How To Effectively Manage LUAs, DORs And Other Adverse Examination Findings: The Definitive Guide

August 17, 2018

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 LUAs can be unpublished or published, with published LUAs available for public review.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.

 

Convservatorship

 

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.

 

Involuntary Liquidation

 

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:

  1. Manage risk without being directed by examiners to eliminate it.

  2. Respectful conduct from their examiners.

  3. Be examined by well-trained competent examiners who understand the unique characteristics of
    credit unions.

  4. 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.

  5. Question, and seek corrections to, examiner findings, conclusions and directives.

  6. Provide alternative and/or additional data, conclusions, and solutions to address problems identified by the examiner.

  7. Know the specific authority or legal basis for an examiner’s directive.

  8. Receive clearly written examination reports, notices, etc. on a timely basis.

  9. Receive exam reports, findings, directives, and administrative actions that are based on all relevant facts.

  10. Be evaluated on their own strengths and weaknesses and not solely on the basis of regular
    concerns about trends.

  11. Be evaluated for progress toward objectives that are realistic and achievable, proportionate to the
    risk presented.

  12. Examination findings and directives that are risk prioritized.

  13. Appeal examiner findings, conclusions, or directives without retaliation from their regulator.

  14. Have instructions on how to appeal; detailed on every exam report provided to credit unions.

  15. Record meetings with examiners and other agency personnel.

  16. Have a representative, such as an attorney, present during meetings with the examiner and other
    regulatory personnel.

  17. Have any published orders — such as consent orders — address only facts and not conjecture or
    speculation by the examiner.

  18. Have confidential, non-discoverable communications with their legal counsel regarding
    examination issues.

  19. Develop and use “high-level” policies, which should be separate and distinct from detailed
    procedures.

  20. Have a lead examiner that is state or federal, consistent with the credit union’s charter type.

  21. Know the timing of when NCUA will publish a Letter of Understanding and Agreement if the
    NCUA is planning to do so.

  22. 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.

  23. Have communication with their examiner prior to final issuance of the examination report.

  24. 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.

 

 

 

 

 

 

 

 

 

 

 

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