By Sheryl S. Jackson

In business, transparency is the basis for trust between a company, customers, partners and employees. Being transparent means being honest and open when communicating with all stakeholders about matters related to the business.

Transparency is essential in the regulator-credit union relationship. The reality, however, is that regulatory agencies are not always as transparent as needed in some areas, which presents challenges to credit union compliance programs especially.

“The most concerning issue for credit unions is a lack of transparency about supervisory and examination expectations because regulators can be very guarded about their approach to examinations,” said Ann Kossachev, director of regulatory affairs for NAFCU. “There is a difference between compromising the integrity of the examination and giving clear rules to credit unions that allow them to meet the expectations of the examiner — we are just asking for clear rules.”

One of the longtime issues with National Credit Union Association (NCUA) examinations is the confusion caused by the issuance of “guidance” versus “rulemaking.”

“NCUA would issue guidance that examiners used as de facto lawmaking — a move that bypassed the lengthy rulemaking process and did not allow credit unions to comment on consequences or value of the rule,” said Kossachev. “In January 2021, the NCUA, along with other federal financial regulators, codified the difference between regulations and guidance, saying that supervisory guidance creates no binding obligation on the credit union, but can be referred to as a best practice.”

Since January, Kossachev revealed she has not heard from NAFCU-member credit unions who have experienced an examiner that has used guidance as a rule.

Room for Further Improvement

There could still be improvement in how examiners share best practices, said Keith Sultemeier, CEO of Kinecta Federal Credit Union.

“When an examiner offers supplementary guidance, or best practices, we treat that information the same way we treat findings — we address it,” he said. “If an examiner has specific best practices that are typically recommended, we’d like to receive it beforehand, which would give us time to evaluate it to determine if it is applicable to our organization and would benefit our members.”

He also pointed out that there are times when the credit union already has processes or programs in place that accomplish the same goal, just do it differently. “Having the ability to review it before the examiner visits would save time and resources for everyone,” he added.

“I would like to see financial regulators be clear about their boundaries, especially when there is overlap between regulatory and legislative issues,” said Lisa Schlehuber, CEO, Elements Financial. An example of recent overlap was found through the NCUA’s creation of a separate consumer protection exam for certain larger credit unions. “Protecting consumers is a fabulous goal, but having multiple regulators approach it from different perspectives just muddies the waters and makes it difficult for credit unions to understand what constitutes compliance.”

There is also a lack of transparency related to “gray” areas that require subjective interpretation — which can vary from region to region, said Schlehuber. Credit unions that operate in multiple regions of the country face the challenge of the same rule being interpreted slightly differently in each area, she explained. “We need consistency in the interpretation across the continuum to eliminate as much subjectivity as possible.”

Clear Communication Needed

Other areas that need improvement include the NCUA budget and the NCUA’s communication strategy with credit unions, said Kossachev. Because credit unions provide the funding for the agency, the NCUA should let them know how the money is used, she said. “Even though credit unions have been consolidating, the NCUA budget consistently increases,” she said. “The funds sent to NCUA represents money that cannot be used to serve members.”

In September, the NCUA responded to NAFCU’s request for a mid-year budget update. “This update creates more transparency about the use of NCUA funds to support the industry, and the association will continue to monitor agency spending,” said Kossachev. “We have also asked that the upcoming budget reflect lessons learned last year as a result of the pandemic and travel restrictions,” she said. “Exams were conducted virtually in 2020, and we all learned that they worked.” While NAFCU members appreciate the face-to-face interaction with examiners, the money saved on travel costs raises the possibility of hybrid versions of exams — alternating in-person and virtual — or other approaches that ensure the best use of credit union funds, she proposed.

In a recent request for information (RFI), the NCUA asked for feedback on communications issues. Some of these issues include the sheer volume of messages from the agency, said Sultemeier. “We were receiving messages from as many as nine different sections of the agency — all on different letterheads and many of them marked as urgent,” he said. “When most emails are marked ‘important’ or ‘urgent,’ you become immune to the heading and treat them all as routine.”

