Watters |
Treichel |
Q. It’s been just over three years since Governor Granholm signed the Michigan Credit Union Act (MCUA) modernization bill, which made significant changes in credit union powers, structure and governance. What is your impression of its impact, both on credit unions, consumers and other financial institutions?
WATTERS: My initial impressions are that the Michigan credit union industry is very much in a transitional state right now. I think the impacts are potentially different for each group. New field-of-membership flexibility has opened up the potential for much greater consumer access to a broader variety of credit unions, although many credit unions with expanded fields have yet to fully expand their delivery systems in order to conveniently serve newly approved groups. I expect this to be a continuing challenge as new members expect conveniently located bricks and mortar to service their financial service needs.
While merger activity has increased recently, a noticeable trend under the new MCUA involves mergers between healthy, well managed credit unions for strategic reasons. We’ve seen combinations of this sort in all asset sizes, and are aware that some credit unions have adopted an aggressive growth-by-merger strategy that has fueled voluntary consolidations.
Generally speaking, most credit unions are relatively conservative and have taken a “wait-and-see” posture concerning many of the progressive new features of the MCUA. I hope and expect to see these new features utilized in a more meaningful way in the near future.
Consumers should inevitably benefit from the new flexibility provided to credit unions. Increased competition through greater field of membership flexibility should increase access to a wider variety of innovative institutions.
I don’t believe the new MCUA has impacted other financial institutions. Credit union/bank competition remains a region-by-region circumstance. We are aware that vigorous competition with community banks continues to be a market feature in many regions around the state. Credit unions appear to have been unable to develop and launch a product that effectively competes with “payday lenders.” Finally, in light of all the current concern surrounding mortgage fraud and the pushing of unsuitable exotic lending products on less-than-informed consumers, I believe credit unions have an opportunity — although I believe they have yet to exploit it — to demonstrate to their members why their mortgage products offer superior value in both terms and price.
TREICHEL: Michigan has a robust population of both federal and state credit unions. From a big picture perspective, the MCUA modernization bill ensures that the state will continue to have dual-charter options, which is good for credit unions, members and potential members in Michigan. The NCUA recognizes the continuing assessment and revision of credit union powers will provide credit unions the opportunity to service members in a fast-changing market. We’ve implemented many regulatory updates during the past three years; for example — revisions to the member business loan rule, and a recent interim final rule that revises the maturity limit in the general lending rule and permits federal credit unions to provide certain limited financial services to non-members within their fields of membership. The NCUA reviews one third of its rules and regulations each year for revision possibilities.
Q. The regulatory burden generally — and for smaller credit unions in particular — is becoming a huge drain, to the point that it is taking away time and resources that would otherwise go toward running the credit union. What can the regulators do to help reduce this burden and its impact on smaller credit unions?
TREICHEL: The regulatory burden on credit unions has increased over the past several years due to changes to the financial industry landscape and the world we live in, the Bank Secrecy Act, OFAC and HMDA being examples. As a point of clarification, in my opinion, regulatory compliance is time spent running the credit union, it’s just not time spent on your normal book of business such as lending and savings programs. However, these requirements also exist to ensure that the consumer is properly protected. That being said, I do realize that this is creating increased pressures on all and particularly the smaller credit unions that have fewer resources available to handle these requirements.
While we must require compliance, we also play an educational role by passing along best practices we see in other credit unions and providing training sessions through our Office of Small Credit Union Initiatives (OSCUI). Should credit union officials find themselves in the position of negotiating examination findings or Document of Resolution items with their examiner, I recommend having a candid discussion about the time lines established for resolution. In many instances, we can be flexible and work with the officials to develop time lines and action plans that will work for both the credit union and the NCUA. Some timelines for resolution may allow less flexibility on the examiner’s part. In any event, the examiner should talk openly with credit union officials and staff about why and when deficiencies must be addressed.
The NCUA also reviews all regulations on at least a three-year cycle. In doing so, the agency must balance issuing a regulation that complies with all external requirements and properly protects and considers the consumer without creating any unnecessary burden on the credit union. Additionally, with each regulation the agency considers what flexibilities can be built into the regulation for smaller or less complex credit unions — the Regulatory Flexibility Program, Investment rule and Prompt Corrective Action, for example. I encourage credit union officials to provide their input during the comment period for proposed regulations, as the NCUA Board frequently revises proposals based on real world comments received from the credit union community.
