Improving NCUA's Exam Process for Efficiency, Effectiveness, Flexibility

With Halloween coming up, perhaps nothing may spook some credit unions as much as trick-or-treaters knocking on your door dressed as NCUA examiners. But, it really doesn’t have to be that way.

As I travel the country, the credit union officials I meet with discuss many topics. Many (if not most) praise their own examiners as professional, capable, knowledgeable, constructive and helpful. One topic that comes up consistently though is how NCUA can further improve our exam processes, including exam cycle length and how NCUA can take better advantage of technology for better offsite monitoring to minimize our onsite footprint when conducting exams.

So, I looked into this. As part of my Continual Quality Improvement Initiative, last spring I asked Region IV Director C. Keith Morton to head up an internal working group on how to improve the exam process and add flexibility where warranted and prudent. This summer the working group held more than 60 conference calls and meetings, consulting with a wide range of stakeholders, including federal and state credit unions of all sizes and from all over the nation, as well as with state credit union supervisors. It also received 79 comment letters.

The message the working group heard from stakeholders is that NCUA should consider:

  • Extending the examination cycle for low-risk credit unions based on prudent criteria;
  • Reducing NCUA’s onsite presence through improved offsite analytics and technology, including developing a secure portal, modernizing the Automated Integrated Regulatory Examination System (commonly known as AIRES), and revising NCUA’s Call Report system;
  • Improving preplanning, including better advance notice, document requests, scheduling and scoping;
  • Improving our scheduling and coordination with state regulators to reduce duplication;
  • Bettering consistency between examiners; and
  • Enhancing communication between examiners and credit union management.

Last month, the NCUA Board received the final report with specific working group recommendations for making changes to our exam processes without jeopardizing safety and soundness. After review, careful deliberation and some adjustments, I will support the final recommendations.

2017 Extended Exam Cycle: Who May Qualify?

Beginning January 2017, well-managed, well-capitalized and low-risk federal credit unions under $1 billion in assets that meet certain criteria will be eligible for an extended examination cycle. The cycle will run between 14 and 20 months from the prior exam completion date.

Eligibility criteria include:

  • Under $1 billion in assets;
  • CAMEL code 1 or 2, both in composite and management rating components;
  • Well-capitalized under prompt corrective action requirements;
  • No documents of resolution related to significant recordkeeping; and
  • No formal or informal enforcement or administrative orders.

Final determination will be made by NCUA based on safety and soundness concerns like financial trends, risk and other facts or circumstances that may not be covered above, which may suggest more frequent examination is necessary and advisable.

NCUA will also change the current requirement to conduct annual insurance reviews or joint examinations of state charters over $250 million in assets. It’s appropriate to raise the current eligibility threshold up to $1 billion. That threshold provides parity with federal charters and is consistent with recent congressional legislation requiring annual exams for banks and thrifts with more than $1 billion in assets.

Additionally, NCUA will create a working group to coordinate with a representative group of state regulators to evaluate and recommend any further changes to the agency’s examination program for federally insured, state-chartered credit unions.

Improve Off-Site Monitoring Capabilities, Exam Preplanning

Performing certain examination procedures offsite will result in improved efficiency for the agency, including some reduced costs (such as examiner travel). NCUA’s ability to implement fully this recommendation over time will depend on several important factors, including the rollout of a reliable, secure file transfer portal by 2017, completing the current Call Report and Enterprise Solutions Modernization initiatives in 2017–2018, and deploying critical business intelligence tools and analytical capabilities based on these enhancements.

NCUA also plans to make further positive enhancements to examination preplanning, including providing examiners a greater time allocation to prepare for an exam, providing credit unions more advanced notice of when the exam is scheduled to take place, and better coordinating pre-exam document requests, along with ensuring those document requests are more tailored to the credit union’s specific risk profile.

Examiner Training and Consistency

Additional examiner training and development will help address examiner consistency concerns raised by credit unions. Our examiner training will continue to emphasize the importance of timely, ongoing and open communication between examiners and management or volunteers to enhance mutual understanding and to minimize surprises during the exam reporting process to the credit union’s board. Communications are a two-way street, and both credit unions and examiners must make the effort and take initiative during the exam process to communicate.

Recommended Changes Provide More Exam Flexibility

I also want to publicly thank the working group and the credit unions and state supervisors who participated in calls or provided comments throughout this process. Because the Board already voted to eliminate the requirement for annual exams, these changes will not require an additional NCUA Board vote, but will be rolled into the agency’s upcoming budget that is scheduled for consideration in November.

However, understand that implementing every recommended change to our exam process is not instantaneous; it will take time. Some changes will come quickly, while others will be rolled out with the deployment of new technology and new examiner training. Nonetheless, I am committed as Chairman to implementing these improvements as expeditiously as possible.

Based on June 30 Call Report and prior examination data, NCUA staff estimate nearly two out of three federal credit unions (64 percent) under $1 billion in assets, and at least as many federally insured, state-chartered credit unions, will be eligible for an extended 14- to 20-month exam cycle beginning in 2017.

Credit unions should welcome and not be spooked by these sensible and prudent changes to our exam processes—all part of our continual effort to improve agency operations and reduce any unnecessary burdens on credit unions.

— Rick Metsger