How to Appeal Your NCUA Examination Results

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Treichel: Hey, everyone.

This is Mark Treichel with another
episode of With Flying Colors.

One of the first episodes I did back when
the podcast started over two years ago 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 NCOA

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 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 it.

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 NCUA 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 that 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 NCOA.

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 it's, 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 is the preamble explains why
they're doing what they're doing in the

final rule or what they changed from the.

Pose rule, and it really is the arc
of all three of those things that you

need to look at to best understand
why NCA puts a rule in the place.

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 NCA.

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 to 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 the regional director.

But the example I'm talking about
for this example would be someone

being downgraded from either a two
to a three or a three to a four.

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 N.




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 NCOA is pushing

a little too hard on that, although
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 NCUA regulations.

So it would be an application for
something, field of membership

subordinated debt, something that
doesn't have another way to appeal

identified in that particular regulation.

You can appeal under Part 7468.

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 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.

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 can 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 Campbell.

Now, the other thing, but it 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, 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.

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.

Podcast on this, but you know where 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 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 will
will be losing at every level until

you ultimately go to the NCUA 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 NCUA's internal
legal guidance that once they

know that the clock starts, but.

So I 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 of, 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've got to go to the office the
regional director or 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 on.

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 appeal

to reply to your appeal.

So now we're 60 days and
we're at the end of May.

Let's assume they say nope.

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 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.

We'll want to take it to E and I, cause
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
eight 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 people
who would decide your appeal now.


What does expeditious mean in when
it's either gone to the Office

of Examination of Insurance or
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 4 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.

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 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 appeal
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?

And, 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 rarely, 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?

Cause 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 chance of
success is greatest there.

Second greatest at the
supervisory review committee.

Level and then he and I and then
the office director and quite

frankly tie goes to the runner.

So think of this when someone walks into
your office complaining about 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 runners, 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 the runner.

You were clearly safe at first base.

And here's why.

That's a, a good sports
analogy relative to this.

In any event this podcast, I got
it a little bit more into details.

I went down a couple of rabbit holes.

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.

Thank you for joining us on this episode
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How to Appeal Your NCUA Examination Results
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