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Treichel: Hey everyone.

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

And recently the NCOA board at their
quarterly share insurance briefing noted

that camel codes continue to deteriorate.

I did a podcast about it, short podcast
about it recently, following up on their

communication of this information and
what happens when camel codes get worse.

Examinations get harder.

Examination reports get harder and
specifically credit unions start getting

more examiner findings, supplementary
facts, document of resolutions,

perhaps regional director letters.

informal type of communications,
informal enforcement actions from

NCUA that, that can make credit
unions lives more complicated.

So we're here today to start talking about
all of those things I just mentioned.

And I've got Steve Farr and Todd
Miller of my team with me here today.

Guys, how you doing?

miller: Good morning.

I'm doing great today.

We have a day with no wind for a change.

Treichel: Glad to hear it.

No wind.

We'll try and wrap this up so you can
go get out, get some yard work done

there in the beautiful state of Montana.

But guys, if Steve and Todd,
let's go with Steve first.

If you could give a little bit of
background, maybe there's some new

listeners who haven't heard you on
the podcast before, if you could

give a little bit of your background
at NCUA and that'd be great.

So Steve, fire away.

farrar: Great.

Hello everyone.

Yes, Steve Farr.

I spent 30 plus years at NCUA.

Most of them I would say really great.

And the first half of my career
was heavily involved in the

examination function, primarily
as the problem case officer on the

West Coast, but I was involved in
conservatorships throughout the nation.

Then I moved into the central
office and spent the last half

of my career there working in
the division of risk management.

One of my accomplishments or duties
that would particularly apply to

this broadcast was I, I wrote the
NCLA's, uh, enforcement manual,

which was put out as an instruction.

And I just realized that was
20 years ago, 20 years ago.

Time flies, man.

It seemed like yesterday and I was
looking back at it, but then I spent

my career there in that, uh, the
division of risk management and, uh,

worked on the corporate resolution.

And one of the last things I worked on
was the, uh, risk based capital rule.

All right, good.

miller: Similar to Steve, I
was around more than 30 years.

Actually, it was just a couple
short months, less than 35 years.

I enjoyed my career a great deal too.

And instead of breaking mine
in two, like Steve, I could

probably break mine in three.

First 10 years or so, I was an
examiner and problem case officer.

The second 10 years, I spent it
as a capital market specialist

from 2000 through 2010.

I do have a lost year there
where I was involved with the

conservatorship at West Corps.

And in the last decade or 11 years of
my career, so I was the director of

special actions in the Western region,
supervising problem case officers

and capital market specialists.

Just a little sideline, I also spent time
on NCOA Supervisory Review Committee.

I chaired a couple of appeals,
sat on another appeal.

That was an interesting little sidelight
to my career, but like Steve, I

enjoyed almost all my years with NCOA.

COVID was a little less fun when
you couldn't talk to people, but

for the most part, I enjoyed working
with credit unions a great deal.

Treichel: Rig, I would, I would
echo that remark in my 34 years.

And now in this new, this new thing
that we're all doing, I'm having

even more fun helping credit unions.

So a lot of credit union conversations
we've had has been based around.

The examination reports, then the
issue in the enforcement manual related

items, uh, tied to the examination
report and whether it's getting

draft documents that they don't quite
understand why it might be placed in a

certain part of the examination report.

A lot of questions around that arena.

So I thought it would be good to just do a
little bit of education on the particular

parts of the examination report.

I, I'm thinking that maybe the first item
to discuss would be the examiner findings.

So let's chat a little bit about
examiner findings and or pivot

from that any which way you think
based on your past experience on

exam reports and examiner findings.

miller: Go ahead, Todd.

Examiner's findings, they reflect problems
that examiners find during the exam that

they think credit unions should address.

But there are problems that don't threaten
the viability of the credit union.

They don't represent systemic
violations for the most part.

They're treated as items that
management can correct in the

normal course of business.

They don't require the timeliness
that some of the other things do

that we're going to talk about later.

But they're just items that the
examiners believe need to be

corrected, but they can be corrected
in the normal course of business.

The examiners don't usually spend
a lot of time Documenting them

in the report, the descriptions
of them are very, fairly brief.

There is a short action deal
with this over the course

of the next year in general.

farrar: And I think one of the important
things on those is, is as a, if you

were, you know, a board member looking
at the exam report, that looking at

the volume that you have of examiner
findings, it may be that the NCOA

is trying to send you a message.

Because we've had cases where the,
the problems weren't real horrible,

horrible, and that it wasn't going
to get to where it was a cost of

the insurance fund, something,
and not quite to level the door.

There's just a lot of
little, little things.

And then when you get a, a, you know,
laundry list of just examiner findings

covering multiple areas, but minor
things, that's, that's a clear indication

that NCA is trying to send to the
board of directors that they need to

pay attention to is, what's the root
cause of, of, of all those issues is

that, Breakdowns at multiple levels.

