When bank examiners get it wrong: financial institution appeals of material supervisory determinations.

• Author: Hill, Julie Andersen
• Position: II. Appeals Processes by Regulator D. NCUA through Conclusion, with footnotes, p. 1149-1185

4. NCUA

   The National Credit Union Administration supervises federally-chartered credit unions (276) as well as federally insured state-chartered credit unions. (277) Credit unions are distinct from the financial institutions previously discussed because they arc owned by their "members" (rather than investors), (278) have limited authority to engage in commercial lending, (279) and pay fewer taxes. (280) Credit unions are, on average, smaller than banks. (281) Notwithstanding these differences, the NCUA evaluates credit unions using the CAMEL rating system (282) and, like the other federal regulators, must provide an "independent intra-agency appellate process ... to review material supervisory determinations." (283) As of the end of 2012, the NCUA supervised 4272 federal credit unions and 2547 federally insured state-chartered credit unions. (284) It has 1191 full-time equivalent employees. (285)

   1. NCUA Appeals Process

      The NCUA adopted its process for reviewing MSDs in 1995 following the Congressional mandate. (286) Although the NCUA has made minor changes to the scope of appealable matters, the structure of its appeals process has remained largely unchanged. (287)

      Like other regulators, the NCUA prefers to address credit unions' complaints informally. (288) However, when such avenues prove ineffective, the NCUA's MSD appeals process is open to both federally-chartered credit unions and federally insured state-chartered credit unions. (289) State-chartered credit unions can only appeal those determinations that were made by an NCUA examiner. (290) If a state examiner made the MSD at issue, the NCUA refers the appeal to the state for appropriate action. (291)

      According to an NCUA policy statement, the first step in the appeals process is to "contact the regional office regarding the examiner's decision within 30 days of the examiner's final determination." (292) The policy statement is somewhat unclear about whether this mandatory step is simply a notification to the office that oversees the examiner or whether the notification is intended to be treated as an appeal to the examiner's supervisor. The policy statement provides that "the dispute will be handed [sic] by the Region and become appealable to the [Supervisory Review] Committee either 30 days after a regional determination or 60 days after the regional office has been contacted if it has not made a determination." (293) According to Joy K. Lee, the current chair of the Supervisory Review Committee, the regional directors routinely investigate credit union appeals and respond in writing during the 30-day period. (294)

      In any event, if the credit union's "contact" with the regional office does not resolve the dispute, the next step in the appeals process is to submit an appeal in writing to the NCUA's Supervisory Review Committee. (295) The appeal must be authorized by the board of directors of the credit union and "must include the name of the appellant credit union, the determination or denial being appealed and the reasons for the appeal." (296) The policy statement encourages credit unions "to submit all information and supporting documentation relevant to the matter in dispute." (297) In practice, the material submitted varies widely--from a four-page letter to several binders of material. (298) The Committee may then "request additional information" from the credit union or the regional office. (299) The Committee often sends a letter detailing these additional required materials, but it is also common for the chair of the Committee to have a telephone discussion with the credit union to provide more guidance on potentially helpful documentation. (300) The Committee also reviews the material that was submitted to the Regional Director and the Regional Director's decision. (301)

      The NCUA's Supervisory Review Committee is made up of three "members of the NCUA's senior staff as appointed by the NCUA Chairman." (302) No members of the Committee can directly oversee the examination function. (303) All Committee members serve a one-year term, but can be reappointed for additional terms. (304) Until recently, the NCUA treated the makeup of the Committee as a closely guarded secret. (305) However, facing calls for greater transparency in the wake of the financial crisis, the NCUA now publishes the names of Committee members on its website. (306) The Committee currently consists of a program officer, the Secretary to the NCUA Board, and the Special Assistant to the Executive Director. (307) A FOIA request for the names and titles of past members of the Committee reveals that it is common for the Committee to contain an attorney (308) as well as former credit union examiners. Most Committee members serve only one or two years. (309)

