Credit Union Exam Solutions Presents With Flying Colors

Hey everyone, this is Mark Reel.

What follows is a recording on NCA
succession planning rule with JT Lau,

who is the general counsel at the
League of Credit Unions and affiliates.

I'm doing this preamble, if you will,
because NCUA has reopened this rule

for comment and it's doing so, uh,
was published in the Federal Register.

NCUA has taken comments through June
23rd, and this is because of President

Trump's mandate to regulators saying.

That they wanted all regulations that
had not been finalized to be reviewed.

So Holman, the board at NCA is trying
to comply with that and they're

seeking comment, and that makes
this even more timely because if

you like this rule, you can comment.

If you dislike this rule, you
might be able to make changes.

I made comments on this rule.

The only rule I've yet officially
commented to on NCA, because I

thought there were some flaws with it.

And in any event, JT has a great
summary of what this rule means.

If you like what he has
to say, let me know.

If you dislike what he has to say
or I have to say, let me know.

And more importantly, comment again
or comment for the first time.

If you'd like to have your
thoughts considered by and CUA.

Without further ado, here's jt.

Treichel: Hey everyone, this
is Mark Rele with another

episode of With Flying Colors.

Today we're gonna be talking about
NCU a's succession planning rule,

and I have a repeat guest on today.

I'm joined by JT Blau.

Who is the general counsel for
the League of Credit Unions and

affiliates, where he leads their
compliance and regulatory affairs team.

The league represents and advocates
for credit unions in Alabama,

Georgia, Florida, and Virginia.

I.

JT has worked for the League and
the Legacy Virginia Credit Union

League for three years before coming
over to the league side of things.

JT worked on the credit union side
for seven years with Call Federal

Credit Union in Richmond, Virginia.

Jt, how you doing today?

I'm good, mark.

How are you doing?

I'm doing great.

I'm doing great.

I'm excited to talk to you
about succession planning,

which is an important topic.

I for those who haven't heard J
T's last podcast he spoke about

n NCAA's ability to evict or exp.

What's the right word?

I'm thinking about the by It was

JT Blau: member, it was
the member expulsion rule.

I'm happy to report that the
succession planning rule is a

little simpler than that one was.

That rule had a lot of
layers and complexity.

I remember we, we dove into that
for a while about the different

paths that you could take.

And this one is a little
more straightforward.

I'm happy to report.

Treichel: Yes.

Yeah.

This one's not not quite as
complicated, but it's it's equally or

more important in the, the future of
credit unions, et cetera, especially

depending on, the approach you
have to it, your size, et cetera.

But why don't we start at the beginning.

So how did this rule come about
and what's the purpose of the

succession planning rule, jt?

JT Blau: Yeah, so this rule has
been in the works for a long time.

Going back, even back to 2014, that there
was an NCUA analysis that looked at.

Data from credit union mergers around
that time in 2012 and 2013, and that

analysis found that for succession
planning was cited as either a

primary reason or a secondary reason.

In about 32% of the
sampled consolidations.

So the roots of this go back over
10 years, but things really picked

up momentum, I'd say in 2022.

In January of 2022, the
NCUA board approved a, a.

Proposed rule that would've established
succession planning requirements for

federally chartered credit unions.

And it would've had made it so that
federal credit unions had to have

succession plans for key positions board
members, management officials, supervisory

committee members and the like.

And they would've had to look
at this on an annual basis.

The board got some comments on that
rule, and ultimately the time that

did not proceed to the final rule
stage, so it was just stuck in the

proposed rule limbo for a while.

The other thing that happened in 2022
was that the board put out a letter

to credit unions about camels codes.

And it emphasized that within the M
of camels, that management rating that

succession planning for key management
positions could be a factor that was

considered in the management assessment.

So we start to see it
pick up steam in 2022.

Then in fast forward to 2024, the
board issues a new proposed rule

that summer, and it looked very
similar to the 2022 proposed rule

with a couple of key changes.

And then the major difference was
ultimately this rule was progressed to

that next stage, to that final rule stage,
which was issued at the end of last year.