Is it a breakdown at the top?

Is it a breakdown in internal controls?

But pay attention to what could
be an overarching message.

Treichel: Great points, guys.

We'll probably get into this again in
different discussions, but citation

of a regulation, citation of safety
and soundness, citation of A letter to

credit unions and an examiner finding
anything you want to share relative to

what I just said there, as opposed to
contrasting it with a document resolution.

I guess the ultimate question is, if
something's in the examiner findings.

Should the examiner be able
to tie it to a written into a

product as a reference point?

miller: Yes, sorry, Dan.

Uh, they're supposed to cite a regulation
for any of these informal administrative

remedies, whether it's an examiner's
binding a door, a preliminary warning

letter, an LU, a regional director letter.

Those citations should be there.

They should include regulations,
your examiner's findings, and doors.

They, in addition to the regulations,
they may include other guidance letters

that the party union, that NCUA is issued.

So letters to credit unions.

NCOA issues supervisory guidance
documents, it could cite one of those,

it could cite the exam guide, but
in general, all of these informal

actions, when examiners are asking
your party to take action, there

should be citations to a regulation.

Treichel: Very good.

Very good.

Steve, anything else on that topic you
would like to add on the examiner finding?

farrar: And just a reminder, our,
our listeners and that it's easy

to use the tools on the internet to
look up the regulations that I use

the ECFR, and you can negotiate and
navigate around that really easily

and then just focus on that one area
so that that's the quick and easy.

The other advantage on that is.

It has the links to the kind of the,
what the history of that regulation,

you can go in and you can read the
preamble if you're really want to get

into the details of what happened with
that regulation, what the history,

you can, you can get to it that way.

And when, when we've are faced with
so our career, we spend a great deal

of time in those preambles to make
sure that we understand what NCOA's

intent was with certain regulations.

Treichel: That's a great
point on the preamble.

I actually always have enjoyed the
preamble more than the actual regulation.

You can probably read that and
know what you need to know.

And I think in a previous podcast, I might
have made a statement such as that it's

a regulation is almost a three act play.

There's the preamble of the proposal,
there's the preamble of the final, and

then there's the actual regulation.

And to really understand the entirety
of what NQA is trying to achieve,

it's important to understand, I
think all three of those documents.

So,

negotiating with NCUA, Todd, you
mentioned in a perfect world, it

would cite a regulation, right?

And you could argue that any regulation in
and of itself, if an NCUA examiner wanted

to take a position that a regulation
was violated, that that could rise

to the level of document resolutions.

Oftentimes it doesn't, but let's say,
for example, you've got a situation

where there are a volume of examiner
findings and they decided, maybe with

negotiations with the credit union,
that they would put them in the examiner

finding instead of a document resolution.

Next exam comes around.

What happens to the, what does the
examiner do relative to the 10,

10 examiner findings that were out
there coming into the next go round?

What should the credit
union expect to happen?

Particularly if maybe
there is non compliance.

miller: It's somewhat interesting
because I used to teach and Steve

also taught a lot of examiners classes
and examiners would ask questions

like this and the answer to them
was, it depends, but there, there is

no black and white answer to this.

And it really depends
on the nature of those.

examiner's findings to
elevate them to a door.

There has to be some evidence that
if they're not corrected, it's going

to cause financial or operational
damage to the criterion, or continued

noncompliance with the regulation,
or as Steve alluded to earlier,

sometimes if there's a significant
number of findings not being addressed.

It represents a widespread problem
throughout the credit union.

Sometimes they get elevated to a
door just to send a message to the

board that there are significant
numbers of internal control problems

here that are not being addressed.

So sometimes findings just get left
as findings for a couple years.

Sometimes the findings are not addressed
and Like I said, the examiner's

judgment, those unaddressed findings
can lead to operational problems or

violations of regulation or internal
control deficiencies, then they can

rise to a document of resolution.

For most credit unions, they should
probably operate on the assumption that

if they don't resolve findings in a
material way, they probably will find

their way to a document of resolution.

Treichel: I would agree.

I would agree with that sentiment.

And I'm thinking of a quote,
commit no mire blunders, right?

You've been told this is an issue
you can expect and see a way to

look at it when you come back.

And the best way to make sure
it doesn't go to a document

resolution is to resolve the issue.

And of course, that that presumes
that you're comfortable that the

issue needs to be resolved and
you can have discussions with the.

The credit union around that topic.

So any last words on examiner
findings before we pivot,

perhaps to supplementary facts?

Very good.

Okay.

So the supplementary facts portion of the
examination back in the day, long time

ago, back even before the 20 years ago,
when Steve wrote the enforcement manual.

I remember utilizing the
supplementary facts for compliance

with a letter of understanding.

And that was really where I got
my teeth wet as an examiner was

the, an LEA was outstanding.

And we, as a problem case officer,
you typically would have those.

