Federal and state regulators such as the NCUA and ODFI examine credit unions on a roughly annual basis. Examinations focus on assessing risks like credit, interest rate, liquidity, compliance and reputation risks. Credit unions have the right to respectful treatment by examiners and to discuss and appeal examination findings and directives. Examiners are expected to identify problems but also work cooperatively with credit unions to find solutions.

1. How to Manage
Your
Relationship
with Regulatory
Examiners
Valerie Edgington  www.linkedin.com/in/valerie1120/

2. Who and How Often?
Federal Credit Unions:
National Credit Union Administration (NCUA).
State Credit Unions:
Ohio Division of Financial Institutions (ODFI).
12 month exam schedule.
Occur more or less frequently depending on risk profile and
other issues.
Page 2

3. Who’s In Charge?
Sometimes “joint” exam with federal and state regulators.
State‐chartered federally‐insured credit unions (FISCUs) are
subject to NCUA’s examination.
“Document of Cooperation” between NCUA and State Credit
Union Supervisors (NASCUS) coordinates NCUA’s and state
examiners’ oversight of FISCUs.
“It is recognized and agreed that the regulation and
examination of state‐chartered credit unions properly
belongs to and is the primary responsibility of the state.”
NCUA will independently perform “insurance review” of
FISCUs.
Page 3

4. Who’s In Charge?
NCUA will immediately inform state regulators of NCUA’s
findings and recommendations as a result of independent
insurance review.
NCUA’s policy to hold conference with credit union officials
within 30 days of completing insurance review.
NCUA does not discuss with, or disclose to, FISCU officials the
CAMEL ratings it examiner assigned to the credit union, which
may differ from those assigned by the state examiner.
If state law or regulation does not prohibit a credit union policy
or action that NCUA considers unsafe, the NCUA examiner will
cite it as a problem in the report to officials and will expect to
see corrective action taken.
Page 4

5. How Did We Get Here?
The “examiner” was examined by the Government
Accountability Office (GAO).
GAO issued report of its findings in 12‐247:
Failures of corporates and credit unions since 2008.
Assessment of NCUA’s response to the failures.
Prompt Corrective Action (PCA).
GAO recommendations.
Page 5

6. NCUA’s Response to GAO 12‐247
“NCUA is committed to proactively addressing
safety and soundness problems at credit
unions.”
“NCUA will continue to build on its current
enforcement efforts in requiring credit unions
to promptly correct problems at the earliest
possible time.”
“Consistent with GAO’s findings, NCUA will
also continue to take steps to strengthen the
effectiveness of our enforcement program,
striving to develop new predictive PCA
measures that identify emerging problems
earlier and better protect the Share Insurance
Fund from losses.”
Page 6

7. Examiner Duties
Review of credit union’s financial performance and assess how
well the credit union is managing its risks.
Risk‐focused examination program used by NCUA and ODFI.
Key areas of risk review:
Credit Risk Strategic Risk
Interest Rate Risk Compliance Risk
Liquidity Risk Reputation Risk
Transaction (operational) Risk
Page 7

8. 2012 Supervisory Focus
NCUA Letter 12‐CU‐01 highlights 2012
supervisory focus.
ODFI focus substantially similar to NCUA.
Focus areas include:
Credit Risk
Interest Rate and Liquidity Risks
Concentration Risks
Page 8

9. Required Questionnaires
Minimum Required Exam Questionnaires
BSA – Bank Secrecy Act Interest Rate Risk ‐ A Ln – Participation Loans
5300 Review Interest Rate Risk – B Ln – Controls
SC Audit & Verification Interest Rate Risk – C Ln – Real Estate – IC
SAFE Act Interest Rate Risk – D Ln – Indirect Lending – IC
Red Flag Questionnaire Liquidity ‐ A Ln – Sub‐Prime Lending – IC
Credit CARD Act Liquidity – B Ln – Home Equity – IC
Foreclosure Procedures Liquidity – C Ln ‐ Business Loans – IC
Unlawful Internet Gambling Sh – Controls Ln – SBA – Parts I and II
FFIEC Authentication Sh – Internal Controls IC – Lines of Credit
Third‐Party Relationships IC – Financial Triggers IC – Cash
Page 9

