Credit Union Exam Solutions Presents With Flying Colors

Mark Treichel: Hey, everyone.

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

I'm excited to be here today
with Steve Farr and Todd Miller.

Guys, how you doing?

Steve Farrar: Doing well.

Thanks, Mark.

Good.

Beautiful morning here.

Mark Treichel: Glad to hear it.

Long time no see.

Yesterday, we recorded … What
did we record?

The NCUA entry letter, and we
made references to some other

things, maybe including what
we're gonna talk about today.

Today we're gonna talk about s-
the safety and soundness regulation

that came out for FDIC and OCC.

Before we get into that, let's
get give a, a 10,000-foot intro to

your background at NCUA for those
listeners or watchers who may have

not seen an episode with you before.

We'll start with Steve.

Steve Farrar: Hey.

Y- yeah, good morning, everybody.

I, I break my career
at NCUA into two parts.

The first part is out in the field,
predominantly as a problem case

officer where you worked closely
with credit unions with problems

involving conservatorships,
liquidations assisted mergers.

My first assisted merger wa-
it was assistance of $30,000.

And I remember it being early
in the morning, the guy calls me

up and I was like, "All right.

I'll do an assisted
merger for this amount."

And it was like, I had authority from the
region for $30,000 and we got it done.

It was in a remote area, and
I was actually just standing

in my bathroom negotiating it.

So that was how times changed,
but that was enjoyable.

And all that time.

Then after you went to the central
office, I spent the next 15 years there

in the central office, Division of Risk
Management, and en- enjoyed that because

the, the work was diverse and challenging.

The, my favorite part was trai- training
the examiners in problem resolution

big communication section and then
working on the en- enforcement manual

and the then risk-based capital kind of
towards the end, and finished my career

as the, a vice president of the CLF.

Mark Treichel: Yep, yep.

Chock-full of good memories
and good accomplishments.

Todd.

Todd Miller: Greetings, everyone.

I spent 34 years with NCUA.

Something we haven't talked about in
other introductions is Steve and I

were hired by the same person, and we
were in the same SE group for a while.

And we were in the same
division of special actions

under the same DSA for a while.

But basically, the first 14 years
of my career or so, I spent it as

a problem case officer and examiner
in the field in the Western Region.

Then I spent a decade or so as a
regional capital market specialist in the

Western Region, but I also got involved
in a lot of other team exams At the

national level, like I was on Pena--
or Navy's exam for four years in a row.

Did a lot of the training and had
a hand in writing a lot of the

interest rate risk and liquidity
policy at NCUA during that decade.

Then I spent another decade or so,
a little bit more, as a director of

special actions in the Western region,
supervising problem case officer,

regional capital market specialists,
and regional lending specialists.

Like Steve, I got involved in a
lot of assistance cases, a lot

of mergers, a lot of, or a number
of liquidations, some involving

assistance with very big amounts.

Was involved in a couple conservatorships.

Actually, at one time, I had six
conservatorships at once in twenty eleven

that I was managing but I returned a
couple conservatorships to the members.

They're still there today.

That was always a gratifying
part of my career.

But all in all, I enjoyed
my 34 years with MCUA.

It was a very…

I just enjoyed every bit of it.

And you become ensconced in the
whole credit union philosophy

when you spend that much time with

Mark Treichel: it.

That's a fact.

That's a fact.

Six, six conservatorships
at one time is is crazy.

I would've had rules against that too.

We were talking about some
of the rules I had when I,

Todd Miller: when I was- I
was the only DSA, and I got a

supervisor of the year out of it

Mark Treichel: Lane Baumgartner,
regional director in, in, in the

eastern region used to conserve a lot.

This was before the 2011 timeline,
so this would've been I'm digressing

here, but Dan Murphy was the
regional director y- you worked for

during b- before that 2011 period.

I worked for Dan.

Dan w- had a, when he retired he sent out
an email and he, Lane Baumgartner liked to

do a lot of conservatorships, like having
six or seven at one time, and he said

that he Lane, h- he joked that Lane had
written a boat, or he, how did he say it?

He said, "It's easier to put a
credit union into conservatorship

than it is to take them out."