So you'd give an update in that
form, but it over time, it's morphed

into being utilized a lot more.

And if you would like to
describe the purpose of the super

supplementary facts, and maybe some
advice for credit unions in that.

On that on that document

miller: examiner's use supplementary
facts for a number of different

ways, and sometimes they're
tied to document a resolution.

Sometimes they're tied
to examiner's finding.

Sometimes they're just general
information, but in general.

It gives credit unions alternatives
to address the problem.

Here's some deficiencies in
your commercial lending program.

Here's options A, B, C, D, E
suggestions that might address that.

So it gives credit unions a
broader explanation of what the

examiner sees an issue and perhaps
alternatives to address it.

They put a lot of suggestions in
supplementary facts nowadays because

the overview is supposed to be
condensed, but Maybe there's an

issue that doesn't rise to an exam
finding, but could in the future.

And examiners will use
supplementary facts to explain that.

And some of these issues, especially
with information security, some

of the consumer compliance type
regs, um, some of the intricate

credit risk management type things.

There are long discussion items that
really don't belong in the overview.

The overview is tied to the officials.

Here's the main things.

The supplementary facts can be used.

Here's other important things that
management needs to pay attention to.

It doesn't rise to the board level.

Um, so that supplementary
facts has become a multiple use

document in many different ways.

And examiners have a lot of
discretion as to when they choose

to use the supplementary facts.

Um, nowadays NCUA has so many specialists,
they have the information security

specialist, the payment system specialist,
the regional lending specialist, the

regional capital market specialist.

A lot of times you'll see those
specialists will use that supplementary

facts to convey information to the
criteens and here's how you can mature

your program in these respective areas.

So you see the specialists use the
supplementary fact quite often.

Treichel: Now that makes sense.

Steve.

Eddie.

thing to add on supplementary facts and
the use of them, uh, in the exam report.

farrar: No, that was just to add a
written down to make sure we cover

the, the specialist thing, and
Todd just covered it really well.

You

Treichel: nailed it.

Todd hit another grand slam,
so we'll, we'll, uh I didn't

even have it right on my note.

You mentioned supplementary facts.

You don't apply with it, or something
maybe deteriorates, and this is, I think

your answer is, depends, you're gonna
give me the lawyer answer, but Uh, it

could then rise to an examiner finding.

So really in the hierarchy of pain
for a credit union, the lowest

pain to have something discussed
in is supplementary facts.

The next highest level of pain would
probably be the examiner finding,

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Oh, let's

Treichel: pivot to, see I even
turned it, I'm not going to give you

the opportunity to say it depends.

I'm just going to paraphrase that.

Let's pivot to the document resolution.

And we've, we, we had a conversation.

All of us were in a, had some
conversations with the credit union

recently that had a substantial
volume of document resolutions

north of a, of a really big number.

And to the point of
prioritization becomes an issue.

But before we maybe dive into that
particular nuance of it, document

resolution, what's the purpose?

What's your, your vast experience
about with document resolutions?

Would you like to
communicate here with the op?

I

miller: think this one, maybe
we will just read from NCUA's

national supervision policy.

So you understand exactly what examiners
are, how they're supposed to be using

document or resolutions from their
own national supervision policy items

that elevate themselves to a document.

A resolution must be seen.

Not that an examiner would recommend
escalating to the next level.

Elevated enforcement action, that being an
RDL, an LEUA, preliminary warning letter.

One of the things the examiners are
supposed to consider when they decide

they're going to write a door is if
left unresolved, could the violation

or problem cause the party to use
serious financial or operating damage?

Does the problem result in fundamental
noncompliance with laws or regulations?

Is the problem something that would
need to be escalated to the next

level of enforcement unresolved?

And is the problem a result
of management's inability or

unwillingness to properly identify,
measure, monitor, control risk?

And then Steve talked about this earlier.

The last item is Is the problem
widespread throughout the credit union?

So that's one of those, if you have
30 minor findings, is it really

an indication of a widespread
problem with internal control?

So those are words specifically
straight out of the National

Supervision Policy Manual.

Documents of resolution should
be significant if she is, that

if left uncovered, presents
a risk to the insurance fund.

Treichel: That's a good summary
right from the, uh, words of NCUA

and of course, the NSPM, the National
Supervision Policy Manual, uh, there

is a redacted, uh, version of that,
uh, uh, live for credit unions.

There is what appears to be an
increasing tendency of NCUA to

redact more and more of that.

And it's something I haven't
really talked about a lot here,

but it's something that I.

I have on my list to potentially talk
with NCOA, uh, down the road, especially

if it keeps getting worse, but Steve,
anything relative to what Todd said, I'm

sure that document resolutions, you've
got a lot of experience on these, both at

NCOA and recently, what are your thoughts
on the document resolution process?

farrar: Oh, one of the things that
crossed my mind is that you talked,

talked about the volume of them.