10. Examination vs. Audit
Examinations: Audits:
Performed by regulator. Outside company
retained by credit union.
Safety & soundness.
Accuracy of accounting
Overall controls. records or procedures &
Regulation Compliance. records related to a
particular regulation (i.e.
Recordkeeping. BSA).
Internal controls.
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11. Examiner Expectations
Examiners will send the credit union a preliminary notification of
information needed for the examination.
Exam notification will indicate:
Date of the exam.
Number of examiners to expect.
Anticipated length of stay.
Documents and reports needed from the credit union by
examiner upon arrival.
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12. Examiner Expectations
Accurate and timely financial data.
Management and officials understand risks.
Efficient operations /conservative operating expenses.
Sound internal controls / effective audits.
Detailed written policies that reflect actual practices.
Realistic budget and strategic plan.
Communication.
Page 12

13. The Blame Game
When failures or losses occur, everyone points the finger at
everyone else:
Auditors.
Examiners.
Supervisory Committee.
Board of Directors.
Manager/CEO.
Page 13

14. Credit Union Examination Rights
Credit unions have the right to:
1. Manage risk without being directed by examiners to eliminate it.
NEG Pg. 1‐3: Examiners should not “insist that a credit union eliminate risk but,
instead, should ensure that credit unions identify and manage their risks. The desired
reward for taking risk is stable profitability and increased net worth. Credit unions
must balance risk and reward responsibly.”
2. Respectful conduct from their examiners.
NEG Pgs. 21‐3; 21‐4: Credit unions, as well as regulators, expect examiners to act
professionally – which they do most of the time, according to credit unions. However,
if a credit union feels that an examiner has stepped over the line in terms of conduct
involving the credit union, the credit union should report the incident to the
supervisor examiner or regional office, without fear of retaliation.
3. Be examined by well‐trained, competent examiners who understand the unique
characteristics of credit unions. Page 14

15. Credit Union Examination Rights
Credit unions have the right to:
4. Meet and discuss examiner findings, conclusions, directives and administrative
actions with the examiner, or privately among themselves without the examiner
present. Credit union officials should be able to have management staff present at
the officials’ discretion.
NEG Pgs. 1‐11; 1‐15, 21‐2 & 21‐3: According to NCUA’s Examiner’s Guide, examiners
are instructed to provide time throughout the examination process for discussion
with management and officials regarding developments and findings in the
examination. Examiners are encouraged to provide credit union officials with a draft
copy of the examination report and give officials sufficient time to review it before
the joint conference or exit interview. As the Examiner’s Guide notes, ―Nothing
presented at the joint conference, exit interview, or in the examination report should
surprise the [credit union’s] officials.‖ It is equally important that credit union
officials not surprise examiners and that they take advantage of opportunities to
meet with examiners and discuss issues throughout the examination process.
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16. Credit Union Examination Rights
Credit unions have the right to:
5. Question, and seek corrections to, examiner findings, conclusions and directives.
NEG Pg. 1‐15: Accuracy is an essential component of strong safety and soundness
regulation. Examiners are human and all humans make mistakes. It is not only
appropriate but very important that credit unions work with their examiner to
ensure all reports are as accurate and timely as possible and that all directives are
based on accurate information.
6. Provide alternative and/or additional data, conclusions and solutions to address
problems indentified by the examiner.
NEG Pgs. 1‐11; 2‐3; 3‐10 & 21‐6: According to the Examiner’s Guide, examiners are
not expected to dictate credit union policies but rather should work with credit union
officials to reach a favorable outcome. The Examiner’s Guide emphasizes cooperation
and coordination between examiners and credit union officials, which should include
flexibility for credit union management to provide alternative perspectives and data
as well as alternative solutions to problems—as long as such alternatives are
factually based and appropriate for the situation.
Page 16

17. Credit Union Examination Rights
Credit unions have the right to:
7. Know the specific authority or legal basis for an examiner’s directive.
NEG Pg. 20‐7: The Examiner’s Guide makes it clear that examiners must be willing and
able to provide to credit union officials the legal authority for the action they are
suggesting or directing the credit union to take. In addition, examiners do not have
flexibility to insist on actions or policies that are counter to or inconsistent with
statutes, agency policy, or GAAP.
8. Receive clearly written examination reports, notices, etc. on a timely basis.
NEG Pg. 20‐1: Credit unions should not be expected to comply with directives that
are not in writing. In order for the credit union’s record of performance, including
efforts to address problem areas, to be as accurate as possible, directives should be
provided in writing to the credit union and included in the credit union’s examination
history.
Page 17

