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Treichel: Hey, everyone.

This is Mark tranquil with another
episode of with flying colors.

I'm back here today with Steve
far and Todd Miller of my team.

How are you two doing this fine morning?

Miller: It's a beautiful day.

It's a beautiful day in
Billings, Montana as well.

Doing well.

Treichel: Very good.

Glad to hear it.

We chatted recently about informal
administrative actions, and

today we're going to talk about
some of the most materially used

formal administrative actions.

Before we do that, let's get a little
bit of your background in case somebody's

listening for the first time today.

And Steve, you're going to go first.

Farrar: Okay, yep, my 30 year plus career
at NCU has really broke into 2 parts.

The first 15 years I was out in the
field, primarily as a problem case

officer, where in regard to the
day's topic, I was involved in, the

working with credit unions on many.

LUAs cease and desist, actually just
a few of those, and conservatorships.

Then the last half of my career, the
other 15 years, I was in the central

office and involved in such things as
I wrote the enforcement manual for NCOA

and was involved in assisting regions
as they were considering enforcement

actions against the credit unions.

Good and Todd.

Miller: I spent just a few months
short of 35 years with NCUI.

I can break my career out.

Maybe 3 pieces.

The 1st decade or so as an examiner
problem case officer that 2nd decade or so

as a regional capital market specialist.

And that third decade or so as a
Director of Special Actions, where

I supervise problem case officers,
capital market specialists.

One of the things we're going to
talk about today is conservatorships.

I actually did one of those as a PCO
and one as a DSA, where we returned

the crediting to the members.

Did a lot of them that didn't go back
to the members as well, but I did return

a couple creditings to the members
as part of conservatorship actions.

I counted those as wins.

The ones that didn't
go back to the members.

I counted those as failures.

So I didn't keep good track of
how many of those there were.

Treichel: I did a couple like that.

I think Steve did as well.

And it is nice when it ends with a
rising from the phoenix like that, as

opposed to a liquidation or a merger.

Okay, very good guys.

So let's 1st walk through.

Letters of understanding and agreement
and you know what they are, why

they use them, when they use them,
and we can maybe get into some a

little bit finer details beyond that.

But either, either of you prefer
to chat first about the letters

of understanding and agreement.

Farrar: Go ahead,

Miller: Todd.

So a letter of understanding and agreement
and we talked a little bit about this

on our last podcast that can be informal
or formal depending on whether NCUA

publishes them or not, but at this point,
the agency considers the Rob problem

severe, you're probably going to be
classified as a troubled credit union.

Although there can be an LUA
for compliance reasons where

you might not have a code for.

I would expect that to
be very rare, though.

In most cases, this is
a troubled criterion.

You've had some persistent problems.

The NCUA wants a commitment from
the Board of Directors to address

these problems, and they want that
commitment to be a formal commitment.

In the case of a formal LUA, NCUA
is probably going to publish it and

there are certain state regulators.

If there's your state charter, you're
going to end up with a published

letter of understanding and agreement.

But these are usually generally cases
where it's a severe number of problems.

NCUA Once that commitment from the board
of directors to a address this problem,

and a published l UA is the first step
in other more severe actions where it

opens that door for them to take other
administrative type of actions If the

credit union is unable or unwilling
to address the problems but by getting

a board to sign, they're trying to
ensure that this party unit at least

is willing to address these issues.

Treichel: Steve, anything
relative Tolus that Todd said

or anything you wanna add on?

Letters of understanding and agreement?

Farrar: Just that the, that the LUA and
the way it's written up, the first part

of it de describes the pro the problems
that are supposed to be addressed in

the corrective actions in the LUA.

So those would, those should be those
major issues of what you're dealing

with, then when you get down to the
actions that are being called for in

that, it's real important that the
credit union understand what they all

mean, and that they understand the
time frames that are put on those.

Because.

It's like when you're putting
together a budget and in some

years, you make it or not.

And this 1 becomes, if you put
together this budget, that's under

an way, you're going to have to
make all of the requirements in it.

So there's that kind of big
step up in difference versus

a document or resolution.

You should make all those timeframes.

But then if you don't, as long as you
have reasonable reason why you didn't,

it it's, documented in the exam program.

But with an LEA, not making the
timeframes can be really troublesome.

And it's so important
that you understand those.

Especially

Miller: if this is

Farrar: a

Miller: public, a public one.

Go ahead.

I think there's another
side to this, too, as well.

Just the language used in
LUAs that are published.

It's very draconian and very one sided.

MCUA reserves the right
to remove officials.

Assess civil money penalties,
do some other things.

And when you get to a point where
NCUA is talking about publishing the

LUA, it's probably best credit unions
to actually seek some outside advice

on this, whether it's an attorney or
higher credit union exam solutions.