Um, we've had some of our recent clients
that were getting like their first.

Document of resolution and
that one was a really big deal.

And we have some of those that
have pages and pages of document of

resolution so they can run the whole
gambit and the thing, how you react

is, is everything to do with it.

One of the things Todd has wanted to
talk about while we're on that subject

is, I can't recall if it's inside
Zoovision and what would you call a

well written document of resolution?

I know that we used to, is, do they
have still the SMART principle in there?

I know the OCC uses a thing called the
5 C's format is used to communicate.

Essentially is there, they call it matters
requiring attention, we call them doors.

But theirs was, you had to address
concern, cause, consequence.

Mainly of inaction, corrective action,
commitment, and I think NCUA, we didn't,

we used to, is in the regulation, but
we used to teach the SMART principle.

Todd, do It's

miller: still in the supervision
manual, the SMART principle.

It's more, the SMART is geared to
that corrective action piece, not

those other pieces that the OCC uses.

NCUA, they do have to describe the
problem, but the SMART principle is the

actions that they ask the credit union to
do or that the credit union agrees to do.

And we'll talk about negotiating
doors, I think, before we're done.

But the SMART principle is those actions
that we're asking of the crediting,

or NCOA is asking of the crediting,
they should be specific in nature.

They should be measurable.

So are they achieving the results intended
in a very concrete, measurable way?

They should be achievable.

And sometimes this is
where examiners run afoul.

And why people hire us is because
they're given Doors that are

perhaps not achievable in the
manner that the examiners request.

They should be result oriented,
so they should address the

root causes of the problems.

And that's a difficult one, especially
for newer examiners who like to address

symptoms of problems rather than
the actual problem and root causes.

And they should be timely.

So, to reiterate that, just in the SMART
letters, Specific, Measurable, Achievable.

Results oriented and timely is how those
corrective actions should fit in that box.

Treichel: When you walk through the SMART
principle to pop out at me achievable

because we've had some situations where

NCUA's expectations were, I want
to say not in touch with reality,

but that's a little harsh.

We're a little aggressive and the other
one that pops into my head is timely.

And I've been, we've been experiencing,
NCUA's board members have actually

talked about it, that the timeliness
of reports can complicate.

The ability to achieve it.

For example, if when the examiner
is on site, they're saying I want

something done by September and then
August 15th, they actually give me

the final report where they go through
all the nuances and they talk about it

in the overview and I see some things
in there that I don't really like.

And then by the way, they,
depending on code, they might

be coming back pretty quickly.

So you can see some of these things
colliding where the smart principal

Isn't necessarily followed, whether
it's because of staffing issues or

just having an expectation of what,
what can be achieved in a time period.

I remember when we were all out
on the West Coast, there was a guy

that worked in the office named Eric
Jacobson, and I remember him saying,

Mark, only so much water is going to
go down the sink at 1 point in time.

There's only so much that can be done
with the resources that, that you have.

Any thoughts on achievable
or timely and any advice to

credit unions in that regard?

miller: I think when we see those doors
that you are perhaps not achievable,

perhaps not timely, perhaps not really
results oriented, I think it comes

down to how examiners negotiate those
doors because What should happen

throughout the exam process is an
examiner has an issue and they feel

it's a material issue like this.

They should sit down with management,
discuss the issue, get management's

agreement that it is an issue and that
management actually understands the issue.

And then it becomes a negotiation.

Management should say.

This is what we're able to do with
our resources to address this problem.

And I think a lot of the ones where we run
into problems with our clients, or where

they run into issues with DOORS not being
smart, it's because that whole negotiation

discussion process hasn't occurred.

The examiners are under time pressure.

They write the DOOR, they throw it
in front of management's face without

management having time to say that this
is what we're able or unable to do.

There hasn't been this whole agreement
that this is even a problem, and

there is a lot of disagreements out
there, especially around interest rate

and liquidity in this environment.

So when examiners shortcut the process,
that's when you start ending up

with doors that are not achievable,
results oriented, or time like.

And this is really important
that when a credit union gets a

door, especially at the board and
management level, that they truly

understand the examiner's RIP concern.

There's always more than one
way to address a problem.

And I think what we're seeing quite
often with our clients is there

hasn't been a discussion of these
multiple ways to address a problem.

And the examiner is just, here's my
solution, credit union, follow it.

And they're not given that
opportunity to say, wait, here's

other ways we can address this.

That's not always the case.

A lot of examiners are really good
about writing open ended doors that

examiner or accrediting give us a
plan to address this issue by the

state and we'll assess it there.

Um, but in many instances, we do
see this where they're given a door.

By fiat, they're given goals and
timelines and there hasn't been

that upfront discussion with
management or that agreement that

this is the significant problem that
jeopardizes the CRO Union's future.

Treichel: Great point, Steve.

farrar: Yeah.

