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Take hundreds of pages of complex regulations covering dozens of different subjects. Stir in hundreds of fallible human beings tasked with understanding and implementing those rules. Add a dash of uncertainty about the facts. The result is an instant recipe for disagreements. Even with the best of intentions on all sides, disputes will inevitably arise over how to apply and enforce the rules in real-life circumstances. Some mechanism will be needed to resolve these issues in a fair and orderly manner.
This is the inevitable situation for credit unions and their regulators, from the National Credit Union Administration and Consumer Financial Protection Bureau to state agencies. While most credit unions report generally positive experiences with their examiners, some find that the regulators are capable of pushing the rules too far, leading to absurd results.
Take the example of one credit union in the aftermath of the Great Recession. It followed the exhortations of our national leaders and agreed to modify some 30-year home mortgages for borrowers in distress. NCUA rules limit credit union mortgages to terms of not more than 40 years. The modifications included extensions of the mortgage terms beyond 40 years from their first origination dates. NCUA examiners took the position that this was a violation of law. The credit union used NCUA appeal channels and eventually received a ruling that the modifications were new transactions and that the term limit should be measured from those dates. By this standard, the modified mortgages complied fully with NCUA rules—and helped the credit union’s members.
As this episode shows, no matter how debatable the examiner’s judgment, the credit union must invest time and resources in dealing with the dispute. What is the best way to address such problems?
Many credit unions appear to have developed their own informal channels and procedures for making themselves heard by the regulators. NCUA has said publicly that it expects most disputes to be resolved “informally and expeditiously,” so there is nothing wrong with that approach. If the examination report has not yet been completed, the commonsense answer is to engage in dialogue with the examiner. Most are open to reason, so long as reason can be squared with the written rules and policies that examiners are obliged to follow. This is a practical approach that most credit unions probably know instinctively to follow.
Obviously, conducting these discussions in an atmosphere of mutual respect and civility is critical. It’s best to put aside any lingering emotions or resentments that might take the conversation in a negative direction, regardless of how justified those feelings might be. Sometimes contacting the pertinent supervisory examiner can provide an effective channel for discussion. Needless to say, not every line examiner will be happy having someone go over his or her head, but sometimes an issue is important enough to justify the risk.
If the examination report has been completed, most likely with the imposition of a Document of Resolution based on questionable examination findings or entailing questionable remediation measures, more formal paths to some kind of review are available. Some of these are for special actions, like prompt corrective action orders. But in most circumstances, the first official avenue of complaint or appeal is to the relevant NCUA Regional Director. If satisfaction is not obtained there, NCUA has established a Supervisory Review Committee to which further complaints can at least theoretically be addressed.
The SRC consists of three fairly senior NCUA career employees. Its jurisdiction covers broad territory and include many critically important sub-issues, such as assignments of CAMEL ratings of 3, 4 and 5 and all component ratings of those composite ratings; adequacy of loan loss reserve provisions; and loan classifications on significant loans. NCUA also has an Ombudsman, but the role of that office is even more limited.
Are any of these channels truly effective from the credit union standpoint? A few years ago, NCUA’s Office of Inspector General issued a report on NCUA’s processes for appeals and complaints (NCUA OIG 12-10). While citing some issues, OIG found these mechanisms to be “robust.”
A strong argument exists to the contrary. To name just a few of the reasons for doubt: First, there appear to have been very few appeals, and even fewer reversals of examiner findings or recommendations (though there have been some). Second, the rights of credit unions to participate actively in presenting their case at each stage of the process appear to be limited or nonexistent. Third, these processes are not laid out in much detail in NCUA’s rules, policies and other public materials. And fourth, many credit unions seem to be deterred by fears of retaliation if they pursue their rights. NCUA does not seem to have done much to address these concerns.
Proposals have been made in Congress and by NCUA Board Member Mark McWatters to strengthen the ability of credit unions to seek redress of grievances. Those are worth continued support. Much remains to be done if the right to complain is to become real.
Eric L. Richard, former general counsel and EVP of the Credit Union National Association, is a principal in the newly established law firm of CU Counsel, Washington, D.C.