And that was the, that's what the,
the book Lane should write because

they had a hard time getting them out.

And

Todd Miller: I-

Mark Treichel: I had

Todd Miller: one-

Mark Treichel: All three of
us, all three of us were DSAs,

all three of us were PCOs.

It was my, and it was the, those
two roles were what I, helped

me be an RD more than anything.

Todd Miller: I had one
conservatorship similar.

We gave them a capital note, and the
NCUA board would not let them out of

conservatorship until that was paid off.

So they got stuck in conservatorship
for five years, but realistically,

every problem was fixed in
probably 12 or 14 months.

Mark Treichel: Yeah, the

Todd Miller: politics
get in the way sometimes.

The political will of the board would
not let them go back to the members.

Mark Treichel: Yep.

It'll be interesting when, so much
turnover at the NCUA board and the,

that plus the corporate knowledge that
has left NCUA, what the new normal

becomes, and whenever they have a
board that actually is more political.

Not that Hauptman wasn't political,
but he drove it in one direction

because there was only one vote.

Re- a reestablishment of the
board's gonna be interesting.

All right lots of rabbit holes there.

Let's jump into the, the rule that
came out on safety and soundness.

Of course NCUA relies
on safety and soundness.

Ha- the 34 years we were at credit
unions, or at NCUA, and the six years

we've been doing this, safety and
soundness gets, has been referred

to in exams from here to eternity.

We talked a little bit in our last podcast
that NCUA's, and we can dip into it here,

that NCUA is using that a little bit less.

But at the same time the
banking regulators have defined

safety and soundness after a
proposal, the rule's final.

So let's, I'm gonna open it up there
for a free for all chat on this.

Who wants to talk about what
first relative to this rule?

Steve Farrar: We'll just, go through
that definition of unsafe and unsound.

That's the main crux of it.

I-- That was a question when I was
teaching problem resolution to examiners.

And then when they were taking that
class, they'd been around a while,

and I'd always start by asking them.

I'd go, I'll go, "Okay, so you've
been an examiner for a while.

We always talk about unsafe and unsound.

Who can tell me where that's defined in
NCUA, the act or regulations or whatever?"

And, they'd all be like, "I

Todd Miller: It's…

Steve Farrar: it's gotta be in the act."

And it's like, "No, I'm
sure it's in a regulation."

It was not defined and it wasn't also
defined for the banking industry.

It was based on whatever case law was out
there and where it had been challenged,

and then it was somewhat defined in that.

So there was kind of this, a, a
little bit of a loose litigated

definition of unsafe and unsound.

And so the regulators, work now to
place a solid definition on it, and

we'll read that in just a little bit.

Todd, do you have an introduction to…?

Todd Miller: Yeah, just a
couple things ar-around that.

If you actually go look at the act,
the word safe, unsafe, safety, it's

only in there 29 times in the act.

And it says, "If you're gonna charter
a new credit union in NCUA, they have

to operate in a safe and sound manner.

NCUA, if you're gonna take an
administrative action, it's gonna

be because they're operating
in an unsafe sound manner."

And that's all it says in the act.

In, in the regulations,
there's a thing about the whole

insurance agreement in 741.3.

Examiners cite that a little bit.

It gives the hodgepodges of
credit unions are gonna have

policies, liquidity, this, that.

Really where NCUA encapsulates what they
think is unsafe and unsound is in their

National Supervision Policy Manual.

They have guidelines for issuing
documents of resolutions, and

they do have a number of criteria
there, but that's not a regulation.

And that's buried back in, I
don't know, let's see, what page?

I looked it up yesterday.

That's buried back in page
225 of the Supervision Manual.

But on page one, they have this
new thing that helped them came up

with, no regulation by enforcement.

It's just interesting.

And then it kinda talks about things that,
that- examiner shouldn't do and how the

agency should not be creating policies
by issuing administrative actions or

documents or resolution, what have you.

So it puts NCUA examiners in kind
of a hard point where they have to

have regulatory cites to issue a DOR.

They're supposed to not
use the unsafe/unsound.

