Credit Union Exam Solutions Presents With Flying Colors

Hey everyone.

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

Today I'm flying solo and we'll
be discussing N NCAA's proposed

rule to eliminate reputation risk.

A little bit of background
previously, NCA.

Chairman had come out with a press
release that they were going to

be getting rid of reputation risk.

Then they sent out an email to all
CEOs from the office of examination

of insurance indicating they were
getting rid of all risk ratings.

And then October 20th, just yesterday,
they came out, with a proposed rulemaking

to take further action to solidify
removal of use of reputation risk.

And I'm gonna walk through what that
proposed rule goes into and then give

you a little bit of my take on what
it means and what it does not mean.

Alright.

As I stated, NCOA is is proposing
a rule that says we will be a.

Creating the elimination
of reputation risk.

They're formally proposing to
codify the removal of reputation

risk from its supervisory program.

Examiners will no longer be able to cite
and rep, cite it in reports, use it in

ratings or base supervisory actions on it.

So they've already done that.

They're codifying it.

Codifying.

What does that mean?

That means they're
putting it in regulation.

To me the biggest corollary here would
be succession planning, which they had.

Previously not handled, and then they
handled it via a letter to credit unions.

And then under the Harper LED board, they
put it out as a proposal to a regulation,

and then they approve that regulation.

So once it's codified, once it's
in the regulations or the regs,

as we like to say, it takes a
board action to unwind that.

My instinct is that the Trump
administration is asking all the banking

re regulators to codify this so that
bell has been wrong, and it would

have to be UNR at the politician and
board po board level at any agency.

Instead of someone coming in and saying,
Hey, we're gonna change this policy.

And having it done at a staff level
makes it harder to take it out.

That's what codifying does.

Alright.

Number two, why reputation, according
to NCUA, reputation risk is problematic.

It's subjective and hard to measure.

I'll give 'em that Leads to examiner.

Inconsistency on unpredictability
and potential bias.

I think that's a stretch.

It distracts both examiners
and credit unions from

managing real measurable risks.

I'm not sure I agree with that either.

Let's go back to it's
subjective and hard to measure.

Sure.

So is unsafe and unsound.

And I'm gonna get into a proposal.

On another podcast on another day
in another week, about the federal

regulators and other agencies coming
out with a proposed definition of safe

and sound, which I believe NCOA would
probably follow if they get to that.

But what's safe and sound?

What is safe and sound?

What's beauty?

What's reputation risk?

Yes, they're all subjective and hard to
measure, but reputation risk is not the

only hard to measure thing that NCOA
and other regulators have to deal with.

They're doing this.

Because they think reputation
risk was misused in the

past, and I'll get into that.

So in the proposal, there is explicit
reference to political reasons.

The proposed rule is clear that NCA
cannot act for political reasons.

Now, if you asked every employee
at NCA, if they believe they could

not act for political reasons,
they would say, of course not.

We don't act for political
reasons, doesn't get it into

unconscious bias and all that, but.

Do do NCA staff believe they do that?

I would bet dollars to donuts that,
that they don't believe they do it.

Examiners cannot pressure a credit
union to deny or close accounts

based on political beefs or
lawful or unpopular activities.

I would bet again that's never
happened at in any NCA examinations.

There were situations in other.

Types of financial institutions
where this was alleged as having

happened recently, and then under
President Trump's first term.

So there is an alignment
here with the White House.

And again, we have a board of one at
NCUA one Republican and they're trying

to carry the water of the White House
'cause that's what they do, right?

No, no criticism here.

It's just the reality of agencies are.

Going to move in the direction
of whoever's in the White House.

So the proposal directly
aligns with President Trump.

President Trump's executive order.

1, 4 3, 3, 1.

Guaranteeing fair banking
for all Americans.

The goal is to prevent regulators from
using reputation risk as a pretext

to cut off lawful financial services.

Now, in the past there was operation
choke point where allegedly.

Individuals who had gun stores were
not, had their accounts closed.

And then there was the pillow
guy I can't think of his name who

had his his businesses allegedly
shut down for the wrong reasons.

And again, I'm not going into the
facts of whether that happened or that

didn't happen, but that's the argument.

Now there are allegations of
politically driven account closures.

President Trump has argued that banks
and credit unions have closed accounts

of Republicans and conservative
groups citing reputation risk.

I don't think he's actually
named credit unions.

So let me clarify that.

I believe he's said that
banks have not credit unions.

Now, whether proven or not, the perception
was that lawful, but disfavored groups.

We're being punished.

