NCUA Issues New Guidance on Exam Report Drafting and the Exam Process
In October 2013, the NCUA announced that it will be changing its examination reports and certain exam processes effective January 1, 2014. These changes are the latest in its “Regulatory Modernization Initiative,” an effort to increase clarity and transparency in the examination process. The announcement and changes can be found in Letter to Credit Unions 13-CU-09, which is available with several attachments here. While the NCUA’s changes do not fundamentally alter the Exam landscape, they introduce some shifts in Exam drafting, as well as significant clarifications that may assist in guiding your credit union’s process of managing exams.
Regarding the drafting and structure of exams, the NCUA is attempting to differentiate between major and minor problems by including them in separate parts of the document. Major problems of a critical nature will now be found only in the Document of Resolution (“DOR”), while less serious issues which may be corrected in the normal course of business will now be found in the Examiner’s Findings. Of course, the distinction between “major” and “minor” issues will remain a matter of frequent disputes, the NCUA’s new guidance will assist both examiners and credit unions to communicate about the level of concern presented by an issue.
Another change is the inclusion of the issue to be corrected in the actual language of the DOR, in addition to the corresponding proposed corrective action. This change is intricately connected to the issue of unresolved DOR items (discussed in additional detail in our October 2011 Emerging Issues). As you may recall, the NCUA Office of Inspector General (“OIG”) has defined “repeat” or unresolved DORs as: “issues or problems repeated over several examination contacts and/or not completed within the prescribed timeframe.”
With this new style of drafting DORs, because examiners are required to list individual problem areas in the DOR itself, credit union will better be able to assess whether a “repeat” DOR is, in fact, meant to address the same issue.
Regarding the exam process, the revised DOR documents and especially revisions to the National Supervision Policy Manual (“NSPM”), provide a number of areas in which credit unions can improve their communication with examiners.
Take Advantage of the Increased Transparency
Take full advantage of the NCUA’s increased transparency in the NSPM which now provides significantly more insight into the details of the process. Take time and familiarize yourself with what examiners are being instructed to do with respect to these new reporting processes. For example, knowing what examiners are required to include or exclude in a DOR will be helpful when your credit union is working with examiners to draft solutions to any identified problems, discussing whether specific concerns rise to the level of a DOR, and negotiating the language of your examination report.
Actively Manage the Examination Process
No matter how well you prepare, examiners are likely to spot issues or make suggestions that you were unable to identify prior to the examination. Active listening during the examination and working quickly to propose solutions or responses to newly identified problems will help you stay ahead of the process. Getting previews of examiners’ concerns will help your credit union be able to develop plans (to the extent appropriate) to timely resolve those concerns. The new guidance emphasizes, to both examiners and credit unions, the importance of meeting throughout the exam process.
To take advantage of this new guidance and revised process, credit unions should employ project management techniques such as the following:
- Assign a point person to collect issues, oversee the beginnings of response or solution development, and respond to examiner requests.
- Meet frequently with examiner, checking in at least daily while on site.
- As issues are noted, track them, plans to correct, and actions taken in a format able to be tracked further and reported to Management and your Board.
Take and Use Opportunities to Shape Action Plans
The NCUA has long noted that that management should be involved in the development of corrective action plans. This recent guidance makes explicit how those plans should be incorporated, though the guidance does still leave examiners significant discretion (in drafting and interpreting the guidance itself). We strongly advise that your credit union, while in the project management phase of the examination, begin putting solutions to examiners’ concerns into writing as quickly as possible. Also, take examiner suggestions seriously and incorporate them into your written responses, even if only to explain why such suggestions might not work for your credit union. If you wait too long to reduce your own proposed actions to writing, it might be a missed opportunity for your credit union to guide and shape its own DOR action items.
If you have questions or concerns about what these changes to the NCUA’s examination process mean for your credit union, please contact SW&M for assistance.