Compliance

Surviving the Examination During Challenging Times

Follow these five steps toward a productive exam.

December 12, 2011
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3. Involve all areas of operations in preparation for the exam.

Before the exam, create an internal team made up of your operational area experts. Except in the smallest of credit unions, interaction with the examiner shouldn’t be a “one-man show,” although you’ll want to choose one person as the central point of contact with the examiner (or team of examiners).

Experience shows that the examiner is increasingly likely to engage more of your staff during the exam anyway, so organizing a team allows you to have some control over the process. It also showcases your operational leaders to explain to the examiner your business, risk management, and compliance strategies.

For instance, if your real estate lending portfolio might raise questions about quality or concentration, you’ll want to have a document prepared, anticipating these issues and detailing for the examiner what you’re doing to address them. Remember the three Rs!

I know having some employees spend time on the regulatory exam takes them away from their “day jobs,” but in the end it’s worth it. Your “prep” team will identify key areas the examiner is likely to focus on and will make sure your credit union is properly addressing unnecessary risks and operational weaknesses.

Moreover, this process will help you effectively and efficiently manage your credit union well beyond the exam.

4. Engage the examiner before, during, and after the exam.

Consider the exam less of an enemy invasion and more of a guided tour of your treasured home. If the examiner cited a major issue in your previous exam’s “Document of Resolution” (DOR), you’ve undoubtedly had follow-up contact.

But don’t hesitate to initiate communication. If you have an emerging issue that could affect your financials or a new product that might raise risk inquiries, it’s better to give the examiner a heads up before he arrives on your doorstep.

Throughout the exam process, of course, make sure your internal examination team has good communication with the examiner so you can address questions or concerns as they arise. After the examiner has completed his initial review, schedule a briefing.

Examiners are instructed to provide time during the exam for such discussions. This is where you can resolve simpler concerns that shouldn’t be listed in the DOR.

Examiners are encouraged to give your credit union a draft copy of the examination report. It’s your chance to review it before the formal exit interview with the board.

Insist on seeing a draft if your examiner doesn’t volunteer one. The Examiner’s Guide states that “nothing presented at the joint conference, exit interview, or in the examination report should surprise the [credit union’s] officials.”

Stay courteous and professional even if tensions rise, especially in these challenging economic times. You might want to check out CUNA’s “Credit Union Examination Rights”—a list CUNA informally asked NCUA senior staff to review before finalizing this year.

It includes 24 items credit unions should reasonably expect, such as having examination findings prioritized, knowing the specific authority for an examiner’s directive, and being evaluated on progress toward realistic objectives.

In September 2011, NCUA’s inspector general released a report critical of examiners’ failure to follow up on unresolved items listed in the DOR. (Find the “Review of NCUA’s Document of Resolution Follow-up Process” at ncua.gov.) Credit unions, regardless of their CAMEL rating, should now expect to provide written responses for all DOR items not resolved within the timeframes listed in the exam report and to see stronger supervisory action if DOR items aren’t corrected.

In the “good news” category, I would expect credit unions will see fewer minor items listed under the DOR.

5. Create the internal structure to enjoy repeated success.

View regulators’ exams as a process, not a singular event. They’re simply a checkpoint in the ongoing continuum called credit union operations.

If you manage your operations year-round with your examination in mind—rather than waiting until the last minute before the exam to compile documents and create plans for addressing risky areas—you should have no surprises, and your exam should run smoothly.

Once you make the exam part of your operational processes, you’ll no longer simply survive the exam but thrive as an organization all year long. And you’ll view the time with your examiner less as a visit from an unwanted house guest and more as a visit from an old friend.

DAVID A. REED, Esq., is with Reed & Jolly, PLLC, Fairfax, Va. Contact him at 703-675-9578.

A Few More Pointers

Ken Schroeder
December 20, 2011 9:28 am
Great Article, David. Here's a couple of suggested add-ons: Business Continuity--(of course I'd add that, since that is what I do) Verify that your program is active and viable. That means a lot more than putting a new date on your plan and getting the boss to sign it. While emphasis has faded a bit since the years following the storm seasons of Katrina, Wilma, Ike, the need for a viable program is in no way diminished. Consider just this past year, flooding all along the Mississippi and its feeder rivers, tornados everywhere, fires in Texas. A solid, well exercised plan will help get a credit union back into operation quicker and provide better service to the membership. Review should be a continual, on-going process within the organization. Any examiner worth his or her salt will see through a paper-only plan. Vendor Management: Every credit union depends on critical vendors to operate, whether it be IT outsourcing, core processing, even inside & outside maintenance. Stop the flow of goods and services and see how long you can keep your doors open. A Vendor Management program doesn't mean buying a new (and usually very expensive) piece of software, putting some data in it and calling it a day. It means every business owner within the credit union knows and understands the critical single points of failure that a vendor relationship presents. Those business owners must have a monitoring process in place to sniff out when a vendor can no longer deliver and have a backup plan in place to mitigate that failure (see my business continuity comments above). Again, any examiner who is effective will look for an internal process that verifies that the dependency on these crtical vendors is adequately managed. Warmest regards for the Holidays!


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