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Examinations
CUNA
Must Know Mondays
The contents of this presentation are intended
to provide you with a general understanding
of the subject matter. However, it is not
intended to provide legal, accounting, or
other professional advice and should not be
relied on as such.
What Have You Gotten Yourself Into?
• Isn’t it great to be a volunteer?
• Your members expect a lot from you!
• Credit unions are much more complex now than just a few years ago.
• Financial services is the most highly regulated industry.
• BUT, the system is designed to provide you with piece of mind.
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But Wait, There’s More
• Safety and Soundness
• Regulatory Compliance
• Security
• Best Practices
• CU Performance
• Members’ Needs
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Action, Not Reaction
• Proper preparation can be the
transactional lubrication your credit union
needs to reduce the regulatory friction
caused by an exam.
• With proper management and preparation
you can not only survive an exam, but
thrive, during the process.
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Examination & Monitoring
Off-site Monitoring
Analysis of 5300 Data
Economic changes
Examination Scope
Examination Report On-site Examination
Administrative RecordFollow-up
Allocation of resources Focus of Examination
Management Results Risk management
CAMEL
Jobs Market
Real Estate Values
Unemployment key indicator for credit union delinquency
Heavy real estate concentration makes credit unions vulnerable to dips
Examination Process: NCUA’s Perspective
The Examination
• It is a process, not an event!
• Preparation does not begin a few weeks
before the next exam, it begins the week
after the last exam.
• It cannot be done effectively from the
“control room”.
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How does the Board currently
prepare for an examination?
What Is Examination Planning?
• Planned
• Process
• Directed towards defined objectives
• Big picture thinking
• Organization wide
• Involves stakeholders critically and centrally
• Linked to broader mission of organization
• Responsive to environment
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Benefits of Planning
• Make more informed decisions
• Allocate limited resources efficiently
• Implement new products and services more
soundly
• Satisfy member needs
• Prepare for future contingencies
• Optimize performance
• Improve operations
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The Basics
• Every exam will include a review of:
– 5300 Call report
– Supervisory Committee Audit
– BSA Compliance
– ALM process
– ALLL process
– Payment processing
– Regulatory compliance
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What Are the Examination Themes?
• Mostly about Safety and Soundness
– Don’t forget the rising tide of Consumer Protection
• Increased emphasis on documenting potential issues and increasing administrative intervention
• If your Board has discussed an issue or a problem, chances are it is on the “examination radar”.
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Role of the NCUA and Your State
• “As a regulator and insurer, NCUA’s goal is a strong, safe credit union system. To that end, NCUA continues to incorporate lessons learned and feedback from credit unions into our examination approach. ”
– Supervisory Focus Letter
• What does your state’s DFI say on the matter?
– Have you visited their website lately?
NCUA Supervisory Priorities
• LCU 15-CU-01
• Here’s their top emerging risks for the year:
– Cybersecurity Threats
– Interest Rate Risk
– BSA Compliance
– Money Services Businesses
– Liquidity & Contingency Funding Plans
– TILA – RESPA Integrated Disclosures
– Ability to Pay and QM Compliance
– Lending Programs
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Things to Consider
• Do you know what to expect?
• Who is on your “examination team”?
• How do you coordinate among areas of
your operations?
• How do you prepare information for the
examination process?
• How do you present it to the examiners?
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Our New Vocabulary
De-Risking
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What About Risk?
• Risk is NOT a dirty word. It is a known element of our operations.
• Risk assessments are an essential management and regulatory tool
• Risk is a simple game – Identify it
– Categorize it
– Deal with it!
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The Three R’s
Risk Recognition and Reaction
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Duties of a Director§701.4 NCUA Rules and Regs
• (a) General direction and control of a Federal
credit union. The board of directors is
responsible for the general direction and control
of the affairs of each Federal credit union. While
a Federal credit union board of directors may
delegate the execution of operational functions
to Federal credit union personnel, the ultimate
responsibility of each Federal credit union's
board of directors for that Federal credit union's
direction and control is non-delegable.
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Duties of a Director(b)(1) Carry out his or her duties as a director in good
faith, in a manner such director reasonably believes to be in the best interests of the membership of the Federal credit union as a whole, and with the care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances;
(2) Administer the affairs of the Federal credit union fairly and impartially and without discrimination in favor of or against any particular member;
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Duties of a Director
(3) At the time of election or appointment, or within a reasonable time thereafter, not to exceed six months, have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the Federal credit union's balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors; and
(4) Direct management's operations of the Federal credit union in conformity with the requirements set forth in the Federal Credit Union Act, this chapter, other applicable law, and sound business practices.
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Duties of a Director
• (c) Authority regarding staff and outside consultants. (1) In carrying out its duties and responsibilities, each Federal credit union’s board of directors and all its committees have authority to retain staff and outside counsel, independent accountants, financial advisors, and other outside consultants at the expense of the Federal credit union.
• (2) Federal credit union staff providing services to the board of directors or any committee of the board under paragraph (c)(1) of this section may be required by the board of directors or such committee to report directly to the board or such committee, as appropriate.
• (3) In discharging board or committee duties a director, who does not have knowledge that makes reliance unwarranted, is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by any of the persons specified in paragraph (d).
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Duties of a Director
• (d) Reliance. A director may rely on: – (1) One or more officers or employees of the Federal credit union who
the director reasonably believes to be reliable and competent in the functions performed or the information, opinions, reports or statements provided;
– (2) Legal counsel, independent public accountants, or other persons retained by the Federal credit union as to matters involving skills or expertise the director reasonably believes are matters
• (i) Within the particular person’s professional or expert competence, and
• (ii) As to which the particular person merits confidence; and
– (3) A committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence.