      Perhaps the most novel part of the NCUA appeals process is the scope of appealable determinations. Under NCUA's policy statement, appealable MSDs include: "(1) composite CAMEL ratings of 3, 4, and 5 and all component ratings of those composite ratings; (2) adequacy of loan loss reserve provisions; and (3) loan classifications on loans that are significant as determined by the appealing credit union." (310) On the one hand, the NCUA's scope of appealable matters is narrow. Under the policy statement, credit unions can only appeal a component CAMEL rating if the overall composite CAMEL rating is a 3, 4, or 5. (311) So, for example, a credit union that received a 3 management rating could not appeal that rating if the credit union received a composite rating of 1 or 2. (312) On the other hand, in some respects the scope of appealable matters is quite broad. The Supervisory Review Committee can review loan classifications if the appealing credit union considers the classification significant. (313) Moreover, a credit union's right to appeal is not cut off if NCUA imposes formal or informal enforcement action on the credit union. (314) However, in those circumstances, the credit union must comply with the enforcement action while the appeal is pending (315) and a reversal of the MSD would not necessarily terminate the enforcement action. (316) Nevertheless, an enforcement action does not preclude review of an MSD by the Committee.

      In deciding the appeal, the Committee has "free rein ... to talk to anybody" that would provide useful information, including the original examiner or other experts within the NCUA. (317) However, the Committee members have not, to date, visited an appealing credit union. (318) The appealing credit union is "entitled to a personal appearance before the Committee." (319) The credit union can choose whether to allow directors or executives to present their case or whether to employ attorneys. (320) In the last few years, the NCUA has made an effort to formalize this "appearance," making it a court-like process. (321) A court reporter transcribes the proceedings and the Committee goes "off the record and on the record." (322) The Committee also questions the credit union. (323) After the appearance, the Committee members meet to discuss the appeal and reach a decision. (324)

      The NCUA policy statement does not specify what standard of review the Committee should use in evaluating appeals. Joy K. Lee, the current Chairman of the NCUA Supervisory Review Committee, explains the standard of review as follows:

      I view myself as a completely independent party. And so I look at it like it's a brand new thing. I just don't totally go with whatever the examiner said and I just don't, you know, completely just say, "Well, this is the examiner's deal, the regional director's determination, so I'm not going to open my eyes to the credit union." I don't. I really and truly look at this as an independent authority and I look at both sides of the coin, and try to understand, you know, the reasons why for both parties. (325) Ms. Lee also noted that she has broad investigative power to talk with those at the credit union and within the NCUA. (326)

      Once the Committee has reached a conclusion, it drafts and edits a written decision. (327) Under normal circumstances, the Committee will reach a decision on the appeal within 30 days of the time the credit union filed the appeal. (328) The Committee sends the written decision to the credit union as well as to the Regional Director that oversees the credit union. (329) The decisions are not routinely circulated further within the NCUA (330) or released (even in redacted or summary form) to the general public. (331)

      If the appealing credit union is unhappy with the Supervisory Review Committee's decision, it can appeal to the NCUA Board. (332) The NCUA's policy statement on appeals does not further discuss the procedures the Board uses for these appeals. (333)

      At the NCUA, the Inspector General is tasked with resolving allegations of suspected retaliation. (334) According to the policy statement, "[a]ny retaliation by NCUA staff against a credit union making any type of appeal will subject the employee to appropriate disciplinary or remedial action by the appropriate supervisor." (335) The NCUA recently added language about their non-retaliation policy to the cover sheet that accompanies all examination reports. (336)

   2. NCUA Appeals

      The NCUA does not publicly release appeals decisions in summary or redacted form. Moreover, for much of its history, the Supervisory Review Committee's recordkeeping was lacking. A 2012 report by the NCUA's Inspector General "determined the [Supervisory Review Committee] [kept] all of its records in hard-copy format in a cardboard box. During a change in [Committee] chairpersons in late 2011, the outgoing chairperson passed the cardboard box of files to the newly appointed chairperson." (337)

      Nevertheless, in response to my FOIA requests, the NCUA provided redacted Supervisory Review Committee decisions. (338) I reviewed and categorized each of these decisions. The NCUA also provided a spreadsheet summarizing credit unions' written "contacts"...