One of the items I know that we've
been dealing with our clients on

is the timeliness when they get the
exam report and, and it has the door

in there, and then when they start
looking at what it'll take to fix it,

the cost of some of these door items.

Is, uh, really great in some cases, and
probably Not much of a consideration and

when it was put together and I think Mike,
that's where I think when you get into

one of these and it's going to be really,
really costly before you really tie into

that makes sure that you're you and your
examiner on the same boat because it'd

be terrible to put a bunch of resources
into something that you thought had

marginal benefit to you, but you thought
was going to take care of the door.

That might not be a good
decision that could have been

taken care of or communication.

The other thing that can happen.

And I used to see this a lot when
I came into the cases as a problem

case officer was the doors that were
inconsistent, one part of it would say

reduce operating expenses and the time
frame was that kind of immediately.

And then on the other parts of the door
where all of these items that we're going

to acquire more resources and people and
be like, well, that's inconsistent there.

So you guys have any thoughts on
how to deal with those issues?

Treichel: The one thing that jumps
into my head and it related to the

priority, but the cost is prioritizing
will will often advise credit unions

to, you know, you got, you've got
six it findings, which one does NC

way think is the most important and.

Typically, when you were training
examiners, presumably there was

discussions about putting document
resolutions in priority order,

putting examiner findings in
priority order to the extent you can.

And we've advised credit unions
to try and establish that point so

that then they could maybe have some
discussions about if there's five that

are saying I need to add expenses.

And you're at the meantime, you're saying
I'm, my, my profitability isn't enough

for my, for where I want my capital to be.

That's one way to approach it.

But Todd, what are your thoughts on that?

miller: The NSPM still says
DOORS should be issued to the

credit union in priority order.

I don't think it says that
about exam findings anymore.

A lot of the exam findings.

Examiners tend to organize those
around subject areas and which

examiner turned in their work first,
that, that capital market specialist

or that regional lending specialist.

But those are items correctable in the
normal course of business and don't rise

to the priority level that DOORS do.

DOORS should be in priority order and
cost should be a consideration of that.

I remember back in the nineties,
we used to look at credit operating

expenses and then we had a board.

That came in and says, examiner, you
don't get to look at operating expenses.

Stay away from them.

That's the credit union's decision.

So it goes back to Steve's thing.

When examiner says, improve your
risk management program, hire a chief

risk officer, develop an ERM program.

I don't think examiners quite
understand that those tasks are

potentially millions of dollars tasks.

They're not something you do in the normal
course of business, like an exam finding.

Those are significant resources
and you start asking people

for third party consultants.

Those things are not cheap and Examiners
don't dig into expenses and I haven't

for a couple decades other than maybe
some of the problem case officers So

a lot of times I don't think examiner
is like Stephen They don't understand

what these things cost and the cost
is maybe a bigger problem than problem

They're trying to fix The parties need
to push back and examiners with that

is, wait, this is the resources this is
going to take and is it really going to

achieve the results intended and plagues
parties should be given the opportunity.

Is there another way we
can address this issue?

Treichel: So I took some notes during this
conversation and I want to circle back to

the NSPM portion where you talked about
the purpose of the document resolution.

And I wrote down and circled three things.

Inability or unwillingness, fundamental
non compliance, and widespread.

So

what caught my attention on inability or
unwillingness was it linked in my head

that the definition of a code three is
the management may be unwilling or unable.

And the operative word there is may
oftentimes, and we're, we'll do some

podcasts coming up here on camel,
but it really caught my ear that.

When they're talking about if you
need a door, it's because you're

in a management's inability or
unwillingness, and that's very

similar to language about the code.

Any thoughts relative to document
resolutions and how they relate, how

they should relate to the camel code?

farrar: I had that written
down as a question also, so

I guess I'll throw it to Tom.

What?

Why do I get picked

miller: on here?

There is a feedback loop between the two.

For instance, in a code one,
you're almost never going to

see a document or resolution.

Code twos, you might see one or
two, um, usually they're going

to be compliance or BSA related.

There are certain regulatory things
that might not be significant, but

because they're violations of the law,
they rise to a document or resolution

when otherwise they would be a finding.

You can correct these in the
normal course of business.

And you see a lot of those with you.

BSA issues and FinCEN related issues,
because we have agreements with

other agencies that these items
will be a document or resolution.

NCUA has agreements.

Keep throwing we in there.

I'm not with NCUA anymore.

Just seems like it.

Yeah.

After 35 years of being with an
organization and probably working

for them, there's a little bit
of, it feels like an old family.

But there is feedback related to
the DOORS and the CAMEL ratings

should be congruent with each other.

And there's a 3 CAMEL rating.

Those are crediting that they're not in
imminent danger of failure today, but if

they don't address things, they could be.

You expect more DOORS there to address
those root causes, to make sure

that the direction that crediting
moves is to a 2, not down to a 4.