But then now the other regulators,
they gave their examiners a

regulatory- Exactly … unsafe/unsound.

And I'm surprised NCUA
didn't join in this.

I'm sure Hauptman had a reason because
more and more NCUA has been joining

with the other FFIC agencies when they
come out with stuff, and I'm surprised

they didn't with this because what's
in this regulation is really not

that far away from the stuff that's
in the NSPM for examiners' guidance.

Mark Treichel: And that's a great point.

And you can probably see as they
look at the NSPM before we started

c- chatting, I talked about the
safety of traveling in crowds, right?

The NCUA can look towards what the bankers
have put in and if it isn't identical to

what the regulation has now, you said it's
similar maybe we can talk through that.

It's a safe place to land, but it's
just guidance, not, it's not a rule.

And it's not even guidance.

It's the, it's what they're
telling their examiners to do.

So it hasn't been put out for
public comment and it's less

binding or not binding when you
get to the final analysis of that.

I

Todd Miller: don't, I don't think the
examiners are allowed to cite their NSPM.

Mark Treichel: Correct.

Todd Miller: It seems it's an- It's
not- … internal operating policy.

Mark Treichel: It, you know- I- an
internal operating policy that has a

version online which has some redactions
and a lot of dead links and boar- Chairman

Cruz, if you or your staff listen to this,
go to that, that, that redacted link.

Look at the dead links.

You guys need to fix that, 'cause
it violates the redaction rules.

I, I get on this high horse on the
podcast every once in a while relative

to that, but it's a disservice to
credit unions that there are dead links

that that may be on those dead links.

There's, 50 pages and they can't see
any of it which means it has to be in

violation of the redaction rule because
some of it would have to be public.

Clean that up.

Maybe when you get a little bit more staff
and ability to hire more people, that's

something that NCUA can take a look at.

All right, off that soap bo- soapbox.

So may…

should we walk through what that
definition is and then maybe

walk through what the NSPM says?

Steve Farrar: Yeah.

We can do it that way.

While I read, the best one I
found is the the information that

OCC released on August 27th on
the, when the rules are approved.

It's succinct and very good.

It defines unsafe, unsound practice.

The final rule defines the term unsafe
or unsound practice for purposes of both

enforcement actions under 12 USC 1818 and
supervisory activities as a practice act

or failure to act alone or together with
other practices, acts, or failures to act.

That number one, is contrary to generally
accepted standards of prudent operations.

And two, I, if continued, is likely…

We're gonna talk about
likely in this one, too.

To, A, materially harm a
financial condition of the bank,

or B, present a material risk
of loss to the insurance fund.

Or two, materially harm the
financial condition of the bank.

To qualify as an unsafe or unsound
practice under the final rule, it would

have to be likely, as opposed to, for
example, merely possible, that a practice

act or failure to act, if continued,
would materially harm the financial

condition of the bank or present a
material risk of loss of insurance fund.

The definition focuses on material
harm to financial condition, i.e.,

financial losses or other negative
impacts to a bank's capital,

asset quality, earnings liquidity,
or sensitivity to market risks.

The definition would not include
risks to the b- bank's reputation

unrelated to financial condition.

An unsafe or unsound practice would
also include a practice act or failure

to act that, if continued, is likely to
negatively affect the bank's ability to

avoid FDIC receivership and present a
material risk of loss to the insurance

fund as a result of the failure

Mark Treichel: There's
a lot there to unpack.

Todd, start unpacking it.

Todd Miller: I'm gonna go to
the end of the regulation.

Steve read you the beginning.

Okay.

This reg's only two pages.

The comments ran 70-some pages, and
they're worth a read for people.

But at the end, it's like, how
does the regulators determine that?

And they put in there, "Here's the
basis for our determinations that

something is unsafe, unsound."

They will use objective facts and
sound reasoning to determine this.

That's good.

So the examiners don't get to make it up.

They have to have some basis for the
regulation or some basis for determining

that something is unsafe, unsound.

There's also another
caveat in the regulation.

Things like BSA and agreements
they've made with other people,

they can enforce those even though
they're not unsafe, unsound.