We can take a look at it with you as well.

These are pretty serious
actions at this point.

NCUA is exhausted what it
considers its informal actions.

These are fairly serious matters.

And the boilerplate language in that is
very draconian for the credit unions.

It's intended to be serious.

Credit union boards, if you get one
of these, make sure you understand

them and don't be scared to seek
assistance from an attorney or from us.

Excellent.

Yeah,

Farrar: your reputation risk, gets
really high really quickly there

because we talked about that, that
they're the trades and stuff are

looking for how NC way publishes those.

And, that gives them,
something to write about.

Then they will.

Treichel: Yeah, on publication.

It's not like NC way.

When they release their NCUA Express
that says that they've conserved

a credit union, or they release an
NCUA Express that says we're having a

training class, why don't you sign up?

They don't use NCUA Express.

As by recollection, when they publish
an LUA, rather they are required to

publish it to make it enforceable.

And I don't want to say they bury it, but
they don't announce, they don't scream

it from the, from the mountaintops.

That being said, people know it's there.

Papers, the trades, without
naming, which news organization

might go look, they do go look.

And then it becomes far more public.

And that's where the reputation
side of it can come into play.

How about the word agreement?

Letter of understanding and agreement.

There are situations, I've said in
calls with clients and on the podcast

and actually it was a client from my
first year that said, every time NCUA

opens their mouth, I have to decide
if I'm going to go along to get along.

And I've turned that into,
NCUA's got a really good idea.

NCUA has a kind of good idea.

Yeah.

And it's, it has a bad idea and how
far back do you, how do you push back

or don't you push back, obviously on
a good idea, you're not going to, but

a mediocre idea, what will you do?

And in a bad idea, what will you do?

And all of a sudden, you have the
arc of those types of things being

thrown into a letter of understanding.

An agreement you're when you sign it.

You're saying you agree which makes
in my mind It very important that a

you can get it done and be that it's
in the best interest of the credit

union and the members any Wisdom you
can share on agreeing to the lua.

Miller: Hopefully by the time you get
to this point your management team

has had a chance to negotiate these
items with Your PCO, our examiner.

Most of the time if we're talking
about a published LUA, you're

probably dealing with a problem case
officer as opposed to an examiner.

But there should be some give and
take on these agreed upon actions.

Hopefully, they are going to be
challenging and stretch goals.

Like you said, sometimes it's best
to, if the cost isn't significant, to

go ahead and deal with these issues.

Usually, by the time you get to
a published LUA, though, they're

pretty significant issues, and
there's usually not cheap ones in

there that are easy to accomplish.

For the most part, usually these
are big stretch goals that you're

being asked to achieve by the
time you get to a published LUA.

It's a toughie, but appealing them
in your actions, NCUA will take

other actions if you don't agree to
a published LUA, and the consequences

to those might be just as severe.

Farrar: Yeah, one of the items that we
are hearing about is gradients are going

through the process of, they've been
informed that because of the nature of

the problems and the extent of them,
that they're going to pursue the LUA.

And then you have, it
goes with the exam report.

Some gradients can feel pressure
in terms of timeliness that occurs

between when they're provided with
maybe the first draft of the LEUA.

And when the meeting is scheduled, when
they would want it signed, I think, the

credit union has every right to on that
to request that timeframe be reasonable in

terms of, the credit union has to address
that they can make those items and they

want to probably discuss that with their
board prior to that meeting on signing.

So I think it's important to have
that communication that says.

We understand that you got to do this
action for us to really accept it.

We need that reasonable
amount of time to digest it.

Make sure that the timelines are good
and make sure our board understands.

What we're getting into,

Treichel: but, I had a conversation
with the credit union board last week.

And, the discussion was, this
is a scenario where they may

reserve the right to publish.

They don't actually have the language
yet, but they know they're getting 1.

So they were trying to educate themselves.

And there was.

There were, I think, board members who
are going to sign it and are comfortable

with it, and there were board members
who aren't comfortable signing it,

there were board members that appeared
weren't comfortable if it was going to

be publishable and I pointed out to them
if you abstain or if you vote no, and

as a collective, the board agrees to,
and let's say it's a publishable one,

so let's say there's 15 board members,
I'm going to give a big number because

I don't want to, pick a number that 15
board members, let's say eight of them

vote yes and seven of them vote no,
and they sign it and it gets published.

All 15 are subject to that LUA
because it was a board decision.

Even if you voted no, even if you
abstained your organization voted

and you have that corresponding
fiduciary responsibility, et cetera,

et cetera, as a board member.

And, I saw some eyes open
up wide relative to that.

To, to that.

So the board needs to know a lot
of board governance discussions.

And, board governance really hits
home when you have them signing a

letter of understanding and agreement.

