Credit Union Exam Solutions Presents With Flying Colors

15 board members.

Let's say 8 of them vote yes,
and 7 of them vote no, and they

sign it, and it gets published.

All 15 are subject to that anyway,
because it was the 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, to that.

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

And a board governess really hits
home when you have them signing a

letter of understanding and agreement.

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.

They're conscientious
objectors, essentially, because

they're still on the hook.

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Hey everyone.

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

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

How are you two doing this fine morning?

It's a beautiful day.

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

Doing well.

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, uh, 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.

Okay.

Yep.

My 30 year plus career at NCO
has really broke into two parts.

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

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

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 in time.

I spent just a few months
short of 35 years with NCUA.

I can break my career out, maybe three
pieces, the first decade or so as an

examiner, problem case officer, that
second 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 specialist.

Uh, 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,
um, 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.

I did a couple like that.

I think Steve did as well.

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, uh, 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 letters of
understanding and agreement.

Go ahead, Todd.

So a letter of understanding and
agreement, and we talked a little bit

about this on our last podcast, they
can be informal or formal depending

on whether NCUA publishes them or not.

But at this point, the agency
considers the 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,

we expect that to be very rare though.

Thank you.

In most cases, this is
a troubled credit union.

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 is You're a state charter.

Um, you're going to end up
with a published letter of

understanding and agreement.

Um, but these are usually generally cases
where it's a severe number of problems.

NCUA wants that commitment from the Board
of Directors to address this problem.

And a published LUA 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 by
getting a board to sign, they're trying

to ensure that this party, at least
is willing to address these issues and

Steve, anything relative to LA ways
that Todd said, or you want to add on

letters of understanding and agreement,
just that the, that the LA way, and the

way it's written up the first part of
it, this describes, uh, The problems

that are supposed to be addressed in
the corrective actions in the LEA way.

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 that's like when you're
putting together a budget.

And in some years you make it or
not, and this one becomes, if you put

together this budget that's under an
LUA, you're gonna have to make all

of the requirements in it, so there's
that kind of big step up in difference,

uh, versus a document or resolution,
you should make all those time frames.

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

it's documented in the exam program.

But with an LUA, not making the timeframes
can be really troublesome, and it's

important that you understand those.

Especially if it's a
problem, a public one.

Go ahead, Todd.

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.

Yeah.

Yeah.

NCUA 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 Dracodian for the Crottyians.

It's intended to be serious.

Crottyian 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 point.

Yeah, your reputation risk gets really
high really quickly there because we

talked about that there, the trades
and stuff are looking for how NCUA

publishes those and that gives them
something to write about and they will.

Yeah, on publication, it's not like
NCUA 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, and now 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 for the, the reputation.

Side of it, uh, can come into play.

How about the word agreement?

Letter of understanding and agreement.

There are situations.

Yeah.

I've said in calls with clients and on the
podcast, and actually it was a, a client

from my first year that said every time
NCUI opens their mouth, I have to decide

if I'm going to go along to get along.

And I've turned that into, NCOA has got
a really good idea, NCOA has a kind of

good idea, and NCOA has a bad idea, and
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 on 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, a very important that a,
you can get it done and B that it's

in the best interest of the credit
union and the members, any wisdom

you can share on agreeing to the LUA.

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.

Uh, most of the time, if we're talking
about a published LUA or 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.

Um, 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, but 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.

Yeah, what the items that we are
hearing about is Koreans 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 credit unions can feel
pressure in terms of timeliness that

occurs between when they're provided
with maybe the first draft of the LUA

and when the meeting is scheduled,
when they would want it signed.

And I think the credit union has
every right to, on that, to request

that timeframe be reasonable in terms
of, Well, credit union has to kind

of, you know, 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.

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, they don't want to pick a number,

but 15 board members, let's say 8 of them
vote yes, and 7 of them vote no, and they

sign it, and it gets published, all 15
are subject to that anyway, 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 to that.

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

And a board governess really hits
home when you have them signing a

letter of understanding and agreement.

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.

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 or resolution
and not necessarily all the items

that are in a document or 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.

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 resolution.

Um, 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 LUA should

be skinnier than the door and
should focus on the main thing.

In concept, yes.

We're not necessarily seeing
that in reality, but it, uh, in

concept, yes, that's how you would
do it if you were still at NCUA.

Is that a fair statement?

Yes, that's how we always did it.

The LUAs only addressed mainly the,
what we would refer to as the root.

Causes of the problem, the
root causes of the problem.

Very good.

And Steve, you trained
in CUA staff and pod.

You did, you train your
staff to do it that way.

And 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, 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 often more.

And I've said here before, a dear
friend who passed away, who used

to be the general counsel at SUA,
when he consulted, 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, etc, etc.

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 on LUAs, guys?

Just something you mentioned, dates there.

Other than new credeans, new credeans 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

is the way Steve used to phrase it when
he was still teaching me how to do this.

And that's how you determine,
has 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 LUAs at the side

of that COVID a little bit.

They missed things when
they were off site.

Things built up because credit
unions had stuff off site.

Then you had the bank failures.

You have an inverted yield curve.

You got delinquencies creeping up.

Just as an insurer, 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.

Great.

Agreed.

And you just triggered something in
my mind that, uh, 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 believe their current policy
reads as if you're a 4, you're going

to get an unless a higher level says
you don't need to have an anyway.

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 SUA board
talking about their concerns.

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

on a limb for a credit union.

And so I think the correlation
between if you're a four troubled

status, you are going to get an LUA.

People opting to go a different path,
I think is going to be rare, very rare.

It's always been rare by definition
and code for by their own policy,

generally involved in LUA or
a preliminary warning letter.

One of the two.

Yes, it's always been rare, but
I have recently seen where it

wasn't, uh, but yeah, it's, I
think it's going to give a rare.

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 orders, prohibitions,

conservatorships, and a couple other
topics, but I'm splitting those into

separate topics for later release.

I want to for listening.

I hope you'll listen again soon.

This is Mark Treichel, signing off.

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