They have a cop-out in the
regulation that, "Hey, we get to

enforce this other stuff as well."

Because we have agreements with FinCEN.

If you have BSA violations, you
have to make those doors or as the

OCC and then call them material,
how come the word's escaping me?

It's in the regulation even itself.

Mark Treichel: Could
you repeat the premise?

Todd Miller: Their com-
equivalent of a door.

Oh, MRA.

Steve Farrar: requiring attention.

Todd Miller: we go.

Steve Farrar: M- MRAs, yeah.

Todd Miller: I had a
brain lock for a minute.

Mark Treichel: Yeah, that's all right.

Todd Miller: They also say if they can
make an MRA out of this other stuff,

other regulations from other regulators.

Just like MC- NCUA, we have
agreements, hey, BSA violations,

certain ones have to be made a door,
whether they're unsafe, unsound.

OCC and FDIC do have themselves a, a
cop-out in this regulation where they

can enforce those other items as well.

Mark Treichel: Items lower than an MRA?

Todd Miller: Other agencies … that
don't meet unsafe and unsound

regulation, but they can still make
them an MRA because they've got

agreements with other regulators.

Mark Treichel: On the repu- the reputation
risk it's funny, I was having a credit

union conversation the other day, and
we went into the fact that I think

generally it's good that reputation risk
doesn't have to be in the exam because

it's almost it's almost a given that
if someone has to deal with reputation

risk, they should be dealing with it.

So if you're facing something that you
did wrong that could lead to a lawsuit

or a class action lawsuit it's not
necessarily that the regulator needs to

tell you to deal with it, because it goes
to the heart of being an organization.

Or if there's, a malware that takes
over, you don't necessarily need the

regulator to point that out and all
things being equal, I think agencies

not highlighting that is okay.

On the material, the the MRA versus the
door any, any thoughts, a- any other

thoughts on how they deal with the MRA and
how that m- how that differs now relative

to where NCUA and credit unions are at?

Todd Miller: I think NCUA is going in the
direction of where this regulation is.

MRAs have always been a big deal in
banks because you're dealing with private

investors, and so i-it's stockholders
that you're arguing with, so there's

always been a little bit more of a
challenge for the other regulators to

include an MRA than there is at NCUA.

And this is a pretty high hurdle here,
especially in larger banks, for them

to declare something unsafe and unsound
and to demonstrate with objective facts

that this is gonna be a material risk

Mark Treichel: And when you say
the stockholder thing, that's

because there's a cost, right?

Todd Miller: Yes, and so when the owner is
the board chair and the CEO, they don't-

Mark Treichel: It is their money

… Todd Miller: they don't
like to agree to MRAs-

Mark Treichel: Right

… Todd Miller: that cost them money
or handcuff them in different ways.

Mark Treichel: Steve, any,
any thoughts on that piece?

Steve Farrar: No, I
think we're fine on that.

more consistency in what is a dir-
a clear directive like the, the

MRAs for the banking is helpful.

Mark Treichel: Todd, you referenced
the comments, and I think I

picked up on, if I'm remembering.

I've been reading a lot of different
things lately the the likely or

merely possible and all that I
think there were comments that

said there should be a list, right?

Or there should be a bright line,
and they resisted doing that, and

they went with these, these words
that are open to interpretation.

And I guess, Steve, if you go back to
what you said, that the def- definition

of safety and soundness wasn't defined
before, and it was case law, right?

So now it's gonna turn into probably
case law on what means likely and

what means merely possible and
what means material loss, right?

It the you try and clean up and create
something with the new rule, but

it's still all based on words, and
words have meanings, and then facts

get applied to that or misapplied
to that, and people end up suing.

So it's gonna kinda walk through
that whole timeline again perhaps.

Steve Farrar: Yeah, I like this one
quote that's in the OCC statement.

"The final rule explains that the
agencies will use objective facts and

sound reasoning to determine whether
they may take an enforcement action

based on an unsafe or unsound practice
or issue matter requiring attention.

The examiners must share with
the bank the basis for their

identification of a unsafe and unsound
practice or the issuance of a MRA.