18. Credit Union Examination Rights
Credit unions have the right to:
9. Receive exam reports, findings, directives, and administrative actions that are
based on all relevant facts.
10. Be evaluated on their own strengths and weaknesses and not solely on the basis of
regulator concerns about trends.
NEG Pg. 3‐5: While examiners must be mindful of problems and conditions in their
regions and even across the country, it is essential for the accuracy of each credit
union’s examination report that the examiner’s assessment of a credit union reflects
an accurate depiction of the performance and operations of the credit union under
review.
11. Be evaluated for progress toward objectives that are realistic and achievable,
proportionate to the risk presented.
12. Examination findings and directives that are risk prioritized.
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19. Credit Union Examination Rights
Credit unions have the right to:
13. Appeal examiner findings, conclusions, or directives without retaliation from their
regulator.
It is clear that under the FCU Act, agency policy and practice, credit unions have the
right to appeal ―material supervisory determina ons, including decisions to require
prompt corrective action‖ to the NCUA Board. As discussed in this Section, matters
that may be appealed include, for example, cease and desist orders, removal of
officials, and conservatorships. Credit unions also have the right to appeal material
examination report findings, conclusions, and directives from the examiner.
Documents of Resolu on and LUAs are not generally ―appealable‖ because they are
technically voluntary agreements, but the credit union should be able to appeal to
the regional director as part of the DOR or LUA negotiation process.
Page 19

20. Credit Union Examination Rights
Credit unions have the right to:
14. Have instructions on how to appeal, detailed on every exam report form provided
to credit unions.
NEG Pg. 17‐1: NCUA’s process for allowing an appeal is far from clear. NCUA and
state regulators should ensure that all examination report forms which examiners
provide to credit unions include sufficiently detailed information as to which issues
may be appealed or challenged and the process for making such an appeal. CUNA
and the Leagues are pursuing greater transparency in the appeals process.
15. Record meetings with examiners and other agency personnel.
NEG Pg. 21‐2: The Examiner’s Guide states that credit unions often use tape
recorders to record their meetings at the joint conference, and that the NCUA
examiners usually agree to the request, and may request a copy of the tape or
transcript. A recorded meeting provides an objective transcript of the discussion
between the examiner and the credit union officials.
Page 20

21. Credit Union Examination Rights
Credit unions have the right to:
16. Have a representative, such as attorney, present during meetings with the examiner
and other regulatory personnel.
NEG Pg. 21‐6: The Examiner’s Guide states that credit union officials have the right to
invite other persons to the joint conference, and that an examiner will rarely object
to the attendance of any outside individual. Proper communication about the
attendees in advance will facilitate the meeting.
17. Have any published orders – such as consent orders – address only facts and not
conjecture or speculation by the examiner.
18. Have confidential, non‐discoverable communications with their legal counsel
regarding examination issues.
19. Develop and use “high‐level” policies, which should be separate and distinct from
detailed procedures.
Page 21

22. Credit Union Examination Rights
Credit unions have the right to:
20. Have a lead examiner that is state or federal, consistent with the credit union’s
charter type (except with respect to some insurance reviews performed solely by
NCUA staff).
NEG Pg. 22‐B3: NCUA appears to be compelled to accompany state regulators during
the examination of state‐chartered credit unions, par cularly on federal ―hot
button‖ issues such as MBL and indirect lending. Thus, it is important that the lead
examiner be comparable to the credit union’s charter type. It is also important that
the state regulator—not NCUA—be responsible for assigning the credit union’s
CAMEL rating during an examination.
21. Know the timing of when NCUA will publish a Letter of Understanding and
Agreement.
Page 22