The messages were broadcast to all credit unions whether the issue applied to them or not, which required staff to review each one in detail so there would be nothing missed that might apply, he explained. “The website is also not user-friendly when clarification is needed.”

The good news is that responses to the RFI prompted a change, said Kossachev. “The messages will now come from a single address, which means less opportunity for an important message to go to a spam filter or be difficult to identify.”

NAFCU’s response to the NCUA’s RFI also addressed the need for open and transparent conversations related to rulemaking before and after the comment period as well as a more narrowly-focused use of the Freedom of Information Act (FOIA) exemptions. While FOIA allows exemptions for agencies to protect sensitive information from public disclosure, NCUA relies heavily on exemptions for information requests that don’t seem to fit the intent of the exemption component of FOIA, said Kossachev. “In our response to the RFI, we also asked for clearer guidance on when external stakeholders can meet with regulators to discuss rulemakings, because there is no clear policy on these ex parte communications.”

There is also concern about physical safety of credit union staff and members when consumers send an issue letter directly to the NCUA, said Sultemeier. “There have been instances when the letters contained threatening language toward a specific credit union branch or employees, but the credit union was not notified in a timely manner,” he said. “A filter that identifies threatening language, and a protocol that ensures a potential threat is immediately forwarded to the credit union needs to be put into place.”

What Can Credit Unions Do?

One of the first steps to creating a transparent relationship between the NCUA and credit unions is for credit unions to be more proactive with individual exam teams, said Sultemeier. “We can contact the lead examiner or member of the team ahead of time to ask for information,” he said. Ask questions such as “What are you seeing in other institutions” or “What should we be prepared for in the exam,” he recommended. “Building a relationship with open conversations before the visit, allows the credit union to be better prepared — saving time for both the organization and the examiner.”

“Individual credit unions should review proposed rules and respond during the comment period to make sure that the NCUA or other regulatory agencies know how the proposed rule will affect credit unions and their members,” recommended Schlehuber. “While NAFCU comments — based on feedback from members and staff knowledge — on proposed rules, it is important that agencies hear from individual credit unions as well.”

Commenting on a proposed rule does require careful attention to notices of proposed rules, but the comment period is long enough to allow a credit union to review the proposal, evaluate how it will affect the organization or its members, and identify unintended consequences, burdensome requirements, significant costs or negative impact on members, said Schlehuber. “This process can be disruptive for smaller organizations with fewer resources, but it can also help you better prepare for new regulations,” she said.

For example, when the NCUA approved the rule to transition federally-insured credit unions to the current expected credit loss (CECL) methodology, Elements Financial had already put a lot of hours into planning to push the new accounting methodology out. Schlehuber explained, “The phase-in for the rule has been pushed out to 2022 due to the pandemic, but we have a solid plan and will tweak as necessary as more is learned about the rule.”

In addition, NAFCU members with assets approaching or already over $10 billion can participate in two NAFCU-sponsored summits each year that provide direct access to a supervisory representative from the NCUA to answer questions and provide instructive information.

“We are hoping to offer the Large Credit Union Summit and other channels for direct conversations at our CEO Conference in the spring and the Congressional Caucus each fall,” said Kossachev. “For smaller credit unions, we provide webinars to discuss specific issues or rules and answer questions.”

Because some credit unions may want to preserve their anonymity when asking NCUA about specific requirements, NAFCU staff also have conversations with the regulator on the credit union’s behalf, she said.

Although the previous White House administration was attempting to clarify and finalize a number of regulatory practices, some of those efforts were rescinded with the arrival of a new administration, said Kossachev. “Credit unions will continue to face challenges, but they must be vigilant,” she said. “Don’t be afraid to ask for more information and explanations and highlight inconsistencies or concerns. Reach out to NAFCU, that is why we are here.”