NCUA Changes Exam Frequency: Or Regulatory Theater?
Download MP3Hey, everyone, this is Mark Treichel with
another episode of With Flying Colors.
I am flying solo today, and
I'm going to be talking a
little bit about NCUA's budget.
Not much, because people actually
aren't interested in that as much
as the trade associations are.
But the budget did have a couple of
interesting topics, one of which I'm
going to highlight in this podcast.
And that is that they are changing
or they are announcing that they
are changing their policies on their
examination cycle, which is something the
trade groups have asked for some time.
And specifically, they're going to
make some changes to credit unions over
1 billion and less than 10 billion.
There are roughly.
420 some credit unions that
fit into that category.
And until recently, those credit unions
were required to be examined annually
and actually are right now because they
have to finalize this, finalize it at
their budget meeting in December, which
is on Tuesday for a rare situation.
It is on December 17th Tuesday, the N.
C.
A.
Board meeting.
So they will finalize their budget.
And by the way, they announced
these changes to the exam cycle
in their public budget briefing.
Sometimes they call it a hearing.
It's technically a briefing because
the federal credit union was accurate.
Has changed to say that they needed to
do a briefing, and it's a public briefing
where, staff presents their budget,
which has already been pre cleared
by the board chairman and discuss it.
And then they invite people to
speak and trade groups come.
America's credit unions came.
The West Coast credit union came, the
defense council credit union came.
And I think there was another group
that also came and gave presentations.
They're speeches about the budget.
Essentially, the budget's too high, costs
should go down because mergers happen.
That's essentially what the
trade groups generally say.
Now, in this instance, NCUA dropped
something in there that, when I
saw it, it caught my attention,
going, wow, this might actually
be some relief for credit unions.
And I think I'm going to call
this podcast, what's, either,
What's the Sound of One Hand
Clapping, or Regulatory Theater.
Haven't decided which one I'll use,
Because they both have a special
ring to what actually happened here.
So what did happen or
what is about to happen?
Let me get to those details.
So NCUA.
At the budget briefing did a PowerPoint
and the PowerPoint has a slide that I
will have on my blog story relative to
this and I'll post it on LinkedIn as well.
But they mentioned that they're going to
make some changes to their exam cycle.
Basically, if you're a code 3,
a code 4, or a code 5 credit
union, nothing changes NCUA.
will do their exams.
Their policy will be that they will
do their exams in the same timelines.
And that is for a code for code five.
You're gonna have contacts
every excuse me, you're gonna
have contacts every 120 days.
If you're code three every 180 days.
And that's from measured from
the close of the last exam to the
start of the next exam now where
the changes are being proposed.
And because they've been proposed
again, they're going to be made.
They would not propose them if
they were not going to do them.
This is for all credit
unions between a billion.
And 10 billion, if you're over,
if you're over 10 billion, you're
going to get an examination that
starts between 8 and 12 months.
And that's the too big
to fail theory, right?
Credit unions of that size would
impact the insurance fund so
dramatically that NCUA needs to be
in there once every calendar year.
Now they don't have to finish the exam
every calendar year, which is what
it was required long ago, back before
Rick Metzger as NCUA Board Chairman
made some changes that allowed it
to be measured based on start date.
But where the theoretically
big meat of the change is in
credit unions between a billion.
And 10 billion.
And currently, those credit
unions are in that same category.
They need to have exams done
between an 8 and 12 month period.
Under the proposal, if you're in that
category, 1 billion to 10 billion, and
you are a CAMEL credit union of a code
1 or 2, and when I say CAMEL, CAMELs,
Camel credit union of one or two.
That means the C.
A.
M.
E.
L.
And S.
All have to be a one or two.
So if you have a three in any of
those categories, say earnings or
liquidity or sensitivity, you're going
to be under the 8 to 12 month cycle.
Every component must be a one or two.
And then also they need to
have had the same CEO that
was in place in the last exam.
So if your exam your file, not a
follow up exam, your full exam.
I'm taking this to me.
Your code 10 exam as NCUA
would call it in their systems.
If that was as of June of last year, and
the same CEO is there and at that contact,
that examination contact, everything was
a 1 or a 2, you are eligible to instead
of having an 8 to 12 month cycle, you're
going to have a 12 to 16 month cycle.
And then credit unions below
a billion, they're actually
going the other direction.
They're taking away a little
bit of, a little bit of relief.
Under the current policy, those
credit unions have a cycle of 14
to 20 months, and they're proposing
changing that to 14 to 18 months.
So they trimmed two months off there.
They added four months on those well
run credit unions for the lack of a
better term where they, that are between
the 1 billion and the 10 billion.
They actually then went on to say
that there are exam hour savings.