23. Credit Union Examination Rights
Credit unions have the right to:
22. Defer to their CPA if there is a disagreement between the officials and their
regulator regarding issues related to U.S. generally accepted accounting principles.
NEG Pgs. 5A‐4 & 7‐28: Credit unions over $10 million in assets are required to follow
GAAP and a credit union’s CPA is responsible for ensuring that the credit union’s
activities and financial statements are in compliance with GAAP. Therefore, rather
than the regulator becoming involved in the specific accounting issues of numerous
credit unions, the examiner should not seek to override the credit union’s CPA when
disagreement on accounting issues arise, absent clearly erroneous guidance from the
CPA. Such practice will benefit not only the credit union but also the regulator by
freeing up its resources.
Page 23

24. Credit Union Examination Rights
Credit unions have the right to:
23. Have communication (i.e., discussion of draft findings) with their examiner prior to
final issuance of the examination report.
NEG Pg. 21‐1: The NCUA Examiner’s Guide states that examiners should set aside
time periodically to discuss with management and officials developments in the
examination.‖ NEG page 21‐1. In addition, an examiner should provide credit union
officials and management sufficient time to review it before the joint conference or
exit interview.‖ NEG page 20‐1.
24. Have directives from examiners (including verbal and written comments) be
consistent with regulatory requirements, policies and Letters to Credit Unions.
NEG pages 3‐1; 6‐15; 6‐16; 6‐20; 7‐35; 9A‐18; & 10‐1 – 10‐14: While this seems like
an obvious right, this is frequently raised by credit unions across the country. NCUA
examiners must follow the guidelines in the Letters to Credit Unions. For example,
the Examiner’s Guide states that credit unions must follow Letters to Credit Unions in
areas such as CAMEL ratings, risk‐based lending, and risk management.
Page 24

25. Enforcement Actions
Prompt Corrective Action.
Document of Resolution (DOR).
Letters of Understanding and Agreement (LUAs).
Cease and Desist Orders.
Civil Monetary Penalties.
Removal of Officials/Prohibition Orders.
Termination of Insurance.
Conservatorship.
Revocation of Charter.
Liquidation.
Page 25

26. Prompt Corrective Action
Prompt Corrective Action (PCA) net worth categories are based
on credit union’s net worth ratio.
Currently, 7% net worth deemed “well‐capitalized.”
Less than 7% net worth subject to increasingly harsh PCA
sanctions as net worth declines.
GAO 12‐247 states:
NCUA should consider additional triggers for PCA.
Credit unions that did not fail were more likely subject to
earlier PCA action.
Page 26

27. PCA Appeals Process
Examiner required to inform credit union of right to appeal
“material supervisory determinations.”
May also appeal adequacy of ALLL and classification of any
“significant” loan.
Credit union must contact the regional office within 30 days of
the examiner’s final determination.
If finding in favor of examiner, credit union may appeal the
region’s determination to the Supervisory Review Committee
(SRC) within 30 days of region’s decision.
Page 27

28. PCA Appeals Process
Credit union may also appeal to the SRC if the regional office
fails to respond to its initial appeal within 60 days.
Issue under dispute remains in effect pending the appeal.
SRC makes determination on the appeal within 30 days of
receipt or 30 days from date additional requested information (if
applicable) received.
Page 28

29. Document of Resolution
Document of Resolution (DOR) issued by examiner to document
agreements reached with credit union on reducing unacceptable
material risks.
Includes persons responsible and timeframes for correction.
DOR should not address minor issues.
Examiners should strive to reach agreements with credit union
officials on needed corrective action.
Page 29

30. Document of Resolution
If credit union will not agree to DOR, examiner should work with
credit union officials to develop alternative solutions or provide
additional time to develop acceptable plans of their own.
If credit union officials do not agree to DOR or offer acceptable
alternate plans, examiner may recommend administrative
action, depending on severity of identified risks.
Do not sign or agree to when first presented.
Terms of DOR can be negotiated.
Page 30

31. Letters of Understanding
and Agreement
Letter of Understanding and Agreement (LUA) is a more formal
supervisory tool.
Negotiated when credit unions have not adequately responded
to less severe measures, such as Documents of Resolution.
“Voluntary” contract between NCUA and a credit union and/or
its officials, in which the credit union or officials agree to take, or
not take, certain specified actions.
Severe consequences for failing to follow and fulfill terms LUA.
Page 31