WATTERS: First, one has to recognize that most of these burdens are mandated by federal laws or regulations — which I only mention because, while State Regulators are charged with ensuring compliance, we work within an existing framework. Compliance remains a significant cost of doing business and this is unlikely to change in the foreseeable future. Many regulatory requirements impose equal compliance obligations regardless of the size of the institution, if it makes the business decision to engage in a particular activity.
In light of this, regulators can work with individual credit unions and their trade associations to provide greater transparency as to compliance expectations. Credit unions need to understand the compliance costs associated with engaging in specific lines of business and activities and, if the costs outweigh the benefits, then business decisions must be made concerning whether the activity is core to the institutional mission.
Trade associations have an excellent opportunity to ramp up their efforts to provide their members with compre-hensive regulatory compliance consulting services on a broad variety of potential problem areas — from IT exams to BSA compliance. Because this is a heavily regulated industry, it’s a fact of life in 2007 that credit unions unable to tackle these challenges internally and unwilling to retain outside consultants for assistance will remain exposed to a wide variety of increasingly significant regulatory actions.
Q. Examinations can often be a stressful time for a credit union. What can a credit union do to make the whole examination process less stressful and more amicable?
WATTERS: The key is a commitment to open communication with the exam-ination team, who want to do their job as efficiently as possible. My suggestion would be an informal pre-meeting with the examiner in charge to discuss the anticipated scope and timeline. A credit union exam coordinator can ensure examiner document requests are acted on immediately and comprehensively. Regular communication with the examiner in charge concerning the exam progress may catch minor problems before they become major issues. Taking full advantage of the exit meeting to understand any initial findings is critical to ensuring there are no surprises in the final exam report.
The exam process is designed to ensure the safety and soundness of credit unions and both credit unions and examiners need to remember their respective roles and responsibilities. For example, it’s critical for examiners to understand how a credit union approached a potential new service offering — what due diligence, including legal or other specialized review, was done; what risk mitigation and other internal controls were implemented; whether staff training and/or monitoring was required; and how the program was being monitored on an ongoing basis. But it isn’t the role of the examiner to second guess sound business decisions even if a venture isn’t ultimately successful.
If a credit union enters into a new venture without having performed or even considered the foregoing, however, not only does this show a lack of sound business judgment, it calls into question the judgment of management in a fundamental way and does little to instill confidence in the capabilities of senior management, who are directly responsible, and the credit union board, who are charged with ensuring proper oversight over the managers.
TREICHEL: I also believe that the stresses of the examination process can best be reduced by open and frequent communication with the examiner. If I ran a credit union and was planning on implementing a new program, I would contact my examiner and discuss it with him or her during the beginning, middle and end of implementation. Doing so can result in our pointing out a best practice we encountered elsewhere, and highlighting any regulatory or safety and soundness concerns that the credit union must address. Then when the examiner begins the onsite examination, he or she will likely have a comfort level about the program from the outset of the examination. Of course, communication is a two-way street, and I expect my examiners to openly communicate during the examination process, and provide draft reports in advance of any exit meetings. The examiner’s goal is to assess the safety and soundness of operations, which can only occur with open and candid communication by all parties. Both the NCUA and the credit union should make efforts throughout the examination process and throughout the year to develop an open line of communication.
Q. Is there room for greater flexibility in establishing the deadlines to fix problems outlined in an exam report — especially for smaller credit unions?
TREICHEL: In many instances the examiner can be flexible on deadlines. The credit union should have an open and frank discussion with the examiner about all agreements to resolve items, and the associated deadline or timeline. In some instances the examiner will be unable to extend timelines — on regulatory issues related to Prompt Corrective Action or filing of 5300 data, for example. Again the key is creating an open dialogue in order to develop a plan that is a win-win.
WATTERS: I think this is an area that warrants further exploration. I look forward to working with the trade association to discuss this matter further.
Q. Exam reports currently do not provide priorities for problems noted. Is this something that the regulatory agencies would consider instituting in future reports?
WATTERS: OFIR examination reports are intended to clearly identify material regulatory and safety and soundness issues. The CAMEL rating system, an integral part of each examination, also highlights where regulator concerns are centered. Each Credit Union Division examination report should include a listing, in general priority order, of the issues identified during the examination, including the basis for our concerns and the appropriate regulatory references.
A Document of Resolution is normally included in each report with CAMEL components rated three or worse.