Examiner's use of objective facts and
sound reasoning will promote objective and

consistent application of the final rule
supervisory and enforcement standards."

done.

Facts always win, and we always will
tell our clients and stuff when they're

dealing with NCUA, if the findings or
whatever the examiners aren't have, aren't

true in fact, that's your best value.

That's where you push

Mark Treichel: back.

Steve Farrar: Yep.

Great point.

The facts always win.

And me, as a problem case o- officer
if I had a an institution that was

doing a lot of things wrong, it would
just be, here's just all the facts.

Fact.

And when you get to, 30-some facts,
there's a ex- a conclusion that should

be reached by the board of directors
as to what's the root cause of a of all

of these facts of of poor operations.

Mark Treichel: Leading
the horse to water, yes.

Steve Farrar: Yeah

Todd Miller: One of the criteria
is harm to a financial condition.

They said that refers to financial losses,
negative impacts on an institution's

capital asset quality, earnings,
liquidity, or sensitivity to market risk.

So it doesn't necessarily have
to whack their capital, it can

be something else that's risky.

A- and they put that in there because
the next section of the regulation is

all about tailoring their MRAs or DORS.

And it's very interesting because it
brings up an issue where it says, "Hey,

as potential losses increase the threshold
for materiality or harm of institution

decreases, but then the granularity of
their actions has to get more detailed."

And when I read that, I immediately
think of something like Centrix.

Okay, they might have a portfolio, it
isn't gonna hurt anything, but it is gonna

cause harm to the financial institution.

Very specific goals.

This is how you're gonna mitigate it.

This is how you're gonna
reduce the risk of it.

And it's interesting that they put that
tailoring thing in there, which means,

hey, this whole DOR has to be commen-
or MRA, it has to be commensurate

with that scope of that problem.

And it doesn't get to be broad general.

It needs to get fairly specific when
they've objectively decided that, this

is going to be an unsafe, unsound issue.

They have to be very specific
in their MRAs as to how they're

going to address those issues.

Mark Treichel: And yesterday we
were talking about the entry letter

on exams, which talked about the
fact that DORS are negotiable.

They-- Not that they haven't
been, but they're kinda

highlighting that fact, right?

That kind of plays into this too.

It-- Well, from an NCUA
perspective it does, right?

But we're talking about the bank rule.

But as you're tailoring that an advantage
of that letter going out is a reminder

to credit unions that they need to
be If they're going to put a door in

place, NCUA needs to work with you on
coming up with something that makes

sense for you, for the members that
doesn't overstep as opposed to just

being a, a grandiose, do 95 things and
we're not gonna get your thoughts on it.

Todd, you mentioned CAMELS the, that
it, those losses have to be linked

back to C, A, E, L, and S, right?

And at the same time it's it seems
pretty clear to me that this definition

of safety and soundness rule and the
reworking of FFIEC of the CAMELS rule

which has been proposed, go hand in glove.

Any, any thoughts on that or
the other statement I made

on doors and negotiability?

Todd Miller: I think so.

I have a quick question for Steve.

Did you look at this proposal
and did they change the rule

much from the original proposal?

'Cause the comments went for and against.

There was a lot of comments
that says, "You need to be

e- even more specific, and-

Steve Farrar: Yeah

Todd Miller: you need to be
harder on the banks than you are."

And then of course there was comments that
say, "Hey you're overstepping already."

So i- it's interesting when you read their
comments that they went both ways on this.

Steve Farrar: Yeah, I was surprised.

There was 36 comments, that isn't a
lot, but they're pretty good ones.

Mark Treichel: I actually have
the data on what what changed.

Yeah.

Th- there were two changes between
the proposal and the final rule.

Go ahead.

Steve Farrar: Yeah.

Mark Treichel: Okay.

The first one institution-affiliated
parties were dropped from the scope.

A def- a definition keyed to material harm
at a large institution would effectively

immunize an individual who underwrote
badl- bad, underwrote badly at a big

bank and then moved to a small one.

Enforcement against in- institutional
affiliated parties or IAPs continues

under the agency's prior standards
and controlling c- cor- law.

So there was something in here about
institutional affiliated parties.