32. Letters of Understanding
and Agreement
Review LUA in its entirety; request clarification if needed.
Seek advice from legal counsel.
Make sure goals are realistic and achievable within required
timeframes.
Board can refuse to sign LUA, but regulator likely to proceed
with more formal administrative actions.
Enforcement difference between “published vs. unpublished”
LUA.
Page 32

33. Cease and Desist Orders
Cease and Desist (C&D) orders prohibit a credit union from
engaging in the activity(ies) described in the order.
May require credit union to take affirmative action to correct
condition resulting from the violation.
C&D made by NCUA board after a hearing; can issue Temporary
C&D before a hearing can be held in certain circumstances.
Credit union can appeal decision to United States Court of
Appeals.
C&Ds can be issued against “institution‐affiliated parties.” Page 33

34. Removal and Prohibition
Orders
NCUA can issued “Removal Order” after notice and a hearing to
remove members of credit union board and paid staff.
Prohibition Orders are broader and can be brought against
institution‐affiliated parties including individuals who are not
officials or personnel of the credit union.
Permanently bar a person from serving or being employed by
any federally‐insured financial institution.
Can issue immediate Removal or Prohibition Orders if
immediate action necessary to protect credit union.
Page 34

35. Civil Monetary Penalties
NCUA has authority to assess civil money penalties (CMPs)
against a federally‐insured credit union or any institution‐
affiliated party.
Three‐tier CMP scheme ranging from $5,000 per day up to $1
million per day.
NCUA required to issue a Notice of Assessment to impose CMP.
Assessed parties have 90 days to pay but may request hearing
within 20 days.
May appeal NCUA Board’s decision to U.S. Court of Appeals
within 20 days of order.
Page 35

36. Conservatorship
Conservatorship allows NCUA Board to take immediate control
of a federally‐insured credit union under certain specific
circumstances.
No notice or hearing required, however, credit union can seek
an injunction within 10 days to set aside seizure.
If a federally‐insured state‐chartered credit union, also requires
written approval of state regulatory agency, however, NCUA can
place into conservatorship if state withholds approval.
Page 36

37. Termination of Insurance
NCUA may terminate an insured credit union’s share insurance
based on grounds substantially similar to C&D.
Termination generally reserved for FISCUs.
Notice of Intent to Terminate Insured Status sets out facts and
establishes time/place for administrative hearing within 30 to 60
days.
Credit union can appeal to U.S. Court of Appeals but order is
effective unless modified by NCUA Board or the court.
Page 37

38. Involuntary Liquidation
NCUA Board may liquidate a federal credit union if it is bankrupt
or insolvent.
Credit union has no legal authority to seek administrative
hearing before closure.
Notice is served on credit union, however, order is effective
immediately. Credit union can appeal to U.S. Court of Appeals
but order is effective unless modified by NCUA Board or the
court.
Page 38

39. Involuntary Liquidation
NCUA Board may liquidate any federally‐insured credit union if
significantly undercapitalized and has no prospect of becoming
adequately capitalized, or the credit union is critically
undercapitalized.
Procedure cannot be initiated without recent examination and
documentation from the examiner as to the scope of problems
and support for the recommended action.
Page 39

40. Other Administrative Appeals
Credit unions may also appeal other decisions:
For MBL decisions and waivers and foreign branching, may
appeal to NCUA Board.
Freedom of Information Act requests can be appealed to
Office of General Counsel.
Appeals of creditor claims in liquidation should following
the administrative review process.
Page 40

41. NCUA Ombudsman
NCUA Ombudsman office set up to investigate complaints and
recommend solutions.
Ombudsman does not make decisions regarding complaints but
will help identify options and make recommendations to
involved parties.
Issues or complaints must relate to regulatory issues that were
first appeals, and were not resolved at the operational and
regional levels.
Credit union must submit an Ombudsman Complaint Form.
Page 41

42. NCUA Ombudsman
Ombudsman can help explain NCUA’s regulations or help raise
systemic or recurring issues.
Ombudsman does not handle matters that are:
Subject to formal review as set forth in NCUA regulations or
policies.
Involving an enforcement action where a Notice of Charges
has been filed, such as an LUA.
In litigation.
Involving a conservatorship or liquidation.
Within the Inspector General’s jurisdiction.
Page 42