We’re always willing to discuss ways in which we can improve our communication, performance and the services we provide.
TREICHEL: While the examination report does not specifically say which concern is of most importance, the Document of Resolution and the Examiner Findings, if any, are written in order of importance. Additionally, the dialogue that goes along with the report delivery and development should provide a sense of which items are of paramount importance. If that’s not clear — ask!
Q. What would you recommend to a credit union that wants to challenge the examiner’s findings in an exam report?
TREICHEL: During the examination process, a credit union should receive drafts for discussion prior to any report being finalized. This provides an excellent first opportunity for the credit union to inquire or challenge specific findings. If the credit union is still unsatisfied, it should ask the examiner to involve his or her supervisor in the discussion. If the credit union is still not satisfied, it should initiate commu-nications with the Region I office in Albany, N.Y.
WATTERS: Clear and open communication is the key. If a credit union official disagrees with an examination finding, the rationale for the credit union’s position should be clearly communicated to the examiner in charge during the examination process. If the issue can’t be resolved at that level, I encourage the credit union to discuss the matter with, in the following order, the OFIR regional supervisor, assistant director, deputy commissioner, chief deputy commissioner and finally, myself. This communication can be through a phone call, or can be documented in a letter, including within the examination response if one is required.
Regardless of the method used to communicate the difference of opinion, OFIR staff will review and respond appropriately. I can assure you that at no time will a difference of opinion be considered a challenge to OFIR’s regulatory authority or result in any retaliatory response. In the end, the goal of OFIR and our regulated institutions should be the same — to ensure a safe and sound credit union industry for Michigan residents.
Q. What is your agency’s appeal process when the credit union disagrees with an exception on an exam report, or feels it has been treated unfairly or unprofessionally?
WATTERS: A credit union obviously should thoroughly discuss the matter with the examiner in charge and if the issue can’t be resolved, file a management response outlining the factual and legal basis for its position. The issue may also be taken up to the Regional Supervisor and then to Assistant Director John Kolhoff, Deputy Roger Little and ultimately myself if necessary, although the expectation is that most if not all issues should be able to be resolved at the Division level.
Unprofessional or unfair treatment by either credit union staff or OFIR staff will not be tolerated and should be brought to the attention of supervisors — as outlined above — in a timely manner. In addition to this, OFIR continues to employ anonymous post-exam surveys, and credit unions are encouraged to be honest, open and frank in their comments.
TREICHEL: The examination report cover outlines what credit unions can do if they disagree with the report. In summary, the credit union can request a review of the issue by writing to me. We will review the issues and respond in writing. If the credit union is dissatisfied and the report meets the criteria of Interpretive Ruling and Policy Statement 95-1, the credit union can appeal to the NCUA Supervisory Review Committee. In some cases, the credit union also may be able to consider contacting the NCUA’s ombudsman. More details about both of these programs can be found on the NCUA Web site at www.ncua.gov.
Q. Should credit unions be up front about problems they are addressing when the examiners first arrive for an examination? Is this important?
TREICHEL: As a former examiner, I have great respect for the CEO who came to me on the front end of an examination and outlined the challenges they were facing — and more importantly how they were tackling those challenges. It helps the examiner understand the thought processes of management and assess the safety and soundness of operations, which in turn creates a comfort level with the direction of the institution. Everyone is facing challenges these days, whether the issue is profitability due to the all-time low net interest margins, member or share growth, or regulatory burdens. The key is how officials and management respond to these challenges. Sharing that information frequently during the examination process can only enhance the process.
WATTERS: Absolutely, and again, clear and open communication is the key. If examination staff discover a material problem and see no documentation showing management knows about or is addressing it, they would reasonably conclude that management is not appropriately addressing risks. If management later tells them they knew about the issue, and didn’t share that information up front, the examiner is left wondering what other information they don’t have. Management teams that proactively discuss material problems instill a sense of confidence that management is aware of the issue, is working to correct it, and is open about the challenges the credit union is facing.
Q. What is the agency requiring of its examiners to protect against loss or theft of non-public credit union and member information and related files?