Yeah.

And they were convinced to drop that.

The other one is a new
category, other violations.

Actual violations that do not earn
an MRA or an enforcement action.

The agency may direct remediation.

So this, I think, is Todd,
the one you mentioned.

And may not direct anything
beyond remediation unless

another law requires it.

For FDIC-supervised institutions,
an uncorrected or, un- uncorrected

other violation can be cited
as an MRA at the next exam.

Todd Miller: If you violated a reg and you
didn't fix it, then we can cite it even

though it's not causing material harm yet.

What I think is interesting is even
though NCUA didn't participate in

this reg, and this tends to change
with different board members, what the

other regulators do does inform NCUA.

And quite often, even if they don't adopt
the exact policy, or in this case they

don't exact, or adopt the reg, their
behavior still considers all of that, and

it does change the way NCUA does things.

Mark Treichel: Sure.

And that goes to traveling with A
they're doing it, so if we're gonna

differ from them, credit unions will
point out banks get to do X, right?

And you're telling us to do Y.

So it's a good rule to be looking at that.

But you're exactly right.

There, there were some board members
who would say, "This is happening there.

We need to do it."

Or this is…

And the lesser side of that would
be, "This is hap- happening there.

Explain to me what we do and
why we should or shouldn't."

Todd Miller: There are different times
over in our career where I thought

NCUA's exam scope and some of our
policies were actually ahead of theirs.

Mark Treichel: Yeah, that and
being nimble and being smaller and

being able to be more flexible.

There's no doubt that in
and it's probably 50/50.

Probably, if you went through them
all, I would bet it's half the

time NCUA is better than what the
banks are doing, and vice versa

Steve Farrar: Yeah.

One thing, and I always look at, when
I look at FDIC tech rules is that they

specifically note that they apply to
community banks because that's much more-

Mark Treichel: Similar,

Steve Farrar: Closely
aligned with credit unions.

And, they do specifically have
the notice in there, "Yes, this

does apply to community banks."

That, that's not really the intent
because the final rule clarifies how

and when agencies may communicate
informal observations called supervisory

observations for weaknesses that
do not rise to the level of an MRA.

Unlike MRAs, the supervisory
observation does not create

a requirement or a supervisor
expectation that will be presented

to the bank's board of directors.

This framework will allow examiners to
share their expertise with management

and the board of directors about
potential enhancements while leaving

decisions regarding the implementation
of any enhancements to the bank.

I love that, that wording there,
that we put that responsibility

back or they put that responsibility
back on the board of directors.

Mark Treichel: Todd, thoughts on that?

I got a couple, but
why don't you go first?

Todd Miller: It's equivalent
to NCUA's exam findings.

And I think it ties back to
that whole first piece of this

regulation at the OCC and the FDIC.

Contrary to generally accepted
standards of prudent operation,

the examiner's experience actually
get to help them determine that.

And, that's another piece of this.

It will get litigated and
turned into case law eventually.

But, that throws a lot on the examiners
to say, "Hey, what's generally accepted

standards of prudent operation?"

Mark Treichel: and the other thing
that jumps into my mind is, again, the

conversation we had yesterday where
NCUA is talking about just because we

have conversations with you and ask
you questions about certain things

and maybe talking about not, maybe
not safety and soundness, but best

practices and how you've got this new
program and you're doing X, Y, and Z.

Have you thought of this,
and have you thought of that?

Those dialogues can still happen, which
is just the sharing of the expertise

and the understanding of the situation.

But that's not a finding that
leads to them having to do X.

And then the whole discussion we
had yesterday about supplementary

facts are not binding.

Very similar, right?

You can talk about different things
in parts of the report that don't

lead to required action but lead to a
better understanding of all parties-

Todd Miller: I think that's the
way examiners, whether you're OCC,

FDIC, NCUA, state, it's their way
of helping improve the industry.

'Cause frankly, I'd rather have an
informal discussion in year one and

have them reassess their policies
and procedures than have to come

back three years later and issue
a DOR or an LUA because they let

a problem grow from tiny to large

Mark Treichel: Which goes back
to the best examiners being

the ones who communicate best

Todd Miller: Yeah.

