Credit unions handed another tool in the fight against examiner overreach

The NCUA, in conjunction with the other primary financial regulatory governmental agencies, published an Interagency Statement Clarifying the Role of Supervisory Guidance paper on September 11, 2018. This interagency paper provides ammunition to credit unions looking to challenge federal examiner findings, if these findings are based on “guidance” and not “law” or “regulation.”  This paper is likely in response to significant criticism from Congress that federal agencies are regulating through “guidance” rather than through actual regulations or laws vetted or passed by Congress.  The most concrete example of Congressional criticism happened this year when Congress used the Congressional Review Act to abolish CFPB guidance on indirect lending and the Equal Credit Opportunity Act.  This is an opportunity for credit unions to push back on examiner overreach and “regulation by guidance” by citing the Interagency Statement.

The core piece of the Interagency Statement is:

“Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance. Rather, supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area.”  [emphasis added]

This statement by the NCUA provides credit unions with some significant arguments if  individual federal examiners attempt an enforcement action on a credit union based on supervisory guidance rather than on the actual regulation or law.  There are five areas of clarity provided by the Interagency Statement.  Of these, there are three primary points that can be used to push back against federal examiners:

• Limit the use of numerical thresholds or other “bright-lines” not supported by regulation.  The use of these thresholds should be examples and not suggestive of requirements.

Example:  A well-capitalized federally-chartered credit union with $30 million paid-in and unimpaired capital surplus as of its last year-end report is in the process of loaning $250,000 to a CUSO.  An examiner says the credit union should lower the amount of the loan to $150,000 due to “risk.”  That threshold is not supported by Section 712.2 of the Code of Federal Regulations, which limits the total loan amount to 1% of unimpaired capital or surplus (or $300,000 in this example).

12 CFR 712.2 – How much can an FCU invest in or loan to CUSOs, and what parties may participate?

…

(b) Loans. An FCU’s total loans to CUSOs must not exceed, in the aggregate, 1% of its paid-in and unimpaired capital and surplus as of its last calendar year-end financial report. Loan authority is independent and separate from the 1% investment authority of subsection (a) of this section.

• While federal examiners remain free to identify “unsafe or unsound” practices, examiners are not to criticize a financial institution for failing to follow supervisory guidance.

Example:  A credit union is criticized for not using the FFIEC Cybersecurity Assessment Tool.  The FFIEC’s own FAQ states that the Cybersecurity Assessment Tool is not mandatory.  This could form the basis of a challenge to the examiner’s finding.

2. Does my institution have to use the Assessment? No. Use of the Assessment by institutions is voluntary. Institution management may choose to use the Assessment, or another framework, or another risk assessment process to identify inherent risk and cybersecurity preparedness. The FFIEC released the Assessment as a voluntary tool that institution management may use to determine the institution’s inherent risk and cybersecurity preparedness.

• Public comment on supervisory guidance does not mean that the guidance is intended to be a regulation or have the force and effect of law.

Example:  The most obvious example was overturning the CFPB’s Bulletin “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.”

• Aim to reduce multiple supervisory documents on the same topic.
• Encourage credit unions to discuss supervisory questions with their appropriate NCUA contact.

As with any resistance to examiner findings, executive management and the Board’s willingness to engage, history of the credit union’s safety and soundness, and demonstrated meeting of the membership’s needs will all influence the success the credit union may have.  This letter from the NCUA and other agencies simply represents another tool available to credit unions and CUSOs concerned about examiner overreach.