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Identification of Problems
• Credit Union performance
• SC Audit
• Internal Audit
• Regulatory Examinations– Findings
– Document of Resolutions
– Letter of Understanding and Agreement
• Credit Union response
Examination Team
• Harness the expertise of your operational leaders to showcase your compliance, risk management and sound business strategies.
• Experience reveals that the examiners are increasingly likely to engage more members of your staff during the process.
• To keep the process organized, choose one person as the central point of access, but allow your inside experts to explain your individual operational strategies to the examiner.
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Examination Team
• Comprised of your operational area experts, stakeholders, managers.
• Work to identify key areas on which the examiners are likely to focus, and make sure you are properly addressing every potential “issue.”
• Preparation for an exam can help reveal unnecessary risks and operational weakness.
• This process will help you effectively and efficiently manage your credit union.
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No Surprises• Regulatory Alerts
• Letters to Credit Unions
• Legal Opinion Letters
• AIRES Questionnaires
• Examiner’s Guide
• Material Loss reports
• NCUA Report
• Examination process
AIRES Questionnaires
• Automated Integrated Regulatory Examination Software
• They are the audit questions the examiner will use during the examination for each operational area
• Great resource for planning and preparation
• http://www.ncua.gov/Resources/CUs/Pages/AIRES.aspx
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Examiner’s Guide
• Chapter 1: Risk Focused Program
• Chapter 2: Scope, Development and Planning
• Chapter 20: Report Writing
• Chapter 30: Administrative Actions
• http://www.ncua.gov/GenInfo/GuidesManuals/examiners_guide/examguide.aspx
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Examination Hierarchy
NCUA Board
Regional Director
Associate Regional Director
Problem Case Officer
Supervisory Examiner
Examiner in Charge (Principle Examiner) *
Examiner *
New Examination Report
Format• NCUA LTR CU 13-CU-09
– Details the changes and adds additional resources
• Documents of Resolution are now being separated out of the Findings Report to allow greater clarity.
• Addition of a DoR Status Report
• No more informal discussion items will be noted. It will either be a Finding or a DoR.
• Status Update template will provide staus of Administrative Actions.
What Do You Do With the Examiner?
• Who is the liaison?
• Have the senior stack holders been prepared?
• Does everyone know the logic behind the key decisions in their area? Across the credit union?
• Do you seek constant feedback?
• Do you have a system for “rolling compliance” with initial findings?
How Do You Present Your
Operation?• A well organized file for each operational
area that contains essential information with just the right twist, right?
• What would be in that folder?– Strategic Plan/Business Plan
– Policies
– Procedures
– Audit results
– Quality assurance data
– Special reports (financial performance, score cards, etc.)
– Board briefing memo
You must tell your Credit Union’s
story effectively!
Cooperation and Coordination
• Examiners are instructed to provide time during the exam for discussion with the CU regarding their findings.
• They are encouraged to provide the CU with a draft copy of the examination report so it can be reviewed before the exit interview.
• “Nothing presented at the joint conference, exit interview, or in the examination report should surprise the [credit union’s] officials.”
Act Like a Real Person
• When was the last time you had a real conversation with the examiners?
• Start with “Here’s what has been happening this past year and here’s what we have done about it.”
• Take advantage of conversation starters and the opportunity to provide your own narrative to the examination.
• Did they ask to have coffee with your CEO?
During the Examination
• Consider the examination less of an
enemy invasion and more of a guided tour
of your treasured home.
• Highlight what you are most of while
explaining any shortcomings. Control the
message you are giving your examiners.
• Highlight your compliance efforts and
business expertise.
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Will We Meet the Examiner
• Is it required for the examination team to
meet with the Board?
– Probably not. If it is required, it means there
are problems at the CU
• You can request a visit by the examination
to your Board meeting.
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The Five P’s
• Plan
• Policy
• Procedure
• Practice
• Performance
How Is Your Operation Presented to
You?
• Do you understand the basic elements of your Credit Union’s operation?
• Can you connect the dots?
– Strategic Plan/Business Plan
– Policies
– Procedures
– Audit results
– Quality assurance data
– Special reports (financial performance, score cards, etc.)
– Board briefing memos
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Your Meetings
• What does a meeting look like?
• Is it working for your Credit Union?
• Is it form over function?
– “We can’t talk about this anymore, we always
leave at 8:30.”
• Are there last minute agenda items?
• Do you present a major decision one
meeting and vote on it the next?
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Board Oversight
• How do your Board minutes reflect your
continuing involvement?
• Do you have a checklist or a dash board of
key examination findings?
• What does it look like?
• Accountability and responsibilities?
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Informal Remedies
• Exam Report / Document of Resolution
• Regional Director Letter
• Non-Published Letter of Understanding and Agreement
• Preliminary Warning Letter
Formal Enforcement Actions
• Published Letter of Understanding
and Agreement
• Cease and Desist Order
• Conservatorship
• Involuntary Liquidation
Other Formal Enforcement Actions
• Removal and/or Prohibition
• Termination of Insurance (FISCU)
• Revocation of Charter (FCU)
• Civil Money Penalties
When Should an Action be Escalated?
• Noncompliance
• Uncooperative/Ineffective Board
• Time is of the Essence
• Likelihood of Material Loss
• How do you steer away from these areas?
Resources • CUNA
• Your League
• NCUA AIRES Questionnaires
– http://www.ncua.gov/Resources/CUs/Pages/indexAires.aspx
• NCUA Examiner’s Guide– http://www.ncua.gov/GenInfo/GuidesManuals/examiners_guide/exam
guide.aspx
• NCUA NSPM– http://www.ncua.gov/Legal/GuidesEtc/GuidesManuals/SupervisionMa
nual.pdf
• CFPB
– www.consumerfinance.gov
QUESTIONS?