Miller: You made a good point there, Mark.

Over my career, there's different
times I've had board members who

have refused to sign, even though the
majority of the board did, thinking

it shielded them in some way, shape,
or form, but it really does not.

Treichel: Yeah, they're conscientious
objectors, essentially, because

they're still on the hook.

I know all three of us believe in the
concept of an LUA should have the material

items that are in a document of resolution
and not necessarily all the items

that are in a document of resolution.

And it seems under merit, because
merit, going down a little bit of a

rabbit hole, because merit seems to,
they now have the ability to track

and say, okay, this door is done, this
door is done, and this door is done.

But they tend to maybe separate.

Doors into something that might have been
one door in the past might be three doors,

and we're seeing a little bit and then you
throw the economy like it is right now.

You start seeing really
long document resolutions.

And as we've said here before, if
everything's a priority, nothing's

a priority in a perfect world.

You agree with the concept that an
should be skinnier than the door

and should focus on the main thing.

Miller: In concept, yes,

Treichel: we're not necessarily seeing
that in reality, but in concept.

Yes, that's how you would do it.

If you were still at N.

C.

U.

A.

Is that a fair statement?

Yes.

Farrar: That's how we always did it.

The uas only addressed mainly
the, what we would refer to as

the root causes of the problem.

The root causes of the problem.

Treichel: Very good.

And Steve, you trained NCUA staff
and Todd, you did, you trained

your staff to do it that way.

And with with turnover.

Not saying because we left, but
with turnover they've got a lot of

new people and, things change and
then you can get a, you can get.

You can get pockets of the
country that do it different.

You can get redirection from the top.

As as you mentioned, we're seeing
publishable potential LUAs, and

we're seeing that a little bit.

We're seeing LUAs more than recently,
and we're seeing the publishable option

more and I've said here before a dear
friend who passed away, who used to

be the general counsel at NCUA, when
he consulted, and He would advise

clients not to sign them and just send
them a preliminary warning letter.

And I really when he first started telling
me that I really wasn't in that camp.

I'm starting to move a little bit
closer to that camp on a publishable

one, especially if it's publishable
in ad infinitum and it doesn't have

any deadlines, et cetera, et cetera.

If you find yourself with an LUA Feel free
to reach out to discuss it and or reach

out to a legal counsel to make sure you
understand the ramifications of the LUA.

Anything else

Miller: on LUAs guys?

Just something you mentioned dates
there, other than new crediting,

the new crediting can get an
LUA that has a termination date.

For the most part, LUAs, whether
they're unpublished or published

formal ones, they're not going
to have termination dates.

Those things are open ended.

It's will you complete
what you've agreed to do?

And NCUA gets to decide, did the actions,
were the actions completed and did they

achieve the results intended as The
way Steve used to phrase it when he

was still teaching me how to do this.

And that's how you determine
is this LUA been satisfied?

Did you do what you said you
were going to do and did it

achieve the results intended?

And I think we're seeing
these really long LUA's.

It's a side effect.

COVID a little bit.

They missed things when
they were off site.

Things built up because credit
unions had stuff off site.

Then you have the bank failures.

You have an inverted yield curve.

You got delinquencies creeping up.

Just to have them insure NCUA
probably is a little bit stressed

of what might occur in the future.

And they're trying to get things
resolved before they get costly.

Treichel: Agreed, agreed.

And you just triggered something
in my mind that we had a situation

where we had a client conversation
where someone said, we messed up.

We didn't give you an LUA last time.

And we should have.

And I believe the reality.

Is that's not the case.

The policy, I believe their
current policy reads as if you're

a four, you're going to get an L.

U.

A.

Unless a higher levels level
says you don't need to have an L.

U.

A.

So somebody in that other situation
said, We don't need the way.

And then they came back and
decided no, we do need it.

And in an environment where you got the
NCAA board talking about their concerns.

You have staff going to be a
little less likely to go out

on a limb for credit union.

And so I think the correlation between
if you're a 4 troubled status, you are

going to get an way people opting to go
a different path, I think, is going to be

Miller: Rare, very rare.

It's always been rare.

By definition at code four by
their own policy, generally

involved in LUA or a preliminary
warning letter, one of the two.

Treichel: Yes.

It's always been rare, but I have
recently seen where it wasn't done.

But yeah, I think it's going
to get, it has been rare.

It's going to be rare
and maybe even rarer.

That's a wrap on letters of understanding
and agreement with Todd and Steve.

We also went on to record a
discussion on cease and desist order

is prohibitions conservatorships
and a couple other topics.

But I'm splitting those into
separate topics for later release.

Treichel: I want to
thank you for listening.

I hope you'll listen again soon.

This is Mark Treichel signing
off with flying colors.

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