43. Small Business Administration
Ombudsman
The Small Business Administration has established an SBA Office
of the National Ombudsman.
Credit unions with less than $10 million in assets have right to
contact the SBA Ombudsman to raise concerns or issues about
NCUA compliance matters or enforcement actions.
Page 43

44. Credit Union Examination
Best Practices
1. Understand the scope of the examination. Activities posing the
highest risk will receive the highest amount of scrutiny.
2. Use past exams to prepare for future exams. Ensure there has
been a resolution of prior exam and audit issues.
3. Ensure credit union officials are fully informed regarding any
areas of material weakness at the credit union and the credit
union’s risk management program.
Page 44

45. Credit Union Examination
Best Practices
4. Ensure the credit union’s policies and practices are appropriate
for the credit union’s risk profile, up‐to‐date, and consistent
with legal requirements.
5. Work with the examiner to provide necessary financial data and
access to personnel on a timely basis.
6. Seek to work with the examiner on a professional basis and be
willing to meet and listen to his/her concerns,
recommendations and directives.
Page 45

46. Credit Union Examination
Best Practices
7. Do not hesitate to provide reasonable supplementary
information to the examiner or to seek corrections in examiner
reports, findings, or directives that the credit union feels are
incorrect.
8. Do not hesitate to point out discrepancies between the
examiner’s directives and the regulator’s Examiner’s Guide or
legal requirements.
9. Do not hesitate to appeal examiner or regional office decisions
on material, supervisory issues that the credit union feels are in
error, unrealistic, inappropriate or inconsistent with its
regulator’s policies or procedures.
Page 46

47. Credit Union Examination
Best Practices
10. Be specific. When an examiner indicates that you must/must
not do a specific thing, ask for the specific legal or regulatory
citation that is the basis for the recommendation.
11. Use CUNA’s Examination and Supervision Issues Reporting Form
after each exam to report on your latest examination
experiences.
12. Seek the advice of legal counsel prior to entering into any type
of legally binding agreement (LUA, etc.).
13. Maintain open communications with examiner before, during
and after the exam.
Page 47

48. Responding to
Enforcement Actions
1. Make sure credit union responds in timely manner.
2. Make sure board is aware of and understands requirements of
the enforcement action.
3. Develop detailed action plan to address each component
requirement.
4. Assign someone to track compliance enforcement action and
report to board or supervisory committee.
5. Consider using outside assistance.
Page 48

49. Resources
CUNA Supervisory Issues and Examinations: Guidance For Credit Unions During the
Current Economic Times and Beyond
http://www.cuna.org/reg_advocacy/member/download/examsuper_issuesguide_20
11‐01.pdf
CUNA’s Examination Experience Reporting Form. Click to report on your credit
union’s examination experiences
http://www.cuna.org/initiatives/member/exam_supervisory.html
CUNA’s Examination & Supervisory Resources for Credit unions
http://cuna.org/reg_advocacy/member/hot_topic/exam_supervisory_resc.html
CUNA’s Due Diligence Resources for Credit Unions
http://www.cuna.org/initiatives/due_diligence.html
Page 49

50. Resources
“Everything You Ever Wanted to Know about Exam Appeals” NCUA’s Newsletter
http://www.ncua.gov/NewsPublications/News/Newsletters/NCUA_Newsltr_
March10_5P.pdf
Guidelines for NCUA’s Supervisory Review Committee (RegFlex), IRPS 02‐1
http://www.ncua.gov/Legal/Documents/IRPS/IRPS2002‐1.pdf
Guidelines for NCUA’s Supervisory Review Committee, IRPS 95‐1
http://www.ncua.gov/Legal/Documents/IRPS/IRPS1995‐1.pdf
NCUA Examiner’s Guide
http://www.ncua.gov/Legal/GuidesEtc/Pages/Examiners‐Guide.aspx
Administrative Actions – Chapter 30 of NCUA Examiner’s Guide
http://www.ncua.gov/Legal/GuidesEtc/ExaminerGuide/chapter30.pdf
NCUA Aires Exam Questionnaires
http://www.ncua.gov/Resources/CUs/Pages/AIRES.aspx
Page 50

51. Thank You!
Valerie Edgington
Success Consortium
www.linkedin.com/in/valerie1120/
Page 51