So that's the timeline of things.

As for the purpose, the goal of the
rule, as stated by Chairman Harper

last year is to address one of the
most common causes for unplanned

and unforced credit union mergers.

Mark, I know you like quotes.

Then Chairman Harper said he
quoted Benjamin Franklin and he

said in his remarks that if you
fail to plan, you plan to fail.

And so that's where NCUA was coming from.

In this, their goal was to have credit
unions have plans in place to replace

key positions so that they don't.

Have to look to merger.

They recognize that merger can be
a viable option and sometimes is

the best option, but they really
don't want it to be the only option.

They want a small or a wide range
of smaller credit unions, diverse

credit unions to help minimize
risks to the share insurance fund.

Treichel: Yeah, and I think I think
Chairman Harper, probably over, if you

look at the different things, he is done.

I'm pretty sure knowing him from my
time at NCA, that this is probably

something he's very passionate about,
wanted to get done, wanted to get,

put it in place in a regulation.

I was more of a guidance, I
thought a guidance approach would

be more appropriate here for
reasons that aren't really relevant

to talking about it anymore.

Because it is a regulation, it is
filed, the board did approve it, and

there's a lot of good things in it.

So I think net it's a positive
thing for credit unions.

I know that one of the
questions that come up.

As it relates to regulations
is who does it apply to?

Does this, jt, does this rule
apply to all credit unions or

just federal credit unions?

Said another way.

Are state chartered credit unions
required to comply with this?

JT Blau: Great question.

That's something we always gotta look
at in anything coming out of nnc UA and

the answer on this one is that the final
rule does apply to both state charter

and federal chartered credit unions.

That was one of the key differences
between the 2022 proposed rule

and the 2024 proposed rule.

The 2024 proposed rule ended.

It ended up being the
case in the final rule.

Applies to both federal credit
unions and federally insured

state chartered credit unions.

That being said they did include language
that says that if your state regulator has

succession planning requirements, they're
going to defer to the state requirements

to make sure that there's no conflict.

So if you're a State chartered Credit
Union, the first thing I would do

is look to see if your state has
succession planning requirements.

If they do, that's what
you're gonna follow.

And if they don't, then the NCA
final rule is gonna apply to you.

Treichel: And I'm trying to think
through the politics of this.

I, if my memory serves me right, 2022.

Harper was chair, but there
were two Republicans when

they proposed that first rule.

And my recollection is that the
Republicans listened to naus a little

bit more than maybe the Democrats did.

And that was carved out to
get the vote to go forward.

Then when the rule was re-proposed, it
was two Democrats and one Republican,

and I think Harper probably got.

Was able to convince ska that's,
that change would be appropriate

for the proposal and the final rule.

In, in any event, it does apply for both.

And it, with that carve out, like
you said, if you have their own,

if they have their own rule that's
a thoughtful way to handle that

that side of it, it would seem.

JT Blau: Yeah, you're right on the
makeup of the board in 2022, it

was, we were in the H era, right?

Houtman, Harper and Hood.

That's right.

And the 2024 rule was put forth with
with board member ska on the board.

Treichel: Very good.

And the one.

Big question that comes into my
mind relative to this is who has

to be included or is covered in a
construct credit union succession plan.

And the inverse of that, who does
not need to be included or covered?

So what positions, for example
apply does this regulation apply to?

JT Blau: Great question.

So in the final rule itself, we have
a section called covered positions.

So that's where we wanna look to,
to see who has to be in the plan.

And in covered positions.

It includes board members.

It includes management officials
and assistant management officials.

And that's as those terms are defined in
the bylaws it includes senior executives

and then there's a catchall at the end.

Any other personnel, the board
of directors deems critical.

Given the credit union size,
complexity and risk of operations.

There's some flexibility in there,
but you're mainly looking at

board members and key management
positions, key senior executives.

And it references the bylaws.

It references also 7 0 1, 14 B two.

For the definition of senior executives.

So it's regulation that points
you to other regulations

in terms of the definition.

So we gotta look at the whole big
picture and make sure we've got

everybody everybody covered in terms of
who is not included in the final rule.

