Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey, everyone.

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

I'm back today with my, my two
most frequent guests and team

members Todd Miller and Steve Farr.

Guys, how are you doing this morning?

Farrar: I'm good.

Treichel: Doing well.

Doing good.

You got, you need a little
bit more enthusiasm with that.

Doing good.

Good there, Steve.

All right.

Today we are going to be chatting about
who reviews your NCUA report before you

see it as a credit union, the examination
period, and related parts of that.

But before we jump into that topic,
this topic why don't you guys

introduce yourselves for those
listeners who may not, who may

be listening for the first time.

Todd, we'll start with you today.

Miller: Okay good morning everyone.

I'm Todd Miller.

I was with N.

C.

U.

A.

about 34 years from 1987 through 2021.

can break my career and do about
3 different pieces over that

34 years about a 3rd of it.

I spent as an examiner problem
case officer about a 3rd of it.

I spent as.

Regional capital market
specialist and about a 3rd of it.

I spent as a director of special
actions in the Western region.

Supervising problem case
officers, regional capital market

specialist, some regional ending
specialists in there as well.

Enjoyed my time with a great deal.

I think what credit unions are doing
in their mission is a really positive

for our country and our economy.

I'm in favor of the whole industry
and I enjoyed my career a great deal.

Treichel: Very good.

Good.

Said and agreed.

And Steve, a little bit of your
background while you were at N.

C.

U.

A.

Farrar: Yeah, I can break my 30 plus
year career into 2 separate parts.

The 1st, 15 years were in the field
primarily as a problem case officer.

We're got to work with credit, the
most severely troubled credit unions

throughout the nation involving
conservatorships and multiple LUAs

and negotiated mergers and all those
types of items really a fun experience.

It, and that one, when you're
working with the people at the

credit unions, actually trying to fix
items, that's a self rewarding job.

Then the last 15 years.

I joined you when you went into the
central office and during that 15 years,

I got to be involved in many aspects
of in terms of policy generation.

I drafted the enforcement manual
that was put in place, but probably

the thing that I enjoyed most.

During that part of my career was I
was in charge of the problem resolution

training that was provided to examiners
where we try to help them with mainly

the dealing with the personalities
and communications when they're

dealing with troubled credit union.

So that in a nutshell is is
what it will apply for today.

Great

Treichel: great great
summary from both you guys.

As I was thinking this morning, a little
bit about the topic that we have, Todd,

you mentioned you started in 1987.

I started in 1986 and I remember, going
to my new examiner training classes and

then, when you're released from training
and you're going to joint conferences

and you're writing reports and you're
on the job trainer is reviewing those

along the way and then at some point
in time, they push you out of the nest.

Like a little baby bird and you're meeting
with boards and you're writing reports and

I just remember it hitting me, early on.

It's wow, a year ago, I was in college
wrapping up my accounting degree.

And now here I am meeting with boards,
writing reports and no one's looking at

them, and they gave a lot of power to me.

An authority and, obviously
smaller credit unions, right?

Cause they start the new examiners with
less, less complex credit unions, which

can be frustrating for the small credit
unions sometimes, but they basically

allow you to fail forward, which is great.

You get a lot of opportunities early.

Sometimes you, the credit unions teach
you a little bit more than you teach them.

But That one of the main topics we're
hitting here is that policy changed

right before Steve, I think it changed
right after you left and a little bit and

we launched it when I was still there.

And Todd, you were there when we
came up with the new process of every

examination had to be reviewed by
a higher level of some sort at N.

C.

U.

A.

Before.

It went out to the credit union and,
we had done a review of looking at how

the other banking regulators did it.

We knew how the different states
did it, and based upon that review

we realized NCA was the only U.

S.

financial regulator that did not
require some level of higher review.

And I remember briefing the board on, the
possibility of going in this direction

and, When they heard that, they didn't
need to be briefed a second time.

They heard once that NCUA was flying solo
on this and they said, you know what?

We really need to step up our game here.

And so the agency did.

And with that, why don't
we tiptoe into that.

We can talk about the exam period and
any related, how the exam process works

and what the cycles are and everything.

But Why don't we first touch on the
report review and how that works,

who looks at it, when, et cetera.

