Examiners Behaving Badly04.22.2019
Before I jump into the kind of behavior that warrants an article like this, I want to say that I think most examiners are good. Over the years, I’ve been fortunate to work with many outstanding examiners and support honest, ethical, and hard-working people at the state and federal levels.
That said, there are still too many bad apples out there who need to be called out. I’m in a lot of credit union shops each year – 45 individual stops last year alone – and I see firsthand the stress examinations can cause. Most of the stress is quite normal and to be expected. There’s nothing fun about having our lives turned upside down, but it’s necessary. Exams are an essential part of our business, and we need (thorough exams) to ensure our safety, soundness, and long-term viability. For me, the problem starts when I hear nightmare examiner stories, stories that, if true (and I believe they are), are unprofessional and uncalled for. Most of the bad behavior falls into three buckets that I’ll call “the bad Bs,” and almost all occurs in smaller credit unions.
Member bias. It’s a shame that at a time when credit unions are more focused on diversity, equity and inclusion, they still have to explain themselves to examiners who display outdated bias, including statements such as “you should quit lending to deadbeats who have credit scores less than 640.”
When faced with this bias, I recommend that the credit union leader take some time to educate the examiner on credit union history and be prepared with research or examples that demonstrate that credit score alone is not a definitive factor in assessment of character.
Credit unions that have been Low Income Designated (LID) by the NCUA should share the NCUA’s Supervisory Letter regarding supervision of LID credit unions. The NCUA issued the letter in 2010 and it was incorporated into Chapter 23 of the NCUA Examiner’s Manual – the chapter on LID credit unions. The guidance discusses the characteristics, benefits, and unique challenges of LID credit unions, and it further states: “Examiners should remember; however, all federal credit unions have a continuing obligation to meet the financial service needs of people of modest means. Examiners should consider these member characteristics and take them into account when they evaluate LICU loan portfolios as well as the products and services these credit unions offer.”
Gender bias. There are still “good old boy” examiners who I believe treat female CEOs disrespectfully. It’s a level of disrespect I don’t believe would occur if the CEO were a male. It usually becomes obvious to me when the CEO is sharing the dialogue with the examiner. Comments such as “I’ve told you before,” “Remember that last time you messed up,” and “We’re never going to approve that, you’ll have to wait your turn.” I admit, I wasn’t there to hear the conversation; it was shared with me in frustration. But I can tell you the effect of the comments was demeaning and were taken to mean the CEO is stupid.
When I hear these of situations, I always encourage the leader to not tolerate it and to call out the behavior for what it is. I also encourage them to report this behavior to their supervisory examiner. Sadly, the fear of reprisal or retribution is high, and I doubt it gets reported. This is never acceptable and should not be tolerated. I believe that supervisory examiners will take these reports seriously. They need to be reported.
These are the examiners who are condescending, rude, and unprofessional to credit union leaders, staff and boards. They overstep their bounds, preying on credit union fear and lack of knowledge of their regulatory rights. These are credit unions that felt coerced into Letter of Understanding Agreements (LUAs), as they honestly thought there was no viable alternative. I’ve seen too many credit unions make agreements that I believe were not the best strategic decision for the credit union or the members they serve.
I recently learned of a state examiner who was yelling at the top of his voice at a credit union leader. It’s never okay for an examiner (or anyone else) to yell at you. If they do, tell them that you expect a respectable decorum, or they can leave. Then report it to the supervisory examiner and demand an examiner that can professionally deal with the issues at hand.
Make sure you understand the roles and responsibilities of examiners, and your credit union’s rights. Don’t get coerced into something that is wrong or damaging for your credit union. Ask questions, and, if necessary, hire an attorney to give you sound legal advice.
Also, NAFCU published an Exam Fairness Guide that is a great resource to help you navigate some exam challenges.
I could go on all day here; I’ll try to be brief. There are so many examples of examiners providing credit unions with advice that frankly, I don’t believe they are qualified to give. Far too many try to fit all credit unions into one-size-fits-all box. For example, they may assume that an indirect loan strategy that worked well for a credit union down the street will work for all credit unions. I also hear the opposite regarding indirect lending from examiners, that it’s generally bad.
I frequently hear recommendations to close branches or layoff people without enough thought to the reputation risk that could accompany some of those decisions. Or suggestions to CEO leaders that the credit union should just merge because there are no viable growth options for the credit union to pursue. Then there’s the specific suggestion on which shop the credit union should merge with.
When I hear situations like this, I’m tempted to tell the credit union to get the examiners “suggestion” in writing on regulator letterhead and ask the examiner to share in the accountability if their “suggestion” does not go as planned. These situations are best mitigated through due diligence. I’m not opposed to credit unions considering examiner suggestions. However, like anything else, they need to vet it and consider all the potential implications. Then, if they know it’s the wrong decision, they need to take a stand.
Why It Matters
Culture kills strategy. A culture that’s driven by extreme risk aversion, i.e. “the examiners won’t approve,” will not end well. Examiners don’t run our businesses, we do. Unfair or discriminatory biases don’t belong in credit unions, and that includes examiners. Don’t tolerate it. Credit union leadership in smaller credit unions is frequently a thankless job. Don’t undermine your experience and that of your team, or your quality of life by tolerating inappropriate behavior. YOU deserve better.
Following bad advice, whether it comes from an examiner or any other source could at worst cost you your charter, or at best could set your credit union back years financially. Credit unions – especially smaller ones – don’t have time or money to burn.
Scott Butterfield is the principal of Your Credit Union Partner, a company that provides strategic and tactical planning, compliance training, and program development services to credit unions.