WATTERS: OFIR works within the Department of Labor and Economic Growth and the Department of Information Technology policies, which broadly outline staff responsibilities to keep information confidential and technology related protocols. Our responsibility to keep this information confidential is also outlined within section 205 of the Michigan Credit Union Act. The nature of the data OFIR collects, particularly relating to credit union members, requires additional protocols not necessary for some of our other regulatory responsibilities. OFIR has worked and will continue to work with internal and external groups to ensure information collected during the examination process is kept secure. This involvement includes work on the NASCUS/CSBS Technology Committees, NCUA Supervisory System Work Group and AIRES Development Team, and a recent request to become involved directly with the FFIEC Information Sharing Sub Committee. The Credit Union Division recently completed its own risk assessment, much the same as that required by our institutions. As you would expect, at-risk areas have been identified and we are moving to address those issues.
Without giving specifics, which would compromise our protocols, access to the computers and the state networks are restricted. OFIR staff members are trained on an ongoing basis about their responsibilities in this area. We currently encrypt the data under various methodologies in a multi-tiered approach to ensure we don’t become overly reliant on any one technology and to make unauthorized access more difficult. Finally, OFIR is committed to working with each institution to ensure every reasonable measure is taken to meet internal policies relating to third-party vendor information sharing.
Obviously, technologies in this area are constantly evolving as new products are developed and older ones circumvented. OFIR is committed to proactively address this issue with the understanding that its perpetual nature requires ongoing due diligence.
TREICHEL: NCUA’s AIRES examination software has built in safeguards. Specifically, when we receive credit union data via an AIRES data download, the member’s Social Security numbers are not included, and the files are encrypted. Also we now require file encryption on all NCUA computers and documents by using AES-128 encryption, which is the Federal Information Processing Standard. As new data safety features become available, the NCUA will continue efforts to ensure we meet or exceed all data security requirements.
Q. This one is specifically for Commissioner Watters: You have been the OFIR Commissioner for nearly four years; what have been your most significant accomplishments and biggest disappointments? What are your priorities for 2007?
WATTERS: We have effectively worked with our industry stakeholders to pass a number of important pieces of legislation, including the Michigan Credit Union Act. Consumer protection has been a main focus of my tenure here at OFIR and I have been pleased to be directly involved with a number of successful negotiations that have resulted in the payment of literally millions of dollars to Michigan consumers. Our consumer and industry outreach has significantly increased at all levels within the agency, with OFIR staff regularly presenting on a variety of topics in communities across the state. As Commissioner, I’ve personally visited scores of credit unions, banks, insurers, insurance agencies, mortgage brokers and various other vendors who work for financial service providers.
Without a doubt, my biggest disappointment has been that there aren’t more hours in the day to work on the broad variety of important public policy issues that come before the agency. I have been truly amazed with the diversity of issues that we deal with, and with additional staff resources I am confident that we can meet the coming challenges head on.
As for 2007 priorities, we have a number of legislative initiatives that we worked on in the last session that I know will be up for consideration again this year. I think it’s a safe bet that there will be a lot of focus on redoubling our efforts to stem the tide of mortgage fraud, both from a regulatory and legislative perspective.
I look forward to working with the new House leadership and the new Senate Majority Leader, Mike Bishop, who we interacted regularly with when he was Chairman of the Senate Banking and Financial Institutions Committee.
Q. A final question specifically for the NCUA Region Director: Michigan was the most recent state to be added to Region I. How do federal credit unions in Michigan generally compare or contrast with credit unions in other states in Region I? What are your priorities for 2007?
TREICHEL: Collectively, and individually, Michigan and Region I credit unions are in strong financial condition. The economic challenges that Michigan faces are impacting credit unions, as evidenced by a higher merger rate in Michigan compared to the rest of Region I, and slightly higher delinquency rates. That being said, Michigan credit unions are working diligently to mitigate these economic impacts.
Year in and year out, the NCUA’s top priority is ensuring the safety and soundness of the Credit Union System, individually and collectively. I would refer credit unions to the following NCUA guidance on several critical topics — 06-CU-16, Interagency Guidance on Nontraditional Mortgage Product Risk; 06-CU-13, Authentication for Internet Based Services; 06-FCU-04, Evaluation of Earnings; and 01-CU-20, Due Diligence Over Third Party Service Providers. I also want to encourage credit unions to subscribe to the “NCUA Express.” NCUA Express is a customer service offered free of charge by the NCUA to all federally insured credit unions. It’s a fast, efficient and easy way for all subscribers to keep up-to-date on changes taking place at the NCUA and in the credit union industry. Subscribers to NCUA Express receive select NCUA communications via e-mail within hours of their publication.
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Regulatory Affairs