There were some people who were in the
proposed rule in 2024 that were not

ultimately included in the final rule.

Key members of this include
supervisory committee members.

Credit committee members, if your
credit union has a credit committee

and loan officers, the proposed
rule in 2024 included all three of

these groups, and ultimately in the
final rule, those were taken out.

Now, you can have those positions
in your succession plan, but you

don't have to, they're not required
positions like your board of directors

or your, your senior executives.

Treichel: Very good.

Yeah.

And I'm trying to think back.

I know I did some research on
this when the rules came out.

And one of the, one of the pros
and cons out there relative to

how you structure these is there
can be how do I wanna say this?

A, a challenge that if.

You have, let's say you have, just
for the sake of discussion, you have

10 vice presidents and you determine
that, that eight of those meet the

definition of senior executive and the
other two, for whatever reason, based

on what their responsibilities are,
don't require a succession planning.

That in some instances a position
not being included can create some ne

negative car where this rule is trying to.

Proposed path paths and maybe career
ladders, wherever you stop it.

Some that, that can be viewed as a bridge.

My positions aren't quite as important
and I'm not asking for your thoughts

on that, but I remember finding
some research on it relative to it,

that's something that a credit union
needs to control the narrative.

So that those staff members who
don't fit into those positions are

viewed as as important as these
other positions and have a path

to get to these other positions.

Anyway, that's just a, an editorial
comment outside of the regulation.

JT Blau: The other thing that I think
is interesting is you look at the

scope of credit unions from large to
small and some of these small credit

unions, you think about, okay, we wanna
have succession planning for the CEO.

The CFO the head of operations,
sometimes that's all the same person

at some of these small credit unions.

Versus a, a larger credit union,
you may have, like you said, 10

10 VP positions and it can vary
largely in terms of the scope of.

Of of the org chart and the org
structure and that's all has to

be taken account in tailoring and
finding a succession plan that works

well for your specific credit union.

Treichel: Yeah, that's
a great way to say it.

And it's good that they point out that
you can include anyone, any position

that you feel is appropriate and
they make that, that statement there.

So credit unions aren't wondering
if they have to limit it, so

that, that's very positive.

So the.

Succession planning.

The second word of that
is plan is planning.

So what kind of plans need to be
included for each position or person?

And does a successor need to
be identified for each person?

Those are a couple
questions that come to mind.

JT Blau: Yeah, great question.

So I'll say right off the bat, it does
need to be in writing always always

important to to think about there.

So it does have to be
an actual written plan.

And as we look at the final rule,
we talked earlier about the kind

of the covered position section.

So right after that we have a section
called Contents of Succession Plan.

So that's where we look to and
we say, okay, what does the

plan actually have to cover?

So in that.

Section it wants, they want you to include
the title for each covered position and

the expiration of the incumbents term.

This would apply to a board
members with maybe term limits.

Some credit unions might have
board members who have to roll

off the board at a certain time.

So that's where this would
come into play there.

Or they say the anticipated
vacancy date if known.

So this would be something like
a retirement on the horizon.

We know someone is gonna retire on January
1st of next year, or something like that.

They want you to have the federal the,
sorry, the credit unions kind of plan

for filling vacancies and kind of the
strategy for how you're gonna go about it.

So I would say it's more about the
process that the credit union would go

through to fill the vacancies rather
than identifying specific individuals.

You don't have to say, alright, if
our VP Melissa leaves, we've got.

A VP Steve ready to go
and step into his place.

It's more about the process
that the credit union would go

through to to recruit talent to
fill positions things like that.

So it's a little more focused on
that than specific individuals.

Treichel: No, that makes sense.

And in the federal government
terms the, what, what pop, what

pops to mind is pre-selection
under the rules that they have.

You don't wanna pre-select.

And if you had to identify
people, you'd be pres.

That would be a little bit more
towards, if you were looking at

it through the federal government
light towards a pre-selection.

But it gives you the flexibility.

You're saying this is the position.

This is the person and when they might
leave, and then developing strategies and

plans and processes to select a successor.

