. In most states, it's going to be similar, but. For state charter credit, just be aware your state supervisory authority, they have an agreement with the region that can modify some of this stuff for specific states. But a lot of the states, it does follow along with the same federal program. So 1st off, there is a small number of credit unions.
Credienes that are under 1 billion and they have a CAMEL composite of one or two and a management rating of one or two. They qualify for what's called an extended exam period or an extended exam cycle. I might not be using the exact term, but for those credienes, they'll get an exam that will be 14 to 20 months from when their last exam was delivered. And that's a start date. It will start 14 to 20 months out. Supervisors can move that by 30 days or so.
So if you're well on credit, under a billion dollars, you can almost get to 2 years between exams. Not quite. 4 months short, but you can get a quite an extended exam cycle. If you're a well run smaller credit union for everyone else in general, you're going to get an exam once every 12 months. And they have timeframes for that too. They'll start not sooner than 8 months from your last exam, and they won't go longer than 12 months from your prior exam.
And that's from when it was finished and delivered to you to when they start again next time. And then underneath of that for credit unions that get camel codes in threes or four. NCUA will almost always do a follow up exam and they have different dates for that. These can get modified a little bit, but most of the time they don't. If you're a Code 3, generally you're going to get a follow up exam that starts within 180 days of your last exam.
If you're code four, that timeframe is generally 120 days. If you're under a $50 million, it can go out to 210 days for that code three follow up. But that's just for credit unions under $50 million. So you get the follow ups in there if you're a code three, code four, and that's generally all laid out in the current supervision. Policy manual. Some of those follow ups can be waived by SEs and ARDs for a certain period of time. It's not forever.
They don't get to waive them entirely, but there can be extensions granted if they think that Code 3 or Code 4 is not a risk to the insurance fund. That's the time frame form. If you're a well run credit union, you can go 14 to 20 months. If you're under a billion, if you cross a billion, you're going to see those examiners every 12 months, whether you want to or not.
And, as you say that, it reminds me of something we've hit on here before. That was Kyle Houtman at the January board meeting, making reference to annual performance plan, which indicated that their goal of The goals that they have for Code 3 exams and the goals that they have for Code 4s, on the Code 3s, they were only hitting them every 67 percent of the time, which means, in theory, the other 33 percent of the time, someone gave a waiver. Or not, they just missed it.
And on the code fours, they were doing 80%. So four out of every five were done within, say the 120 days, or started within the 120 days. But one out of every five wasn't. And again, theoretically that would've required a waiver at some level. Presumably that would be for a smaller credit union, maybe one that had already decided to merge. But in conjunction with the other issue about having the higher level review of reports they. That's elongating that process, which then can elong.
The opportunity to get back in Steve, I jumped in there and commented on that before I gave you a chance to see what you had to say on this particular topic.
No, that was pretty taught as I was looking through the N. S. P. M. there were some. A specific areas that had been a slightly different timeframes is they fall in the same way. But these are items that are near and dear to our hearts, like severe record, keeping problems or audit deficiencies. And bank secrecy act problems, does that, can that affect the when you could expect a follow up to take place? Yes. And
especially on the smaller credit unions with record creeping and BSA problems the examiners need to follow up on those within 90 days to make sure that they're resolved or not. That could be an offsite exam. It could be an onsite exam. But record keeping issues. It opens the door to fraud and other things, and you're a steward of other people's money.
And when you can't keep your record straight I don't think any of us at NCOA have a very high tolerance for credit unions that can't balance their books. And it's a huge red flag. So NCOA does follow up on those usually within 90 days off site or on site. And the same with Bank Secrecy Act violations. They have what's called significant violations. They're going to follow up on those within 90 days as well.
A lot of times the bank secrecy ones can be handled off site the record keeping ones that can go both ways on site off site. And then, of course, does some fair landing exams. That's under a whole separate program as well. And has its own rules and subset of things. A lot of credits don't get fair lending reviews. We don't do a lot of them each year. Although with the current board, we might be doing more of them. Our NCUA may be doing more of them in the future.
Yeah, and because that one is a different animal, you can have your exam. And feel like you're done and then, shortly thereafter, you could have your fair lending exam. I think we've had a couple of clients that are like, yeah, they were right back in here. We just got, the regular ones out. Now, the fair lending guys are in.
Yes, yeah, we have 1 right now. That's actually just had the fair lending and now has the exam going on. So that we don't.
We don't deal with this with very many of our clients. In fact, I can't remember one, but there also is a QSO review program that is highly targeted especially for data processes. And those QSOs that do a lot of lending stuff for multiple credit unions, there's a whole separate program. NCOA allocates some resources each year for QSO exams. SEs, examiners nominate. Various quesos for those exams, and there's a subset that are chosen by regional management.
Maybe examination and insurance season even has a say in some of that, but that's based on our allocation of what resources they have and risk of those. Quesos, though we didn't really cover that. It's a small part of what NCUA does, but. If you're the primary owner of the QSO, yeah, you could get harassed for a QSO exam and a fair lending exam and an exam.
We actually did have one client last year on a commercial loan commercial loan QSO that had that and been beaten What was what was chatting with them daily while that exam came on and they didn't, that credit union did run into a fair lending, but they had the Q they were the majority owner and then they had that exam and then they had their exam follow up on it.
Most of the time with the QSOs, if there's a single credit union, that's the majority owner, they tend to try and schedule that QSO review at the same time. It doesn't always work out, but in general, they'll try and in. Put those 2 things together at the same time.
Yeah, this 1 without going into details that would give away the situation. It was, there were some unique things that did relative to it, but I'll just leave it at that. All right, guys any other topics on this that we should we want to highlight anything we missed anything I should have asked you on this topic that I didn't. I
think you covered most of it. Like I said, if your exams hanging out there a long time just stay in contact with your examiner. S. E. try and find out when things are, especially if they've given you draft doors and you're already allocating resources to address them. And, most of our credit unions, they take their exams seriously, so when they get those draft doors and things quite often, they are starting programs to address them and fix them.
In most cases, it can be frustrating sometimes to get an exam later and you have something new. And it goes the other way. Occasionally, too. We don't talk about that. Sometimes in that review process, your doors get removed to
like this. Yeah, I haven't seen a lot of those, but that would be that'd be cool.
Those
people are
because they're having, I was going
to say that. Yeah, those are the folks that that. That are happy with NCUA. All right guys this was fun as always appreciate your help on this and listeners I want to thank you for listening. This is Mark Treichel signing off with Flying Colors