All right, I'm going to, I'm going
to stop rambling and Todd, I think

you might be the guy leading the
way on this part of this discussion.

Miller: Sure we'll go back and talk
about contacts in a little bit and exam

cycles, but in general, on every exam
and expects them to be finished within

90 days of completion and what we're
finding a lot of times that isn't done.

And I think a lot of that is due to
their review process that started

when you were executive director.

There's even a name for it.

The free release secondary review.

Thank you.

With state chartered credit unions,
there's a document and secondary review

of CAMEL when the state's in charge and
CUA still has supervisors looking at that.

A lot of this kind of depends on
size of your credit union and CAMEL

codes, but in general, every credit
union, your exam, especially in a

federal, the supervisory is in charge
for reviewing that exam report.

The examiner is supposed to
finish up their field work.

They're supposed to get that
report to their supervisor

within five business days.

The supervisor then has 10 days
to review 10 business days.

I actually use that term business days
and then SPM to review that report

for appropriateness as the camel
rating supported has the examiner done

everything that they were supposed
to do and issues and instruction

every year on examination scope.

The SE is basically qualit quality,
controlling that exam with that

instruction on examination scope.

So for credit unions under $50 million
and a Camel 1, 2, 3, it's just that

supervisor and that's as far as it goes.

For smaller credit unions,
you get a Camel four or five.

It involves the division of
supervision in each region.

That adds another 15
business days to the process.

And for.

I think that are under 50 million
and they have a camel 4 5, it goes

to the division of supervision.

Everything over from 50 to 250 million.

That's a camel 4 or 5 that goes
to the division of supervision.

Anything over 250 million to 1 billion,
goes to the division of supervision.

So you're looking like a 25 day
review process in all these cases.

And then everything that's over 1
billion, it actually goes to an associate

regional director for review as well.

And that review is supposed to
happen in the same 15 days that the

division of supervision does, but
that assumes everything goes right.

If you've got an SCE, he wants changes,
or DOS thinks something needs to be

changed, or more work needs to be done,
or an ARD that thinks there needs to be

a little bit more work on this, it can
extend this process out because the whole

thing goes back to the examiner and the
SCE to fix this whatever the case may be.

And a lot of times those fixes just
can occur in a day or two, and other

times they don't occur in a day or two.

They require a little bit more time.

Substantive reviews and then it comes
back through the review process again.

There's also a loan concentration risk
evaluation process that goes on behind

the scenes that tends to follow the.

Free release secondary
review with 1 exception.

For credit unions that are over
500Million dollars, if there's one of

these loan concentration risk evaluations
an LCRE, it adds another 15 days to

the process for the regional director
to look at the report in the form.

And if the credit is over 1 billion,
it adds another 15 business days

as it goes to the director of
examination insurance in Washington.

So when you add all that up, if
you're a complex credit union, you

have a specific loan concentration
that meets NCUA's triggers.

You can end up with 30, 45.

Almost 55 days in that review process.

And they're supposed to get an exam
done within 90 days, start to finish.

Not quite going to work when you
have a 55 day review process.

So NCOAs set themselves some deadlines
that they can't possibly hit on

these larger complex credit unions.

And for whatever reason, what we're
seeing amongst our clients, they are

going out much longer in certain cases.

Treichel: That's a great
summary, a lot to unpack there.

Before I add a few questions and comments,
Steve, any thoughts or comments you have

that you'd like to hit on here based
on what Todd said or anything else?

Farrar: No, I like what Todd was
able to do that because just in

preparing for this, I was going
through the NSPM and I was like.

Having a real problem being
able to summarize that down to

something that was like that.

And ideally, it'd be nice to have
some sort of a table on that could be

produced, but that was a great summary.

And it took me a lot of time
just to figure out half of that.

So yeah, there is

Miller: a table that exists.

At one time it was public in the
latest version of the NSPM, that

quality review chapter is all redacted.

So you don't get to
see that table anymore.

Treichel: We have that topic come up more
and more as, as we, we have these podcasts

where NCUA once had something public.

And now doesn't, and it's something that I
think I'll be highlighting here in more of

these podcasts because it's frustrating.

It would be great to have that chart.

It could help explain to a credit union
why things are moving so slowly because

they'll hear from their examiners.

