NCUA updating operating agreements with state supervisors, follow-up process on reviews of state exam reports

The federal regulator of credit unions is working to update operating agreements with state supervisors and plans to create a formal process for improving documentation of supervisory examiner decisions following its own reviews of state examinations by the end of 2020, according to a recent inspector general report for the agency.

Dated Dec. 18 and posted recently on the National Credit Union Administration (NCUA) website, the Office of Inspector General (OIG) report (Report #OIG-19-11) focuses on a self-initiated review by the OIG to assess the NCUA’s joint examination process with state supervisory authorities (SSAs).

The review, covering the period of January 2013 through December 2018, was to determine: 1) whether the NCUA provided shared oversight of federally insured state-chartered credit unions (FISCUs) to assess their condition and address material risks that could negatively affect the National Credit Union Share Insurance Fund (NCUSIF); and 2) whether the NCUA effectively monitored FISCUs using off-site monitoring tools and joint oversight processes with state supervisory authorities.

The OIG found that the agency met those objectives, but it found that NCUA’s regional offices did not have updated optional operating agreements with each individual SSA that defined roles and responsibilities at a high level for joint on-site examinations of FISCUs. The report said the agency had signed and dated operating agreements during the period from March 2003 to July 2008. It said that of the 45 states that have FISCUs, 18 had signed operating agreements on file, 11 had unsigned operating agreements on file, and 16 had no operating agreement on file. Five states and the District of Columbia, Guam, Puerto Rico, and the Virgin Islands do not have FISCUs.

“As a result of the NCUA not having updated and useable optional operating agreements with each SSA,” the report states, “some NCUA examiners and officials we interviewed, as well as some examiners and officials for the SSAs, expressed there could be confusion regarding roles and responsibilities at a high level and indicated that although optional, having an executed operating agreement in place would help bring consistency to the working relationship and across the joint examination process.”

An NCUA-State Supervisor Working Group was formed in 2017 to identify and address any issues that could positively impact the joint supervision programs of the NCUA and SSAs. The working group implemented a pilot program to alternate the lead supervisory authority on joint examinations (launched in January 2019, the program is set to run about three years) and developed a new template for an optional standardized operating agreement between the NCUA and the SSAs.

The OIG report says that NCUA’s regions are working to update operating agreements with SSAs that wish to enter into them. It says the agency has also updated its National Supervision Policy Manual to provide that NCUA regional directors, not SSAs, will be responsible for maintaining any such agreements. Guidance to clarify examination reviews of state supervisory examinations of FISCUs when NCUA examiners participate in joint examinations has also been revised and clarified, it says.

Other findings of the report were that NCUA management needed to enhance its guidance to clarify its examination reviews of state supervisory examinations of FISCUs when NCUA examiners participate in joint examinations, which the report says has been done; and, while not a requirement, that as a best practice, supervisory examiners (SE) did not consistently document their decisions on follow-up actions recommended by examiners after completing such reviews.

On the latter, the OIG recommended that the NCUA create a formal process to capture supervisory examiner decisions regarding recommended follow-up actions taken or not taken from reviews of state supervisory exam reports “to ensure concerns identified by examiners are properly documented.”

In its response, the NCUA said it planned to use MERIT as the formal process and, in the interim, has implemented steps to adjust the documentation process, the report says. MERIT, or the Modern Examination and Risk Identification Tool, will replace the agency’s AIRES exam system in mid to late 2020 and was being piloted as of the date of the report, it stated.