Of doing this of 21, 000 hours.
I think that's the number.
Yes.
21, 000 hours in a year
of examination time saved.
Now I'm going to explain why
that's wrong based on the other
information that they talk about.
And based on the role I used to have at N.
C.
U.
A.
where I would participate
in these budgets coming up.
And then the budget's being approved.
But N.
C.
U.
A.
In the explanation talks about
the fact that there are 10
examiner positions from the field.
Those would be the regions
that are going away.
And essentially, it's 9 examiners
and 1 supervisory examiner.
You could argue that supervisory examiner
isn't productive time and it's not in
the way that they do math, but it's
easier to track to their erroneous
number if you include it in the math.
So they mentioned 10 examiner
positions going away.
To figure out how they
got to that 21, 000 hours.
You take those 10 examiners times
52 weeks times 40 hours a week.
And so any one person, if they
work 52 weeks, they will have 52
times 40 hours is 2080 hours per
full time equivalent per person.
So 2080 times 10 is 20, 800 hours.
So they rounded up when they gave
the soundbite to 21, 000 hours.
But those are not all exam hours.
So what happens is NCUA, essentially, when
they budget, unless they've changed this,
and if they've changed it, they've changed
it to make their individual employee
less productive in their assumptions,
as opposed to more productive, because
they're always adding things that are
non productive hours, like going to
DEI events, going to training events.
But I digress, and What happens is the
NCUA books every hour that an examiner
does, and they book it to your credit
union, or they book it to annual leave, or
they book it to sick leave, or they book
it to training, or they book it to office
time, or they book it to a training event
for the software skills that they have
in place, like the DEI that I mentioned,
but when you get to the end of all that
math, Each examiner only contributes
about 1, 000 hours of exam time.
In some years, it might be 1, 020.
In some years, it might be 9, 950,
but that's what they budget to.
And remember, this is
what we're talking about.
We're talking about their budget.
So I did a little bit of math.
And if you take.
If you take what they talked about
there and you look at those credit
unions, so there's roughly 420 credit
unions that fall into that category.
So first you adjust, it's not
20, 000 hours, as I mentioned.
It's about 10, 000.
But if you take a look at how many
credit unions fall into that category,
remember that I've talked about here
frequently how NCUA has been showing
that code three, fours and five exams
are going those credit unions coded
three, fours and fives are going up.
And the last time they measured it was
in September, and they basically said
roughly 10 percent of all deposits.
Are in 10 percent of all deposits
are in code three, fours and fives.
We want to deduct from those 420 some odd
credit unions, 10 percent of the credit
unions, but there are also credit unions
that we need to deduct that might have
a code 3 in any 1 of those categories,
C, A, M, L, E, or S, or a 4, right?
Or maybe even they have 2 3s, but
they're still coded an overall 2.
Those credit unions need to come out of
the pool that might have expanded hours
and, oh, by the way you need to take out
credit unions that have a new CEO and
there's just turnover, people retire,
people get fired people get demoted
mergers happen, et cetera, et cetera.
The reality is when you start with
that 420 and just for rough justice I'm
going to deduct 20 percent of those 420.
So you get down to After doing that math,
you get down to about 336 credit unions
that in any 1 year would be eligible for
an examination that would not be required
to be done in that 12 month period.
And it would be under the new 12 to 16.
Category.
So if you take 10, 000 hours
and divide it by 336, that's 29.
76 hours.
I don't like using the decimal points
that long because these are, there's
a lot of assumptions in these numbers,
other than the fact that there's
only 1000 hours of productive time.
But some of these numbers are known and
some of these numbers are unknown, but.
30 hours of productive time, if they're
only getting 20 hours a week out of that's
roughly an examiner for a week and a half.
But, nobody's average, right?
Some credit unions are still going
to get examined within 12 months,
and that might be because the
examiner's in the same town as you.
That happens.
The reality is, if they will have in town
work, they want to have in town work.
It's nuanced a little bit because
of off site work that NCUA does.
But theoretically, the exam for some
credit unions could sneak or change from
a 12 month cycle to a 16 month cycle.
Now, that assumes that this was an actual
change that was be putting in place
because in the reality of all this, I
don't think that's what's happening.
This is more like the airline industry.
Notoriously being late, having
flights come late and the
statistics would be reported that
this airline was only on time.
This percentage and this
airline was only online on time.
That that percentage and with a stroke
of a pen, those credit those airlines.
we're flying far more timely.
How did they do that?
They padded their numbers.
They added about 30 minutes to every
flight so that, of course, everybody
was on time because we're now saying
that being on late is being on time
and they build it into the budget.
And I believe that's exactly
what's happening here at N.
C.
U.
A.
