How To Effectively Manage LUAs, DORs And Other Adverse Examination Findings: The Definitive Guide
The increased use of DORs and LUAs for general regulatory purposes by the National Credit Union Administration (NCUA) has made it more important than ever to understand the most efficient ways to deal with these and other adverse examination findings. Effectively managing the process can depend on understanding your rights and responsibilities as a federally insured credit union.
In this definitive guide, you’ll find a complete rundown of the various types of tools, such as DORs and LUAs, that federal and state regulators use to address non-compliance(s) and how to best address them.
Definitions of Adverse Examination Tools and Findings
Documents Of Resolution (DOR)
Documents of Resolution (DORs) are the
first tools that establish action plans and time frames, developed by the examiner, to induce and monitor compliance by the credit union officials. They are a step beyond remedial recommendations in the “Findings” section of an examination report. A DOR is issued by the examiner to document agreements reached with a credit union on reducing unacceptable material risks.
According to the NCUA’s Examiners Guide, an “unacceptable risk” is an area of operational activity “for which management does not have the proper structure for identifying, measuring, monitoring, controlling and reporting risk.” Unlike the adverse findings section of the examiner’s report, a DOR is a separate document with a defined purpose that includes persons responsible and time frames for correction.
Letters Of Understanding And Agreement (LUA)
Letters of Understanding and Agreement (LUAs) are a formal contract with the government that is negotiated when a credit union has not adequately responded to less severe measures, such as a DOR. It is usually signed by each director or adopted by a majority vote of a credit union’s board who agree to take, or not take, certain actions. There are severe consequences for failing to follow and fulfill the terms of a LUA.
A LUA is generally used in circumstances in which more serious violations are cited by examiners, or when a credit union has ignored or not complied in a timely manner with a previously issued DOR. LUAs can be unpublished or published, with published LUAs available for public review.
Cease And Desist Letters
Non-compliance with a LUA, or repeated noncompliance with a DOR, can result in a more severe regulatory action in the form of a “Cease and Desist” letter. Cease and Desist (C&D) orders prohibit a credit union from engaging in the activity described in the letter.
Immediate action to correct the condition resulting from the violation(s) are usually required. A C&D is made by the NCUA board after a hearing. In certain circumstances, a temporary C&D can be held before a hearing.
A credit union can appeal the decision with the United States Court of Appeals.
Removal of Officials and Prohibition Orders
Chronic non-compliance can also result in a removal order for members of the credit union board and staff. Prohibition orders are more broad in scope and can be brought against institution-affiliated parties, including individuals who are not officials or personnel of the credit union. A prohibition order can temporarily or permanently bar a person from serving or being employed by any federally insured financial institution. If the government deems it necessary to protect the solvency of the credit union and safeguard its assets, it can also issue an immediate removal or prohibition order.
Civil Monetary Penalties
The NCUA has the authority to issue a civil monetary penalty (CMP) against a federally insured credit union or any institutionally affiliated party. A CMP can range from $5,000 up to $1 million per day.
To impose a civil monetary penalty, the NCUA is required to issue a Notice of Assessment. Assessed parties have 90 days to pay and may request a hearing with the U.S. Court of Appeals within 20 days.
A conservatorship allows the NCUA board to take immediate control of a federally insured credit union under certain circumstances. A notice or hearing is not required, but a credit union can seek an injunction within 10 days to set aside the seizure of the institution. Should the former credit union officials pursue an injunction to set aside the seizure, they will not utlize credit union resources for that purpose unless the former officials are successful in their pursuit.
Written approval of a state regulatory agency is also required for credit unions that are federally insured and state-chartered. However, the NCUA can still place a credit union into conservatorship if the state withholds approval.
Termination of Insurance
An insured credit union’s insurance may be terminated based on grounds similar to a C&D. Termination is usually reserved for FISCUs. The Notice of Intent to Terminate Insured Status sets out facts and establishes a time/place for an administrative hearing within 30 - 60 days. A credit union can appeal to the U.S. Court of Appeals but the order remains effective unless it’s modified by the NCUA board or the court.
The NCUA board may choose to liquidate a federal credit union if it is insolvent or bankrupt. The procedure can’t be initiated without a recent examination and documentation of the problems from the examiner, along with support for the recommended action. In this case, a credit union doesn’t have legal authority to seek an administrative hearing before closure.