Yeah, I should get you the report back
in about a month and then I can't guys.

I can't remember the last time we had
a client say, said we'd have it by this

date and we actually got it by that date.

Right?

It's universally things are taking longer.

And as Todd, as you laid out, Those
timelines that's like you said, 55 days,

and that's if everything's going perfect.

And when you have something that has to
go to the supervisory examiner, and it has

to go to the ARD, it's also going to flow
through DOS, because the report's going to

get processed through DOS in case perhaps
it's a code 3, or has these concentrations

that are going to go up onto E& I.

And everywhere along the way It's
a little bit of sometimes it could

be that everybody's, you've got a
lot of chefs contributing to it.

And then the further away you get
from being the actual person who

was there with the credit union.

I had a conversation with a client
yesterday who just said, Hey, we

just heard from NCUA that we're going
to get a new document resolution

added to the draft we've seen.

You can probably guess what topic it was.

Yes.

The topic was corporate governance.

They were going to add something
from corporate governance.

That got dropped into the exam
somewhere along the way, either

from the supervisor or DOS or the A.

R.

D.

And there's that whole dynamic to this.

I'm going down a rabbit hole here, too.

There's the associate regional
director of operations who runs the

office for the regional director.

And there's the associate regional
director of program who runs the field.

Typically, those exams are coming
through the, if they have to be reviewed,

they're being reviewed by the A.

R.

D.

P.

program.

The.

Division of special actions reports
to the and so they get involved.

They get involved as having to be the
higher level review for certain sizes

and codes, just as you described, but the
division of supervision reports to them.

So you can have.

Some dynamics here, where maybe it
was even reviewed by the associate

regional director of program,
but it still also came through.

DOS, especially if it had that
concentration limit that might

have to go to a higher level.

So it can get a lot of fingerprints
on a report and sometimes it can be,

we've seen some situations where it,
somebody far away thought dropping

something it made sense, but it really
had no rhythm or rhyme with what

else had been done in the report.

So I think all in all the process
is a good one, which is why, NCUA

went, decided to move forward
to having a higher level review.

They probably need to relax
their timelines and be a little

bit more communicative on what
the real expectation should be.

Because when you set high expectations
of turning it around and then it

doesn't happen, it frustrates everybody.

Miller: Yeah and see, they put themselves
between a rock and a hard place because

the other side of it is when you take 3
months to get an exam report out and a

lot of these credit unions, it can get
stale hard to convey to the board when

you're in, June of 2024 and you're talking
about something that happened in September

of 2023 and they're under a whole new
business plan that gets frustrating.

And you mentioned it, this doesn't
happen very often, but I think

what frustrates our clients the
most is at the end of field work.

They get a draft document a resolution.

They get draft findings
from the examiners.

They start working on that.

The report goes through that review
process and all of a sudden, here's a

new door that wasn't even spoken about
during the field and that creates a little

frustration and communication challenges.

But overall, I agree with you.

It was, a good process to put
this review thing in place.

I know as a supervisor, even before
this existed, I still made my staff like

supervise problem case officers, but
I still made them share their reports

with me before they went to the credit
union, even when it wasn't required.

And I think there was probably
lots of supervisors did that at

least for the larger credit unions.

Treichel: Great point.

No, that great point.

I did that at times in certain situations
back when I was a supervisory examiner and

a director of special actions a lot ago.

So it definitely happened.

It happened in some instances, but
standardizing it was good policy.

The procedures and the timelines are
a little bit I use a technical term

here, a little bit wonky sometimes.

Farrar: And you talked about,
communications and they're in

people have gotten used to that.

That they can track, like when
you're, when you have an order

from Amazon coming to you, you can
track where it is in the process.

Here in the, as your exam starts going off
going up in the, and it starts taking more

on, you don't know exactly where it is.

And a lot of times the examiner might
not be able to respond back to you.

I think that might be part of
the frustration is there's no

kind of mechanism for following.

That the credit union can use to,
here's where the exam is in this

process that it's, gone to E and I,
because of the concentration thing.

It would be nice for you to do
that, but it would be probably

pretty difficult to implement.

Treichel: Yeah, that's a good point.

It's a bit of a black box.

The credit union just has
to sit there and wait.

They can reach out to their examiner.

