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On Compliance: It’s Time to Think Like a Lawyer

December 2017: Vol 40 No 12
Eric L. Richard
Two NCUA rules effective Jan. 1 offer new opportunities for appeals.

Pensive mature businessman looking up with concentration and writing in his paperwork at officeIn law school, I was taught that lawyers are always the smartest people in the room and deserve to rule the world. But spending the last 20-plus years working with credit unions has taught me humility. With apologies to attorney Roy Bergengren, credit unions have survived and prospered with relatively little reliance on lawyers, compared to banks. Their managers are rarely trained or disposed to think like lawyers.

The time has come, though, when credit union managers could benefit from thinking a little bit more like lawyers. The National Credit Union Administration board is currently chaired by a lawyer of distinction, Mark McWatters, who is putting his background to work to provide regulatory relief for credit unions. To take advantage of what is on offer, credit unions will need to develop some legal consciousness.

For example, NCUA has long lagged behind the federal bank regulatory agencies in providing procedural due process to its regulated entities that would like to challenge agency decisions. At the Oct. 18 NCUA board meeting, the agency took steps to rectify this situation. The board adopted two final rules, effective Jan. 1, that should make it more attractive to appeal adverse decisions rendered by NCUA staff.

On paper, these new rules on appeals are a beautiful thing. They strike a fine balance between transparency and due process for credit unions on the one hand, and the agency’s need to get things done on the other. They are not perfect, but, on their face, they are fair. For them to work, credit unions must be ready and willing to use them.

In the past, appeals of staff decisions have been fairly rare. Many credit unions feared informal retaliation if they appealed supervisory decisions or denials of applications. The new rules include a clear prohibition on retaliation of any kind. More important, by clarifying the standards and procedures for appeals, the rules tacitly encourage more appeals by recognizing their legitimacy.

Each of the two new rules covers different territory. The first rule adds a new 12 C.F.R. Part 746, Subpart A, which deals with appeals of “material supervisory determinations.”  The second rule adds a new 12 C.F.R. Part 746, Subpart B, which deals with a grab bag of appeals of what might be called “programmatic” decisions by senior NCUA officials. All the Part B appeals were previously the subject of separate appeals provisions in other, scattered sections of NCUA’s rules.

The new Subpart A will probably be of more widespread interest to credit unions than Subpart B, though both could be important. In referring to material supervisory determinations, Subpart A sweeps in (subject to some exceptions) any NCUA supervisory action that “could significantly affect capital, earnings, operating flexibility, or the nature or level of supervisory oversight of a federally insured credit union.” 

NCUA says this definition is intended to be broad. An example is a CAMEL rating of 3, 4 or 5 (though not decisions on individual components of the composite CAMEL rating). Other examples include directives on loan loss reserves, the classification of nonperforming loans, and compliance with consumer protection laws (such as restitution orders under the Truth in Lending Act or Regulation Z), among others.

Credit unions considering an appeal must demonstrate that they have asked the original decision-maker to reconsider before moving their concerns up the chain of review. Then, credit unions have the option of seeking review by the Director of Examination and Insurance, but also have the choice of skipping that step and appealing directly to the Supervisory Review Committee.  

The newly constituted SRC will have a rotating membership drawn from an enlarged pool of NCUA senior officials. Usually the SRC proceeding will include an oral hearing at which the credit union can appear. After SRC review, credit unions that are still dissatisfied can seek review by the NCUA Board itself. (At least one member of the NCUA Board must support such a review for it to be granted.) There is even a possibility of an oral hearing before the NCUA Board, at which the credit union can be represented.

As for Subart B, examples of permissible appeals include denials of waivers of limits on loan participations, denials of field of membership expansion requests, denials of low-income designations, and many others. By contrast with Subpart A, the credit union has complete freedom of choice about whether to seek reconsideration of the original decision before appealing. These appeals will go directly to the NCUA Board; the SRC will not be involved. The appealing credit union may request an oral hearing before the Board, which may or may not be granted.

The procedures, deadlines, and documentary requirements governing different types of appeals can get bit complicated. Credit unions with a serious issue at stake will be well advised to get counsel involved in the process. But these rules do have the potential to make appeals more frequent and effective. Time to start thinking like a lawyer.

Eric L. Richard is a principal of CU Counsel PLLC, Washington, D.C.

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