Credit Union Exam Solutions Presents With Flying Colors

Hey everyone, this is Mark with a special
Archive episode of With Flying Colors.

I hope you enjoy.

One of the first episodes I did back
when the podcast started 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 NCUA 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 efficient.

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 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 NCOA 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.

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 NCUA.

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.

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's the preamble

explains why they're doing what
they're doing in the final rule or what

they changed from the proposed rule.

And it really is the arc of all three
of those things that you need to look

at to best understand why NCUA operates.

What's a rule being replaced?

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
NCUA, 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 a 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 additional director.

The example I'm talking about for this
example would be someone being downgraded

from either a 2 to a 3 or a 3 to a 4
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 NCUA 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, uh, NCOA is pushing

a little too hard on that, although, uh,
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 and CUA regulations.

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

So coordinated that something that doesn't
have another way to appeal identified

in that particular regulation, you can
appeal under part seven, four, six, eight.

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've 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.

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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
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 CAMEL.

Now, the other thing, but 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 to, 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.

Okay.

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 video.

Podcast on this, but you know, when
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, 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.

We'll, we'll be losing at every
level until you ultimately

go to the end to a 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 insue's
internal legal guidance that once

they know that the clock starts.

But so I've 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.

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 got to go to the office, the
regional director, 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.

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 heal,

to reply to your appeal.

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

Let's assume they say, nope.

Okay.

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
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
will want to take it to E& I because

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 aid.

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, the people who would
decide your appeal now expeditious.

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

of examination of insurance.

For 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,
four 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.

Uh, 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 Uh, 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 feel 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?

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 prayer.

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?

Because 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 Kansas success is greatest
there, second greatest at the supervisory

review committee level, and then
E& I and then the office director.

And quite frankly, tie
goes to the runners.

So think of this when someone
walks into your office complaining

about your, 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 runner, 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 with the runner.

You were clearly safe at first base.

And here's why that's a good
sports analogy relative to this.

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

I went down a couple of rabbit holes.

Uh, 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.