Again, that's the perception,
and in making this rule,

they're saying it's the reality.

Now, some generic examples of
at-risk groups, political campaigns

or advocacy groups, faith-based
nonprofit, nonprofits with controversial

positions, lawful politically sensitive
industries like firearms, as I

mentioned, payday lending or marijuana.

So those are, that they highlight as.

Being impacted for reputation,
risk, citations, and examinations.

The there's a focus on there.

They want examiners to focus on real
risks instead, so that's credit risk,

liquidity, risk, interest rate risk,
cybersecurity, operational mis risks

are measurable and belong exams, as
opposed to reputation risk, which

do not according to this proposal.

Again, reputation risk adds little
value to safety and soundness.

Oversight according to the proposed rule.

Now, credit unions the other takeaway
from the rule is that credit unions

know their members best management,
not regulators should decide how

member perception affects strategies.

Examiners are not equipped to measure
public opinion or member trust.

I would agree with that.

Prohibited Exam Pro.

So what are the prohibited examiner
actions under the proposed rule?

Under this rule, examiners cannot
require a credit union to close accounts,

cannot discourage offering services,
cannot terminate vendor or third party

contracts, cannot pressure credit
unions to avoid lawful businesses.

Again, if you ask.

Your examiner, do you do
any of these, those things?

Have you ever done any of those
things in your 10, 20, 30 years?

As an examiner, they would say
no, wouldn't even contemplate it.

But this codifies it again,
it puts it in the law.

So there's a broad definition of adverse
action which includes exam, downgrades,

negative feedback, denial of applications,
or even informal supervisory pressure.

Any examiner action designed to punish or
steer a credit union based on reputation.

Is off limits.

Now.

What about state regulators?

What's the context as it
relates to state regulators?

State examiners may still apply a
reputation risk if they choose, but N

two a examiners must not participate
or enforce in that discussion or that

being brought up in an examination
where it's a joint examination where

NCOA is there, or if NCOA in your
state does solo examinations, they

won't touch that, because again this.

Proposed rule.

When final we'll make it we'll make
it a a third rail, if you will.

So it's a wide scope of doing
business with in the proposal.

It goes beyond accounts.

It covers vendor contracts,
employ employment decisions,

and even charitable giving.

It ensures that there are no back
doors, ways for regulators to influence.

Credit union relationships?

That would be the goal.

'cause there are no absolutes
in life, but that's their goal.

So it's already in effect because
on September 25th, NCOA told staff

and credit unions that reputational
risk would no longer be used.

The rule simply cements
that policy into law.

And again, why into law?

Why codify it?

Because it has to be changed by the NCA
Board going forward, again, presuming

that it's approved by the board and
since it was proposed by a board of

one, you can bet your bottom dollar that
it will be approved by a board of one.

Or if Trump puts new board members
in it will be voted on that, I

guess theoretically the one way.

It wouldn't happen, would be if somehow
the Supreme Court would decide that

Otsuka and Harper need to come back before
it was voted on in, in its final form.

If they did come back after they put it
in place, theoretically you could have

the two Dems then unwind that rule.

So what are the expected.

Benefits greater objectivity and
consistency in exams, more clarity

for credit unions, managing examiner
expectations, and it protects credit

unions from being dragged into
political or cultural disputes.

Again, those are the expected
benefits from the author.

You could argue that just by proposing
this, they're getting pulled into

the political disputes again, and
depending on which side of the aisle

you're on, or if you're not in the
aisle and you're in the middle.

No new compliance costs since reputation
risk was already discontinued.

This rule creates no new burden.

So that's funny.

They discontinued it in September.

They propose a rule in October and
say, since we discontinued it in policy

in September, there are no costs.

That's a tricky way of
avoiding some of the.

How much does this cost
and is it a major rule?

And all those kind of nuances
tied to regulation making.

So instead it reduces uncertainty and
increases predictability is what it.

Here's the thing.

The NCA proposal directly
addresses a headline issue.

President Trump has said that
reputation risk was used as a pretext

to shut down Republican accounts.

Whether you buy into that narrative
or not, this rule is designed to make

sure examiners cannot get involved
and those kind of politically.

Driven decisions, and I
guarantee you they don't want to.

That's it, that's the take
on this proposed rule.

And as it gets finalized, as more come up,
comes out on it, I will have follow ups.

I will have a separate short podcast on
the elimination of all the risk areas

and more to come on that down the road.

As always, I appreciate you listening.

I appreci appreciate you watching.

This is Mark TriCal signing
off with flying colors.