So, there should be some relationship
between, um, CAMEL codes and, um,

Your exam reports and doors and
bindings, it's very rare that you're

going to see a camel three that
doesn't have a door unless it used to

be a four and addressed everything.

That's maybe the one exception,
but it's a very rare situation.

As you get down into that camel four
rating, you're almost always going

to have the next topic of discussion
for us and an LUA or a preliminary

warning letter type of action.

There is a step in between there.

Unwillingness and inability to
address problems, if that is truly a

foundational issue, it's almost always
going to get beyond a door eventually.

Treichel: Point.

Fundamental noncompliance,
when I see that, the word

I'd key in on is fundamental.

Violating the loans to one member,
violating a commercial loan, a principal

tenant of a commercial loan rule.

I think you mentioned BSA, because
of the agreements they have.

Anything on BSA is going to fit into
fundamental non compliance almost.

And then widespread, we've had lots of
conversations, not on the podcast, about

situations where it almost appears as if
corporate governance is, is rising in.

Importance in credit unions
from an NCUA perspective.

And when I think widespread, if I don't
know why I'm linking that to this topic

in my mind, but I am where maybe an NCUA
has eight examiner findings and they have

a few things in the document resolution.

We're seeing document resolutions being
grouped into corporate governance.

Any thoughts?

And I know this is a little off
topic, but based on our recent

conversations, we've had any thoughts on.

Document resolutions being widespread
and corporate governance and how

NCOA is, is doing that right now.

miller: I think if NCOA catching up and
maturing their own level of knowledge

about what causes of issues before they
dealt with the symptoms of it, I was

always a proponent that we should have
specific training classes at NCOA just on

risk management and corporate governance.

NCOA really doesn't do that.

Based on what we're seeing with our
clients, maybe they are starting to do

that because we're starting to see a
lot of doors and findings that are under

that guise of corporate governance.

Realistically, corporate
governance is important.

I think NCUA over the decades have left
it alone because they didn't want to scare

volunteer board members away from serving.

Um, now it's become somewhat
critical to do the safe and

sound operation of organizations.

So, I think just as an agency, their
understanding of corporate governance

has improved and that's why we're
seeing those types of language in

these documents of resolution and
findings today as they're getting

better at, um, identifying root causes.

Now, sometimes it does go astray,
but overall, I would see it as a

positive and something that perhaps
needed to happen a long time ago.

Yeah,

farrar: I agree.

I'm a big proponent of corporate
governance because it takes care of

all those little issues that used to
drive us crazy when it would be a matter

of ethics and those types of things
that would just, you know, infuriate

us and they were hard to overcome.

Um, one thing I'm saying though, is
there's this creeping that's occurring,

uh, and the level of the corporate
governance is out there because there's

a lot of guidance out there for.

Uh, institutions, not just credit unions
above the 10 billion, uh, mark, all, all

of which is good advice, but I think I'm
saying that's requirement is like creeping

down to apply it more than an intended
level to the smaller institutions.

Let's have something to be wary of
and know that this is the appropriate

corporate governance for our size,
but we're shooting to be much bigger.

What is our corporate governor
thing to look like going forward?

Go

miller: ahead Todd.

NCOA's knowledge is maturing in
this process and rightfully they're

still stumbling blocks on it.

We still see examiners perhaps
putting burdens on boards of

directors to get involved in daily
operations and daily committees.

Which is very much misplaced
in larger credit unions.

There's clear separations of what is the
board's responsibility versus management's

responsibility and how management
demonstrates compliance with things.

Five, ten years ago, you would
never see an exam report that talked

about risk appetite statements.

We're starting to see those and
rightfully, but I also think

sometimes examiners don't have
their hands around what that all

means yet, from my perspective, but
I think NCOA is still taking baby

steps down the right path, but.

Their knowledge level still
needs to mature along the way.

And they have a lot of
employees to get up to speed.

Credence, you can hire us.

We'll help you out with that.

If you've got an examiner that
is misplaced along their journey.

Treichel: You're very good.

And, and Todd, the catching up concept,
it was a conversation the three of us

were involved in, I think last week, it
might've been a after conversation, but

you said something that resonated with me.

It was like back 20 years
ago, 15 years ago, whenever.

Capital market specialist came into
existence and NCOA elevated the

expectations on liquidity and asset
liability management and income

simulation and all those things.

It was much needed and we, the agency
and credit unions were behind where

banks were and there was this, this
maturity process within the agency

and then within the credit unions.

I think we're at the beginning stages
of that in corporate governance, and

then I'll pivot to say the Office
of National Exam and Supervision has

highlighted as corporate governance
and a lot of the initiatives that

came out in their guidance, and then
ones used to be over 10 billion.

Uh, then they shifted it to 15
billion, yet they have the capital

planning for the 10 billion.

And then Steve, you alluded to other
guidance that's out there, uh, which,

uh, there's this great document that
you've pointed out to some of our

clients and to me, the FDIC proposed
guidance on corporate governance,

which quite frankly is fantastic, but
it's for 10 billion credit unions.