Mark Treichel: You could be extremely
skilled and not be able to get your

point across, and a little less
skilled but have the ability to

communicate and have those discussions.

Todd Miller: I think if you just
take examiners in general from

any industry, they want their
institutions to improve and do well.

Mark Treichel: Facts.

Yep.

Todd Miller: A liquidated credit
union, I don't want to conserve one.

I want you guys just to operate
safe, sound, grow, do well.

Steve Farrar: And on the other
side, I don't want to be associated

with a credit union that caused a
large loss to the insurance fund.

Todd Miller: Our advantage of the
DSA is that you can always blame

the FEs and the people ahead of you.

Mark Treichel: Yeah.

I'm looking at the notes I had here.

I think we've covered a lot of things.

What else what else have we not hit
on this that we need to hit, guys?

Todd Miller: Like I said, for
credit unions, there is a part

of the NSPM that is public.

And that public part, it does clearly
enunciate for examiners what's

a DOR and what's not, and when
you take administrative actions.

So it's worth a quick read.

It's under a specific section on
administrative actions and there's

a whole flowchart for examiners to
follow as to what rises to a DOR or not

Mark Treichel: Very good.

And Steve, any last thoughts?

Steve Farrar: No we've covered all of the
key points that I had listed for today.

Mark Treichel: Very good.

Todd, it looks like you might have had
one more thing you wanted to mention.

Todd Miller: Like I said, just, if
you get issued a DOR and you disagree

with it, credit unions do pull up the
NSPM, look at what rises to a DOR,

make the examiner say, "Hey, show me
here where this is actually a DOR."

Mark Treichel: Do we have that language
in front of us anywhere, the NSPM?

Todd Miller: Oh, I have it.

I have it right here.

Mark Treichel: All right.

Let's say here's what NCUA says
in the NSPM is safe and sound.

Todd Miller: Okay.

It's about a page and a half.

Problems requiring immediate attention
that examiners will address in a

DOR include systemic, recurrent
or willful negligent compliance

violations that pose a material risk.

So it's back to their FDIC thing,
where you're not fixing a regulation,

allow it to go uncorrected.

BSA violations as per the
agreement between NCUA and FinCEN.

So it doesn't have to be material harm,
but we're gonna get you a DOR because

we've agreed to do so with FinCEN.

Unsafe or unsound practices
that present an immediate threat

to credit union's viability.

Unsafe or unsound practices are any
action or lack thereof action that if left

uncorrected, present material financial
risk or harm to the credit union or its

members, including but not limited to.

Doesn't that sound exactly
like the OCC regulation?

Yeah, I'm saying

Mark Treichel: this sounds,

Todd Miller: it sounds like a rhyme.

Mark Treichel: It rhymes, for sure.

Great point.

Todd Miller: Operating with an inadequate
level of net worth or capital for the

type, quality and concentration of assets.

Operating with negative earnings
that do not support operations

and maintain appropriate capital
and allowance for credit losses.

Operating with material or systemic
weaknesses in credit underwriting

or administration practices such as
excessive or inadequately managed

credit risk or loan losses, extending
credit without adequate controls.

Operating without adequate liquidity.

Significant non-compliance with
the Federal Credit Union Act,

NCUA regulations, and other
applicable laws and regulations.

Operating without internal,
adequate internal controls.

And underneath adequate internal
controls, it gives examples.

Persistent record-keeping errors,
numerous loans granted outside of

policy, manipulation of records
Other next item, failure to

keep accurate books and records.

This includes an accounting
and control structure, does not

provide for accurate, full and fair
disclosure of financial statements.

Inappropriate or inadequate
asset liability management.

So that's basically their
list, and it covers everything.

And it says, when determining if
a problem qualifies as a DORA,

examiners will consider the following.

If left unresolved, could the violation
or problem cause the credit union

serious financial operational damage?

Does the problem result in significant
non-compliance with laws or regulations?

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

enforcement, PWL, LUA, cease and desist
order, or conservatorship if unresolved?

And is the problem widespread
throughout the credit

Mark Treichel: union?