JT Blau: Yeah.

And then the other thing that
I'll mention is the rule doesn't

specifically say you, the plan has
to address unexpected or temporary

vacancies in in the covered positions.

That was something that, that was
taken out between the proposed

rule and final rule stage.

But that being said, there's
a template in the, that was

published alongside the final rule.

And in that template, which is
designed for small credit unions,

they have a column on the right.

It says plan for temporarily and
permanently filling vacancies, including

vacancies due to unexpected circumstances.

So while the kind of temporary and
unexpected circumstances may have been

taken out of the official final rule, I.

It's something that I think credit unions
are going to be encouraged to have in

place in their succession planning rule.

Something that thinks about both short
term and long term in terms of temporary

and more permanent succession planning.

Treichel: That's a good catch.

So I would call that guidance
as opposed to a regulation.

So there's the regulation and then
this little piece that they covered

in guidance or the attachment.

So I'm glad you pointed that out.

The rule is final.

And when does the rule become effective?

When do credit unions need
to have their plans in place?

And then once they have that plan
in place I presume at some juncture

they need to take a look at it again.

What are your what can you share
relative to the effective date and

the review process of the policy?

JT Blau: So the final rule was approved
by the board in December of 2024, and

they wanted to give credit union some
necessary time to develop these plans.

So they set the effective date for
the final rule as January 1st, 2026.

This coming January 1st, that's when we
we have to have these plans in place.

And there's also some training
elements of this for the board.

One of the ways that this is
written out is that regulations are

currently in place that set forth.

General authorities and duties of
board members, and one of those is

that board members have to have a
working familiarity with kind of

finance and accounting practices and
the ability to ask questions about it.

So what they did was they took
that section and they basically

added this succession plan.

To the things that board members have
to have a working familiarity with

and be able to ask questions about.

So it's not just enough that you get
one in place, you have to have it

approved by the board, but also your
board members have to have a working

familiarity with your succession plan.

And I could definitely see this as
something where when the NCA examiners

come on site, they want to talk to a
board member co see it being something

that they ask the board member about
the credit union succession plan to

make sure that they have that, that
working familiarity, if that makes sense.

Treichel: No, it does make sense and
I'm anticipating when you say that, so

NCA comes up with their exam priority
letters, in January of each year.

It's possible that they'll touch
on this when it comes out in 2026,

although it's penned by the the
chair, which will be halman or if he's

replaced by then by another Republican.

But it's possible, it could be a
reminder would go out in that regard,

in the priority letter from NCUA.

I'm wondering JT oftentimes when
they come out with regulations, and I

just haven't looked at this one most
recently, are there any other resources

that NCOA has put out there on their
webpage as it relates to succession

planning that credit unions can utilize?

JT Blau: Absolutely.

And I'll just say I want to touch on
real quick on your last question is

the period of review is 24 months.

24 months.

Okay.

It was annually in the proposed rule, they
changed this to 24 months in the final.

That means every 24 months, this
succession plan has to be reviewed.

You can do it annually if you want, but 24
months is the maximum time that you can go

between reviews of your succession plan.

Treichel: Very good.

And

JT Blau: go

Treichel: ahead.

JT Blau: In terms of resources, we
touched on it a little bit already.

They put out a template for, designed
to be used by small credit unions.

It's a kind of a blank table and
it has some of the key positions

that the credit union might list.

And it has a few columns on it.

And one of those columns is the plan
for filling a vacancy should it arise.

So if, particularly if you're
a small credit union, that's

something to check out.

If the nnc y is putting it out
is a template that can be used.

That's something that certainly
is something to look at.

You don't have to recreate the wheel
and start over from scratch on this.

You don't have to use this template
if you and your credit union

already have something in place.

It may already be fitting
all the requirements.

Maybe it just needs to
be modified slightly.

Then I would say this is something
check with your league on here at

the league we are working on our own
template, some FAQ style resources

and some video training as well.

There's no one size fits all
approach to this, but we're trying

to arm our credit unions with.