But that creeping effect is, we see
that, we point it out to clients,

NCUA sees it, they look at it and
go, wow, this is better than anything

we've got in our NSPM and we don't
have a letter to credit unions on it.

And you can start to see examiners taking
on some of those tenants, which is a

good thing, but you can have pending on
who gets assigned to, you can have the

expectations of a 10 billion guidance.

That's not even final for banks.

That ends up being part of a
discussion for a 1 billion or

a 500 million credit union.

Same thing being said, if you're at a
billion dollars and you get corporate

governance brought up, what you want
to do is look at what's out there.

What, how you can.

mature your systems.

And there might be some things there that
do make sense for you at your asset size.

Any, anything I triggered there, or should
we move on to regional director letters?

Go ahead, Todd.

miller: Pete, Pat spent two decades
dealing with troubled cardigans.

I spent a couple, a decade as an
examiner problem case officer,

didn't call it another decade as
a director of special actions.

And even my time as a regional capital
market specialist, there was dealing

with a lot of troubled credit unions.

When you go through the whole process
of resolving issues in troubled credit

unions, there's almost always was
corporate governance at the root.

It's a failure of corporate
governance that got them into

trouble most of the time, not all
the time, but most of the time.

It was never in writing and CUA said, Hey,
credit unions don't need ERM programs.

When I was the director of special
actions for a billion dollar credit

union, if they got the code for
rating came into special actions.

Those I wasn't letting them out until
they were well down the path with a fully

established ERM program, because those
are the things to make sure they don't

ever come back into special actions again.

And I found over my career, over the
2000s, like even you go through the

last recession in 2008 and stuff.

The credit unions in California
and on the West Coast, Washington,

Oregon, that had an ERM programs
in place before that recession.

None of those guys ended up as code
fours or troubled credit unions.

Those programs are successful
at mitigating and managing risk.

They're almost essential in
this competitive environment.

Once credit unions start hitting
that one, two, three, five

billion dollar asset size, I don't
think they're optional anymore.

I think of a credit union
wants to survive and compete.

Those risk management processes
and governance processes, they

have to be in place if you're
going to survive long term.

Treichel: Great, great point.

farrar: I had one more topic on, on
the document or resolution because

it is an item that at the end of the
exam, a joint conference, the regulator

usually asks for the board to accept
or approve the document or resolution.

Sometimes there's an uneasiness there.

I thought maybe we should discuss what
is the board's options when they're I

Treichel: think we're both going to
look to Todd for his take on that,

and then we'll add some comments.

miller: I think it comes back first from
a board level perspective is, do you

really understand the examiner's concerns?

And a lot of times board members are
reluctant to ask the examiner's questions.

When they get a document or
resolution, they're supposed to

get that exam report ahead of time.

They should be discussing things with
management, even lay out the questions

that they might have with the examiners
and make sure they truly understand what

the examiner's concerns and issues are.

And you get that examiner quite
often, their supervisor is there

as well at that joint conference.

Don't be scared to ask them
questions and make sure you have

an understanding of the issues.

At the end of the day, the
examiners are actually trying to do

what's best for the credit union.

Even if some of their suggestions
and guidance might be a little

bit misplaced or there are
alternatives to ways to address it.

That's the root piece right
there is board members.

Make sure you understand what
the examiners are really asking.

There is provisions.

The examiners are always going to
ask you to approve that document

resolution and agree to it.

And most of the time it's
inquiry is best interest to do.

Sometimes it's not.

And if it's not, credit unions, they're
allowed 30 days to respond to it.

We disagree with this.

Here's what we're willing to do.

Here's what we're able to do.

There's a whole appeal process
that the examiners have

gone astray to a great deal.

There's a lot of costs and time
and energy involved in appeals.

So it's not always your best path.

Having an open door and a two
way communication where you truly

understand each other, that's
step one in the whole thing.

for board members is make
sure you understand what the

examiner are really telling you.

And this is another thing
to the timeliness and some

of the issues we're seeing.

The examiners are taking two, three
months to get a report finalized

after they're done with field work.

And then the board members are getting
24 hours or less notice to digest it.

And that's not a timely
way to address the problem.

These are volunteers.

They need a little bit of time
to adjust, especially complex

doors that are asking a lot.

I think NCOA is sometimes not giving
them the time they need to do that.

You know, I think it's perfectly fine
for management to say, We need another

five days to think about this and
truly understand it and digest it.

So credeans shouldn't be scared
to ask for that additional time.

We had a client the other day that
the examiners wanted to meet with the

board with no documentation at all.

No agenda, nothing.

And of course that management
team was right in saying we're

uncomfortable doing that.

And we even told them don't do
it until they give you something.

And it's just not necessarily a good idea.

Treichel: We did indeed.

The, that issue of the reports coming in
late and getting dropped on the board.

