Exam Appeals: Credit unions deserve a better process
Tuesday, December 15, 2015
Posted by: The NCUA Report
If 2015 is a “year of regulatory relief” for NCUA, credit union officials are not feeling any less burdened. In fact, credit union officials tell me they are increasingly anxious as examiners receive even more discretion, such as through the final risk-based capital rule, the final fixed-asset rule, and the proposed member business lending rule. All the while a credit union’s ability to appeal an exam directive remains as futile, ineffectual, costly, and fraught with risk as ever.
The agency’s exam appeals process is discussed in the “Review Of NCUA’s Examination And Complaint Processes For Small Credit Unions,” Report #OIG-12-10, August 31, 2012, which was produced by the NCUA Office of Inspector General (OIG) in response to a request from the Senate Banking Committee. The report found serious flaws in the agency’s record keeping as it relates to appeals but was able to ascertain that from 2007 through 2011, a yearly average of only six credit union “complaints” to their regions regarding exams were filed. Only two such appeals made their way to NCUA headquarters during that period. In 2011, NCUA supervised over 7,000 credit unions.
What accounts for such a low number of exam appeals, particularly during the financial crisis? Is it the result of examiner performance or were other factors present? A murky process? Fear of retaliation?
What Is Wrong with NCUA’s Process:
What our process is and what it should be are just not the same. The 2012 NCUA OIG report described NCUA’s Appeals Process: “…NCUA has an appeals process where credit unions can question examination results through informal and formal channels. Specifically, NCUA has in place a two-tiered appeal process which encourages that disputes over examiner determinations get resolved at the regional office level and at the central office level through the SRC (Supervisory Review Committee, parenthesis added).”
Such a process might indeed produce an objective procedure in which credit union officials feel free to disagree with and challenge exam results without reproach and without sensing that the deck is stacked against their claim, yet credit union officials say this is not the reality. Credit union officials who speak to me feel they can’t even present reasonable alternatives or dispute exam conclusions, much less actually seek a review. These directors and officers also express their uncertainty about how the appeals process actually works in practice. The OIG report recommended that the agency develop a better system of reporting determinations at the regional level and an electronic system to document any Supervisory Review Committee decisions. It is unclear how even these modest recommendations have been fully addressed by the agency.
NCUA must address a credit union’s right to appeal now:
I support appropriate supervision and the full measure of enforcement for bad actors, but every credit union that reasonably concludes an exam directive is inappropriate should be entitled to challenge that directive in a cost effective manner and without fear of retaliation.
NCUA must have an open and fair process that allows for such challenges and provides each credit union an appropriate level of due process, consistent with our Constitution, the Federal Credit Union Act, and other applicable laws. Two bills are pending in Congress to improve supervisory appeals for credit unions and banks, S. 774 and H.R. 1941, both of which NCUA and other regulators oppose.
Recommendations for NCUA action:
NCUA on its own authority, right now, could develop a much more open and user-friendly appeals process by taking some simple steps:
- Seek general comments from credit unions and other stakeholders through an Advance Notice of Proposed Rulemaking on the flaws in and improvements to our appeals process. NCUA Interpretive Ruling and Policy Statement 11-1, as amended, could serve as a starting point;
- Use those comments to develop a new proposal on exam appeals that articulates the kinds of issues that may be reviewed and the procedures for the review; and
- Allow credit unions and other stakeholders to comment and respond to the comments by modifying the final rule as needed, including revisiting the final rule as part of NCUA’s rolling regulatory review.
Read this full article in the December 2015 issue of The NCUA Report here.