The resources that, that they need to help
put together a plan that works for them.

So check with your league.

And as we get closer to the end of the
year and beginning of the year when

this becomes effective, I think there's
gonna be a lot more resources coming

out from a number of players in the
industry to, to help credit unions, make

sure they're complying with this rule.

Treichel: Yeah.

Very good.

It's always good to,
to rely on your league.

And the.

The resources that the league
can provide you to make sure that

you stay in compliance on this.

I'm glad to hear it.

Not surprised, but I'm glad to hear
you guys have some things coming out

on it video wise, et cetera, et cetera.

So can you think of anything else a credit
union should be thinking about as we'll?

See, we're April, we're now we're
eight months away from needing

to have this rule in place.

Any other things that credit
unions should be thinking about or

know as it relates to this rule?

JT Blau: I would say start early.

I think it's better off to be the
end of the year still a little bit

a ways away, like you said, but it's
better off to be starting early than

scrambling towards the end of the year
trying to put this process into place.

And another note I would say
is that in the preamble, in the

final rule, the NCUA wrote that.

Credit unions are reminded that succession
plans should include an estimate of

the budgetary impacts of e of executing
the succession plan including costs

associated with new hires the hiring
of recruitment firms, things like that.

So that's all the more reason if you're
working on, maybe the rule doesn't go

in, the rule doesn't go into effect
in January, but you might be working

on your budget in August and September
if there's budgetary elements of this

that, that you need to account for all
the better reason to get started early.

I know you and I are both big fans
of the reading that preamble of the

rule, and it really gives you some
behind the scenes aspects as to what

was, their thinking behind this.

And then find, yeah, the
last thing I would say is.

We get a lot of questions about
rulemaking and with, in this current

administration, people see things
happening with the CFPB in terms of

rules getting caught up in litigation
or overturned or that kind of thing.

And they say I.

What about this?

Is this gonna go into effect?

And my advice would be nobody knows.

It's really hard to predict what's
gonna happen in Washington these days.

And I think it would just be
prudent for credit unions to plan

like it is gonna go into effect
exactly as it is on January 1st.

Things move fast and.

It's possible that while we're recording
this today, between now and when this

comes out, something could change with
this, but I think it's best to prepare

as if as if that's not gonna happen.

Treichel: Great advice, jt.

Yeah, things happen fast in, in this
current world we're living in and

but all that being said, I would
bet that this rule stays in place.

A lot of good principles here and if
people are looking to overturn things,

I don't necessarily see this as one
that would fall into that category.

And as you said, I do love the preambles.

I kinda look at a regulation
as a three act play.

And maybe in this instance it was
four, 'cause there were two proposals,

but there's the proposed rule,
the preamble, and the final rule.

Oftentimes the preamble will
tell you what the board's

thinking, just as you described.

So I'm glad you brought that
up here to the listeners.

JT, this has been a lot
of good information here.

I appreciate your time.

If someone has listened to this
and wants to chat with you about

it, or wants to, pick your brain on
something else, what's the best way

for them to be able to reach you?

JT Blau: Absolutely.

You can go to our website.

It's the.

Or sorry, it's, excuse me, it
is the league dot co-op, CLOP.

You can also email me, jt
dot BA at the hyphen league.

Do co-op feel free to get in touch.

And like I said, we're working
on our resources for credit

unions, a variety of forms.

Happy to share those with
anybody who would like them.

And and yeah, that's just
the best way to, to reach us.

And this is a collaborative thing.

We're all in this together.

Everybody's in the same
boat trying to work on this.

And I'm a big fan of sharing
resources and be best practices

to to help everybody out.

Treichel: Very good.

Yeah.

We all gotta road that boat.

Collaborative is, it's
credit unions are all about.

So jt, I wanna thank you so
much for being available.

It was great to see you at GA, GAC.

Great to see you here on the video today.

And thanks for your time.

JT Blau: It's great to be back and
happy to walk through this with you.

Treichel: Very good.

And listeners, I want to thank
you as always for listening.

I hope you'll listen again soon.

This is Mark Kel signing
off with flying Colors.