It's a real issue out there.

It's, we're seeing it too much.

For it not to be, and I know NCOA is
trying to deal with it because of some

statements from the NCOA board vice
chairman, but that's been frustrating

recently for credit unions, and I think
there's pressures on the examiners to

get it done, which is why they end up
dropping on them, and they want to write

in the closed section of the report.

By the way, the closed section.

It's what the credit union doesn't see.

It's a little summary of things that
aren't worthy of going in the report.

Here's the hotel you should stay at.

Those kinds of internal items
where NCA will say, yes, they

voted on doing the DACA resolution.

In the perfect world, that's what
the examiner wants to have happen.

The other thing, the other word that
you mentioned that I had written

down and Steve had said it, and you
said it, and I want to say it here.

Communication.

Everything we're talking about here comes
back to communication on both sides.

All the documents we've talked about will
be better in final form if communication

is working optimally on both sides.

Regional Director Letter.

Anybody want to chat about,
also known as an RDL.

Any thoughts on a Regional Director
Letter from where you sit today

versus where you sat at NCUA?

miller: He's nodding.

I think he's waiting for me to talk first.

Again, regional director letters.

They're quite often seen when you
get that code three, they sit in that

slot somewhat in between a document
or resolution and be in a letter

of understanding and agreement.

It's usually a way for the regional
director because they're personal.

The regional director signs them to
tell accordions board that I have

concerns about these doors here.

These are the items you need to fix.

They tend to mirror the doors
that the crediting has been given.

Quite often, they're tied to issues
that have been persistent, and have

not been resolved for a period of time.

That's typically where they occur,
so you've got a repeat type door.

A long standing code 3 that doesn't
seem to improve to a code 2.

It's just the Regional Director's
way to tell the Board of Directors.

You need to pay a little bit more
attention here because issues are

not being addressed in a timely
manner and the regional director

will say, I expect you to address
these issues in a timely manner.

Credit unions should take them pretty
serious because they're a prelude to

a higher level of informal action if
you're not addressing these issues.

Treichel: Excellent, excellent points.

So you alluded to a higher level
of informal, which would be

preliminary warning letters and.

Letters of understanding
that are not published.

You can argue that's a gray area where
you're starting to get more formal

because when a board member is asked
to put their signature on it, something

it seems formal, but it might not
meet the definition of a legal formal.

I think what we'll do here
today is leave those discussions

to, to record another day.

And that those might be a good primer to.

The more draconian formal, formal actions
such as cease and desist orders, which

are rare, removal of officials, which are
not existent, it's a, as I've said to a

lot of people in conversation, they, it's
something that's never done unless they're

all done, unless it's a conservatorship.

So NCOA doesn't go halfway
into removing officials.

They either conserve or
they don't remove officials.

We'll talk about those.

Another day.

Any last thoughts here before we,
before we wrap on a discussion of most

of the informal actions that NCWA has?

You

farrar: hit it in so much of the issues
that we deal with, they all come down to

communication and people plotting in the
time that it takes to do communications.

And it's always seems to be the
root cause of a lot of the problems

that we end up dealing with.

Good point.

Todd, any last thoughts?

miller: The communication breakdowns
can happen on both sides too.

What's pretty is you need to make
some efforts to communicate with

your examiners on an ongoing basis.

Get to know them and let
them get to know you.

And I think maybe the COVID years
where examiners were totally off

site has led to some of this.

There's no face to face conversations.

Even today, a lot of the staff are remote.

Some credit unions are choosing
to be remote and not sit down and

meet with their examiners because
that's the model that they've

developed coming out of COVID.

But communication needs to
be intentional on both sides.

I know NCA historically has
spent a lot of time on examiner

training with communications.

Um, but like Steve said, quite
often there is a breakdown and

quite often it's on both sides.

So credit unions, you need to
make a conscious effort to.

Make sure you're under, your
examiners understand you and

what you're doing and why.

And sometimes a short conversation
is better than the examiner

spending three days looking at
your ELCO and board minutes.

Sit down and talk to them.

Tell them what's behind this
business plan and your challenges.

Treichel: Great.

Very good.

You gave me the opportunity
to end with that.

Quote that you guys have heard far
too much familiarity breeds consent.

The more familiar you are with them and
the more familiar they are with you,

you start to understand each other.

When you understand each
other, it's because the

communications have been better.

This has been a lot of fun guys.

As always, I want to thank you
for your time, Steve and Todd.

miller: Have a great day,

Treichel: Mark, Steve, and listeners.

I want to thank you for listening.

I hope you'll listen again soon.

We've got, we've written down a lot of
topics that we want to record podcasts

on here coming up the rest of 2024.

So stay tuned for those.

I think you'll enjoy them perhaps
as much as you'll enjoy this one.

This is Mark Treichel signing
off with flying colors.

katie: Thank you for joining us on this
episode of with flying colors, subscribe

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