And the math proves it, and their
own words prove it, because, and I've
mentioned it here I've mentioned it
in client conversations, credit union
conversations, I've mentioned it here
on several podcasts, but last January,
NCUA approved their operating plan, and
that operating plan has goals in it.
And board member Kyle Hauptman, who,
by the way, will likely become NCUA
board chairman in January with a
stroke of a pen, another stroke of
a pen when Trump does that and makes
other changes, but NCUA in January of
2024 approved their operating plan.
And in that discussion, board member
Hauptman, said that he was disappointed
that they were only doing their code
fours on time, which was the 120 days
I mentioned 80 percent of the time.
So One out of every five code
fours wasn't being done timely.
And they also mentioned that their
code threes were not being done timely.
And only 67 percent of the code threes
were being done timely, meaning one
out of every three wasn't done timely.
So if code fours, which are the most risk
to the fund, we're only done on time,
80 percent and code threes, which are
the next biggest category of of risk.
And by the way, I'm skipping fives
because no one's ever a five, but By
the time they code you a five, they
take you over, they liquidate you.
So fives really don't happen.
So fours are the worst, threes are the
second, second worst, and those were only
completed 67 percent of the time, on time.
So what do you think?
You think code ones and twos are
magically all done on time right now?
No, because they're going to do the ones
on time that have the most risk, meaning
that code ones and code twos have already
slipped, meaning that this chain that
changed that NC way, in my opinion, Is
proposing and will make is only going
to change the policy so that it matches
what is actually happening, which is how
I get to this being regulatory theater.
Now it's great soundbites because
they can tell almost said CUNA.
They can tell America's credit unions.
They can tell the trade groups, look,
we listen, we're changing our policy.
The reality is the practice was
that was what they were doing.
They can't get their exams done on
time and they're changing their policy
so that they're consistent with that.
But the slap to the regions is
and we're taking 10 bodies away.
So those people are going to go
away, which means they're going to
still have challenges coming up and
meeting these times, which means
there will be a continued elongation
because they just don't have the staff
and they're not efficient enough.
They don't have the experience
examiners enough, in my opinion, to
get some of these examinations done.
So that's.
In my mind, the reality of
what's happening, and by
the way, it's very similar.
I gave the airline industry.
It's very similar to a credit union.
Have a having a concentration risk policy
and then hitting, let's say it's X percent
of net worth will only be 300 percent
of net worth will only be in commercial
lending and you're at 275 and you're at
295 and then you get some really good
loan opportunities and you go to 315 and
you realize you went over your policy.
And then you take it to the
board and you change it.
NCUA will criticize you if you do that.
They will give you document
resolutions if you do that.
And oh, by the way I think they just did
that for their exonic phone exam cycle.
So again, bring it in line
with what the reality is.
Now that's pretty much all I
want to chat about relative
to the budget in this podcast.
There are a couple other
topics I may hit it.
I will at least hit in a blog.
They made some changes with some other
positions that they're adding and
oh, by the way, those positions are
like an office of the secretary and
behind the scenes types positions as
opposed to mission critical positions,
which are the examiner positions there
they're taking from those positions.
Positions and they're putting them
into the central office and positions
that have 0 percent productivity.
And I don't say they don't get things
done that are productive for the
good of the credit union movement.
What I'm saying is they are not productive
as it relates specifically to exam work.
So they took bodies and
budget from that category.
And that is contributing to exams
and they moved them over those 10
plus 4 others that they're adding for
example, they're adding a position
on climate and oh, by the way, I
would suspect that once Kyle Houtman.
Takes over that climate position doesn't
ever get filled, even though it will be in
the buzz it because the chairman will make
sure, in my opinion, that doesn't happen.
That's how these things work when
there's a change of presidents.
Elections have consequences.
That's it in a nutshell.
I hope you had a wonderful Thanksgiving,
and I'll have a little bit more coming
on some of these topics, depending
on what happens at the actual budget
hearing when they approve it skewing
at the budget hearing the budget.
Approval by the board.
on December 17th.
But what happens is most
for the most part, most of
these numbers are all cooked.
If they present it, they may know
that they have a little fat here
and a little fat there, and they
might make a tweak to it to show
that they listen to the industry.
And I expect that the budget will be
mostly approved as already presented
that these changes will occur,
but all they are is the reality
is that this is what's happening.
So they might as well spin it and get
a little bit of credit while they're
stealing some bodies from productive time
and putting it over an unproductive time.
And as Van Morrison once said, that's
what's the sound of one hand clapping?
That's a little bit what
we have here on this cycle.
So It at first appeared like it was
an exciting change and the reality
is it's not much of anything as far
as relief goes for credit unions.
All right, that's it.
This is Mark Treichel signing
off with Flying Colors.
