Credit Union Boards Scrutinized by NCUA

Posted: February 7, 2011 in Credit Unions, NCUA
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Credit Union boards are made up of volunteers, and most have backgrounds and work experience outside financial institutions. In a move I applaud by NCUA, it now is scrutinizing the knowledge that the board members possess, which in the long run if adhered to would bring more accountability. The new rules will take effect July 27, 2011.

With financial reform being a hot topic, one must wonder why financial institutions are not more proactive when it comes to doing the right thing? Like most in life, until we are forced to do change, the status quo rules the day.

General Duties of Directors
The final rule contains the following six key provisions:
1. The board of directors is responsible for the general direction and control of a federal credit union. The board may delegate operational functions to management, but not the responsibility for the credit union’s direction.
2. A director must carry out his or her duties in good faith, in a manner reasonably believed to be in the best interests of the membership, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
3. A director must administer the affairs of the credit union fairly and impartially and without discrimination in favor of or against any particular member.
4. A director must have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the credit union’s balance sheet and income statement and the ability to ask, as appropriate, substantive questions of management and auditors.
5. A director must direct the operations of the federal credit union in conformity with the Federal Credit Union Act, NCUA’s Rules and Regulations, other applicable laws, and sound business practices.
6. A director may rely on information prepared or presented by employees or consultants the director reasonably believes to be reliable and competent and who merit confidence in the particular functions performed.

What a Director Should Know
At a minimum, a director should be able to examine the credit union’s balance sheet, income statement and be able to answer the following questions:

  • What does this line item mean?
  • Why is it important to the credit union?
  • Is the value of the line item changing over time? If so, what does that change (either positive or negative) mean?
  • Is the change important to the credit union?

A director must understand the specific activities in which his or her credit union engages. In particular, a director must understand not only how these activities generate revenue for the credit union but also, and perhaps most importantly, the various risks associated with these activities that could lead to financial loss.
To do their job in a meaningful manner, it is essential that directors understand the risks found in depository institutions — that is, credit, liquidity, interest rate, compliance, strategic, transaction, and reputation risk. Moreover, directors must understand the internal control structures at the credit union that limit and control these risks.

Timetable for Acquiring Financial Skills
NCUA understands that directors are, generally, uncompensated volunteers who have other important demands that compete for their time. The decision to serve as a director, however, is a commitment which includes understanding the financial statements, risks and controls of the credit union so as to properly exercise authority over the credit union’s direction.
Directors who were elected or appointed on or after January 27, 2011, and who come to the position without the requisite financial skills will have six months from the date of election or appointment to acquire the enumerated skills. Sitting directors who already understand their federal credit union’s financial statements and risk controls will not have to do anything further to meet the financial requirements of NCUA’s directors’ duties rule. Sitting directors who were appointed or elected before January 27, 2011, and do not have these skills, have until July 27, 2011 to satisfy the minimum financial standards.

How to Acquire Necessary Financial Skills
It is NCUA’s intent to ensure that all federal credit union directors have a basic understanding of their credit union’s finances. It is not NCUA’s intent to increase examiner scrutiny of the financial skills of particular directors. Rather, examiners will evaluate whether the credit union has a policy in place to make available the appropriate training to enhance the financial knowledge of the directors. The policy should provide:

  • Opportunities and funding for directors to acquire the skills needed to evaluate the credit union’s finances. Some directors may come to the director position with the necessary financial knowledge. Other directors may obtain the necessary financial skills through internal credit union training, external training, self education, on-the-job experience, or a combination of these activities.
  • Education alternatives for directors commensurate with the size and complexity of the credit union. Alternatives could include, but not be limited to, training provided by vendors or trade associations; college courses or other opportunities at colleges or universities; NCUA’s Office of Small Credit Union Initiatives (OSCUI) training program presented at various workshops across the country beginning March 5, 2011; and NCUA’s Office of Examination and Insurance (E&I) internet-based training. Additional information will be distributed when the development is complete.

Is this a good move on the part of NCUA?

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