It's a good definition.

Lot, a lot there.

We could do a s- whole separate podcast
on that as we drop it in here at the end.

But and then so the thing that comes
to my mind is something we mentioned

earlier, is NCUA, if they're doing a
DORA, they have to link it to a reg.

A lot of those things.

So this is the definition of unsafe
and unsound, which is linked to one

reg, but we're hearing through the
grapevine that how do I wanna say this?

NCUA's examiners are asked to be maybe
more judicious in utilizing that than

maybe they had two, four, six years ago.

Thoughts on that, and then maybe a wrap.

Todd Miller: Yeah, so the catchall
for examiners was always the 741.3

if they didn't have another
specific loan reg or something.

That regulation is basically
requirements for insurance, and it lists

a hodgepodge things about policies,
qualified staff, liquidity, ALM.

There's a number of things- listed
underneath that whole insurability

statement, and that's what they would use.

And it doesn't really
speak to this directly.

It does for maybe half of it.

And they're being told,
"Hey, stop using that to…"

Or, "Make it very rare.

We wanna see other more specific regs."

And I think that's just driven by
this whole thing, we're not gonna…

No regulation by enforcement.

And, using that insurance agreement,
you're enforcing things that are

not otherwise in the regulation.

'Cause, we've seen it
in some of our clients.

They'll cite that and it's just "Wait,

Mark Treichel: how does

Todd Miller: that problem apply to
any of these things listed here?"

Exactly.

Mark Treichel: Yeah

… Todd Miller: that's what
they've been instructed to cite

when they have nothing else.

And like I said, they've been told
to be very judicious about that,

or so we hear from other people
still working for the agency.

But in this case, substantively
what's in NCUA's NSPM, which isn't

guidance or regulation or anything,
it's not materially different than

what the OCC and FDIC came up with.

Mark Treichel: Great point.

Steve, any last thoughts
on any of that dialogue?

Steve Farrar: No.

that was very good.

Very good.

It's always, facts speak for themselves,

Mark Treichel: and fact- facts.

You taught me that back
in, … 1995, I believe.

So Steve, I know that
your team is the refs.

Todd, who does your team
play the first week?

Todd Miller: Your team.

Mark Treichel: Ah, the Vikings.

Skol.

You got any predictions?

Let's predict the scores of game one.

You go first.

Todd Miller: Oh, so we're in Green Bay.

Mark Treichel: I think it's Green Bay.

Todd Miller: I always thought they
started in Minnesota, but I hadn't paid

attention other than it's on the calendar.

Mark Treichel: Yeah.

Todd Miller: Yeah.

Mark Treichel: But if it's in Green Bay,
what do you think the score is gonna be?

Todd Miller: 24-21 Green Bay.

Mark Treichel: Oh, you're right.

It's in Minnesota.

You wanna change that?

Todd Miller: Green Bay has had a
problem winning in Minnesota for

the last five or six years here.

28-24 Minnesota

Mark Treichel: 28-24.

Todd Miller: Green Bay's defense sucks-
… and I don't know that they did anything

to fix it either in the off-season.

Mark Treichel: Yeah, they-
they've got some issues.

So I'm gonna say s- same
point differentiation.

I'm going 20 to 16 Vikings.

And Steve, your refs will screw
it up for w- we'll- We'll both be

pissed at the refs, I know that.

Steve Farrar: Yeah.

We're gonna have a better
year than last year, I think.

It's gotta be better.

Mark Treichel: Okay, that's good.

Todd Miller: fun- I don't know
why Green Bay can always jump

out in the lead in Minnesota.

Mark Treichel: That I would
like to see that play out again.

Steve Farrar: All right.

Mark Treichel: And

Steve Farrar: I'll do a shout-out to
one of our loyal listeners, Frank.

Glad that you keep hanging around.

Mark Treichel: Yes.

Lot of loyal listeners out there.

I appreciate it.

Steve and Todd, I wanna thank you so much.

Have a good Labor Day weekend.

And listeners, watchers, you'll
hear this after Labor Day.

I hope you had a good one.

And this is Mark Trakel
signing off with Flying Colors.