They can reach out their
supervisor examiner.

But they might not necessarily be
in control if it's getting reviewed

at one of those higher levels.

So great point.

Great point.

So Todd and Steve two other things
related to this are the how contacts

work and what the exam period
is for different credit unions.

And as long as we've talked about how
the report flows through who touches it.

Why don't we either talk
about how contacts work or

how the exam period works.

Pick one of those two and we
can finish with the other.

Miller: We can talk about exam
periods in The exam period and

exam program in general, that is
still all publicly available in the

national supervision policy manual.

People can pull down, look it up.

They haven't redacted
that for the most part.

As we go through this
discussion, we'll just say this

is for federal credit unions.

In general, the rules for the state
charter critegians are very similar with

the exception being that regions have
different program agreements with each

of their state supervisory authorities.

And some of this can change with
specific state supervisory authorities.

A lot of it is depending on the
state supervisory resources.

Some states don't have the staffing
and people to meet these timelines.

So they have some agreements
with NCUA to extend them out.

In some cases, NCUA does single and sole
exams if those periods get stretched out.

Most of what we're going to talk
about is for federal credit unions.

In most states, it's
going to be similar, but.

For state charter credit, just
be aware your state supervisory

authority, they have an agreement
with the region that can modify some

of this stuff for specific states.

But a lot of the states, it does follow
along with the same federal program.

So 1st off, there is a small
number of credit unions.

Credienes that are under 1 billion and
they have a CAMEL composite of one or two

and a management rating of one or two.

They qualify for what's called an extended
exam period or an extended exam cycle.

I might not be using the exact term,
but for those credienes, they'll get an

exam that will be 14 to 20 months from
when their last exam was delivered.

And that's a start date.

It will start 14 to 20 months out.

Supervisors can move
that by 30 days or so.

So if you're well on credit, under
a billion dollars, you can almost

get to 2 years between exams.

Not quite.

4 months short, but you can get
a quite an extended exam cycle.

If you're a well run smaller credit union
for everyone else in general, you're

going to get an exam once every 12 months.

And they have timeframes for that too.

They'll start not sooner than
8 months from your last exam,

and they won't go longer than
12 months from your prior exam.

And that's from when it was
finished and delivered to you to

when they start again next time.

And then underneath of that
for credit unions that get

camel codes in threes or four.

NCUA will almost always do a
follow up exam and they have

different dates for that.

These can get modified a little bit,
but most of the time they don't.

If you're a Code 3, generally you're
going to get a follow up exam that

starts within 180 days of your last exam.

If you're code four, that
timeframe is generally 120 days.

If you're under a $50 million,
it can go out to 210 days for

that code three follow up.

But that's just for credit
unions under $50 million.

So you get the follow ups in there
if you're a code three, code four,

and that's generally all laid
out in the current supervision.

Policy manual.

Some of those follow ups can be waived by
SEs and ARDs for a certain period of time.

It's not forever.

They don't get to waive them entirely,
but there can be extensions granted

if they think that Code 3 or Code 4
is not a risk to the insurance fund.

That's the time frame form.

If you're a well run credit
union, you can go 14 to 20 months.

If you're under a billion, if
you cross a billion, you're going

to see those examiners every 12
months, whether you want to or not.

Treichel: And, as you say that, it reminds
me of something we've hit on here before.

That was Kyle Houtman at the January
board meeting, making reference to

annual performance plan, which indicated
that their goal of The goals that they

have for Code 3 exams and the goals
that they have for Code 4s, on the

Code 3s, they were only hitting them
every 67 percent of the time, which

means, in theory, the other 33 percent
of the time, someone gave a waiver.

Or not, they just missed it.

And on the code fours,
they were doing 80%.

So four out of every five were
done within, say the 120 days,

or started within the 120 days.

But one out of every five wasn't.

And again, theoretically that would've
required a waiver at some level.

Presumably that would be for a
smaller credit union, maybe one

that had already decided to merge.

But in conjunction with the other
issue about having the higher

level review of reports they.

That's elongating that
process, which then can elong.

The opportunity to get back in Steve,
I jumped in there and commented on that

before I gave you a chance to see what
you had to say on this particular topic.

Farrar: No, that was pretty taught
as I was looking through the N.

S.