A liquidation notice is served on the credit union and the order is effective immediately. A credit union can appeal to the U.S. Court of Appeals but the order remains effective unless its modified by the NCUA board or the court.
Rules and recommendations for handling DORs and LUAs
Examiners will send the credit union a preliminary notification of information needed for an examination. The exam notification will indicate the date of the exam, the number of examiners to expect, anticipated length of stay, and documents and reports needed from the credit union by the examiner upon arrival.
It’s a good idea to keep in mind that the examiner expects to judge the credit union on certain benchmarks that include:
• Accurate and timely financial data • Risk awareness level of management and officials • Reasonable operating expenses and efficient operations • Effective internal audits and sound controls • Detailed written policies that reflect actual practices • Strategic plan and realistic budget • Good communication
How to deal with DORs
In handling a Document of Resolution (DOR), remember that it is neither a contract or an administrative order and should be treated as such. It is only a set of recommendations proposed by an examiner to focus the credit union’s attention on the importance of addressing the risks or problems cited.
That’s why a DOR should always be considered a draft and not signed or agreed to when initially presented. In handling a DOR, you should bear in mind that the examiner’s expertise lies in their ability to spot safety and soundness issues, analyze financial data and detect regulatory violations. And not in analyzing market conditions or membership considerations like a credit union’s CEO and directors.
If the credit union disagrees with the DOR, it should be negotiated with the examiner to develop an alternative solution or provide additional time to produce a plan of their own. If credit union officials do not offer acceptable alternate plans, an examiner may recommend administrative action. A good DOR is one that contains terms that everyone agrees are necessary to improve the safety and financial health of the credit union.
How to deal with LUAs
Unlike a DOR, a Letters of Understanding and Agreement (LUA) is a contract. It’s not binding or enforceable until it has been adopted and executed by a vote of the directors. Like a DOR, a LUA should also be considered only a draft proposal when first presented.
Upon receiving a LUA, a credit union should make sure it takes the time to properly review its terms and seek legal counsel. The LUAs goals should be realistic and achievable within the required timeframes. If necessary, request clarification and submit a response or counter proposal. A credit union’s board can refuse to sign the LUA, but the examiner is likely to proceed with more formal administrative actions.
There’s also an enforcement difference between a “published vs. unpublished” LUA. The NCUA Board will publish a LUA if the Board can legally enforce the violations. Even if it has not published the LUA, the NCUA may take administrative action if the credit union fails to comply with the terms or conducts itself in a way that violates safety, soundness or law.
DORs and LUAs: 6 essential recommendations to follow
1. Do not sign when initially presented Rules and guidelines permit credit unions to carefully review and understand the DOR or LUA before you adopt or execute it.
2. Remember the terms are negotiable Upon the completion of your review, contact your examiner to discuss modifications, clarifications or thoughtful, well-supported counter proposals.
3. If harmful to credit union, officials have a duty to not execute Credit union officials have a duty to not adopt DORs or LUAs that contain terms that they believe are unachievable or harmful to the credit union.
4. Do not ignore and formulate a response as soon as possible Review and formulate a response as soon as possible. If a response to a draft DOR or LUA is not received prior to the time of your next meeting with the examiner, it will be assumed that it will be adopted.
5. Management should keep the Board and Committee current on any adverse findings Officials attending an interview with a credit union’s examiners should never be caught off guard. They should fully discuss issues of importance with management, and at the exit interview be prepared to discuss the issues in question.
6. Be familiar with the consequences of ignoring or not complying with DOR and LUA If the credit union ignores or does not comply with a LUA, it can expose credit union officials and affiliated parties to personal liability.
Rules and recommendations for handling other adverse examination findings
Under the FCU Act, credit unions have the right to appeal examiners’ determinations, including decisions requiring prompt corrective action ordered by the NCUA Board. Matters that may be appealed include, for example, cease and desist orders, removal of officials, and conservatorships.
Credit unions also have the right to appeal examination report findings, conclusions, and directives from the examiner.
Documents of Resolution and LUAs are not generally appealable — because they are technically voluntary agreements, but the credit union should be able to appeal to the regional director as part of the DOR or LUA negotiation process.
The Examiner’s Guide states that credit unions have the right to have a representative, such as an attorney, present during the meetings with the examiner. And also to have confidential, non-discoverable communications with their legal counsel regarding examination issues.