P.

M.

there were some.

A specific areas that had been
a slightly different timeframes

is they fall in the same way.

But these are items that are near and
dear to our hearts, like severe record,

keeping problems or audit deficiencies.

And bank secrecy act problems, does
that, can that affect the when you

could expect a follow up to take place?

Yes.

And

Miller: especially on the smaller
credit unions with record creeping

and BSA problems the examiners need to
follow up on those within 90 days to

make sure that they're resolved or not.

That could be an offsite exam.

It could be an onsite exam.

But record keeping issues.

It opens the door to fraud
and other things, and you're a

steward of other people's money.

And when you can't keep your record
straight I don't think any of us at NCOA

have a very high tolerance for credit
unions that can't balance their books.

And it's a huge red flag.

So NCOA does follow up on those usually
within 90 days off site or on site.

And the same with Bank
Secrecy Act violations.

They have what's called
significant violations.

They're going to follow up on
those within 90 days as well.

A lot of times the bank secrecy
ones can be handled off site

the record keeping ones that can
go both ways on site off site.

And then, of course, does
some fair landing exams.

That's under a whole
separate program as well.

And has its own rules
and subset of things.

A lot of credits don't
get fair lending reviews.

We don't do a lot of them each year.

Although with the current board,
we might be doing more of them.

Our NCUA may be doing more
of them in the future.

Farrar: Yeah, and because that one is a
different animal, you can have your exam.

And feel like you're done and
then, shortly thereafter, you

could have your fair lending exam.

I think we've had a couple of
clients that are like, yeah,

they were right back in here.

We just got, the regular ones out.

Now, the fair lending guys are in.

Treichel: Yes, yeah, we have 1 right now.

That's actually just had the fair
lending and now has the exam going on.

So that we don't.

Miller: We don't deal with this
with very many of our clients.

In fact, I can't remember one,
but there also is a QSO review

program that is highly targeted
especially for data processes.

And those QSOs that do a lot of lending
stuff for multiple credit unions,

there's a whole separate program.

NCOA allocates some resources
each year for QSO exams.

SEs, examiners nominate.

Various quesos for those exams,
and there's a subset that are

chosen by regional management.

Maybe examination and insurance season
even has a say in some of that, but

that's based on our allocation of what
resources they have and risk of those.

Quesos, though we didn't
really cover that.

It's a small part of what NCUA does, but.

If you're the primary owner of the QSO,
yeah, you could get harassed for a QSO

exam and a fair lending exam and an exam.

Treichel: We actually did have one
client last year on a commercial loan

commercial loan QSO that had that and
been beaten What was what was chatting

with them daily while that exam came
on and they didn't, that credit union

did run into a fair lending, but they
had the Q they were the majority owner

and then they had that exam and then
they had their exam follow up on it.

Miller: Most of the time with the QSOs,
if there's a single credit union, that's

the majority owner, they tend to try and
schedule that QSO review at the same time.

It doesn't always work out, but
in general, they'll try and in.

Put those 2 things
together at the same time.

Treichel: Yeah, this 1 without
going into details that would

give away the situation.

It was, there were some unique
things that did relative to it,

but I'll just leave it at that.

All right, guys any other topics on
this that we should we want to highlight

anything we missed anything I should have
asked you on this topic that I didn't.

I

Miller: think you covered most of it.

Like I said, if your exams hanging
out there a long time just stay

in contact with your examiner.

S.

E.

try and find out when things are,
especially if they've given you

draft doors and you're already
allocating resources to address them.

And, most of our credit unions,
they take their exams seriously, so

when they get those draft doors and
things quite often, they are starting

programs to address them and fix them.

In most cases, it can be frustrating
sometimes to get an exam later

and you have something new.

And it goes the other way.

Occasionally, too.

We don't talk about that.

Sometimes in that review process,
your doors get removed to

Treichel: like this.

Yeah, I haven't seen a lot of those,
but that would be that'd be cool.

Miller: Those

Treichel: people are

Miller: because they're
having, I was going

Treichel: to say that.

Yeah, those are the folks that that.

That are happy with NCUA.

All right guys this was fun as
always appreciate your help on this

and listeners I want to
thank you for listening.

This is Mark Treichel signing
off with Flying Colors