Credit union examination best practices
Here’s some best practices to follow to ensure your credit union examination is as beneficial an experience as possible for your institution:
Understand the scope of the examination. Activities posing the highest risk will receive the highest amount of scrutiny.
Use past exams to prepare for future exams. Ensure there has been a resolution of prior exam and audit issues.
Fully inform credit union officials regarding any areas of weakness at the credit union.
Make sure the credit union’s policies and practices are appropriate for the credit union’s risk profile, up-to-date, and consistent with legal requirements.
Work with the examiner to provide necessary financial data access as well as all official credit union documentation to examiner personnel on a timely basis.
Be willing to meet and listen to his/her concerns, recommendations and directives.
Don’t hesitate to provide reasonable supplementary information to the examiner or to seek corrections.
Point out discrepancies between the examiner’s directives and the Examiner’s Guide or legal requirements.
Appeal examiner or regional office decisions, that the credit union feels are in error, unrealistic, inappropriate or inconsistent with its regulatory policies or procedures. Provide factual supporting documentation to augment the reasoning for the appeal.
Be specific. When an examiner indicates you must not do a specific thing, ask for the legal citation that is the basis for the recommendation.
Use CUNA’s Examination and Supervision Issues Reporting Form after each exam to report on your examination experiences.
Seek the advice of legal counsel prior to entering into any type of legally binding agreement.
Maintain open communication with the examiner before, during and after the exam.
Responding to enforcement actions
In responding to enforcement actions, it’s important to make sure the credit union responds in a timely manner. It’s also essential that the Board is aware of and understands the requirements of the enforcement action.
Develop a detailed action plan to address each component requirement. Assign someone to track compliance enforcement action and report to board or supervisory committee. Also, consider consulting with legal counsel or outside assistance.
Credit union examination rights
The rights contained in the following points were taken from the NCUA Examiner’s Guide and should help to explain the rights of credit unions to work cooperatively with examiners in fashioning the terms of DORs and LUAs.
Credit unions have the right to:
Manage risk without being directed by examiners to eliminate it.
Respectful conduct from their examiners.
Be examined by well-trained competent examiners who understand the unique characteristics of credit unions.
Meet and discuss examiner findings, conclusions, directives, and administrative actions with the examiner, or privately among themselves without the examiner present. Credit union officials should be able to have management staff present at the officials’ discretion.
Question, and seek corrections to, examiner findings, conclusions and directives.
Provide alternative and/or additional data, conclusions, and solutions to address problems identified by the examiner.
Know the specific authority or legal basis for an examiner’s directive.
Receive clearly written examination reports, notices, etc. on a timely basis.
Receive exam reports, findings, directives, and administrative actions that are based on all relevant facts.
Be evaluated on their own strengths and weaknesses and not solely on the basis of regular concerns about trends.
Be evaluated for progress toward objectives that are realistic and achievable, proportionate to the risk presented.
Examination findings and directives that are risk prioritized.
Appeal examiner findings, conclusions, or directives without retaliation from their regulator.
Have instructions on how to appeal; detailed on every exam report provided to credit unions.
Record meetings with examiners and other agency personnel.
Have a representative, such as an attorney, present during meetings with the examiner and other regulatory personnel.
Have any published orders — such as consent orders — address only facts and not conjecture or speculation by the examiner.
Have confidential, non-discoverable communications with their legal counsel regarding examination issues.
Develop and use “high-level” policies, which should be separate and distinct from detailed procedures.
Have a lead examiner that is state or federal, consistent with the credit union’s charter type.
Know the timing of when NCUA will publish a Letter of Understanding and Agreement if the NCUA is planning to do so.
Defer to their CPA if there is a disagreement between the officials and their regulator regarding issues related to U.S. generally accepted accounting principles.
Have communication with their examiner prior to final issuance of the examination report.
Have directives from examiners be consistent with regulatory requirements, policies and letters to credit unions.
How can I use this guide for my credit union?
Many credit unions have successfully negotiated terms in DORs and LUAs that they believed were harmful or unachievable, by providing the examiners with constructive alternatives.
In all cases, you should understand that the acceptance of a LUA or any other adverse exam finding by the credit union is the acceptance of the obligation to substantially comply with its terms within the time frames specified.
Once signed and in place, addressing the adverse finding(s) should form a core component of the credit union’s business plan going forward. The consequences of ignoring or breaching the terms of a LUA or other adverse finding can be severe.