Blaine believed SECU's member-owners, today, numbering 1.9 million, had the right to know where their credit union stood.

The NCUA thought otherwise and clearly demonstrated why no credit union had ever been there. The regulator tried to block Blaine from posting the rating, a number that is kept in confidence for all federally chartered and federally insured state-chartered credit unions.

SECU did post its CAMEL rating for the trial year, but the NCUA also came after the North Carolina state regulator. The rating is no longer posted on SECU's website.

“We are very much of the opinion that the regulatory process should be transparent, but NCUA felt that if all credit unions reported their CAMEL ratings to their members it could cause runs on some of the institutions,” Blaine said. “NCUA believes it holds the ultimate trump card and there is no meaningful appeals process in place compelling officials to explain or justify their opinions.”

Julie Andersen Hill, associate professor of law at the University of Alabama School of Law in Tuscaloosa, agreed with Blaine when it came to the NCUA's obligation and response to appeals from the credit unions it regulates. A specialist in banking law, she took the NCUA and three banking regulators to task in her new study, “When Bank Examiners Get It Wrong: Financial Institution Appeals of Material Supervisory Determinations.”

The NCUA fared significantly worse than the FDIC, the Federal Reserve and the Office of the Comptroller of Currency in Hill's study, presented in September at a meeting of community bankers hosted by the Federal Reserve Bank of St. Louis. In the NCUA's case, Hill looked at credit unions' appeals record and the process itself for the 2002 to 2012 period.

“For the period of the study, I would have to give NCUA a CAMEL rating of 5,” said Hill, whose family owns the single-branch Gunnison Valley Bank in Gunnison, Utah. “From 2012 onward, they have been trying to make the process more professional, but before that, there was room for improvement.”

Hill's 83-page study measured the appeals process for the OCC and FDIC back to 1994, when Congress first mandated that appeals should exist for all financial regulators. The Fed provided numbers starting in 2000 and the NCUA in 2002.

“In the wake of the 2008 financial crisis, I was practicing law [in Washington] and started hearing from banks that they were unhappy with their examination ratings,” Hill said. “I realized that it had been 20 years since the Congressional mandate for an appeals process was passed and thought it might be a good time to see what kind of progress had been made.”

She expected to find low numbers in terms of appeals filed since she had heard little about financial institutions winning appeals. However, Hill was not prepared for the disparity of numbers among regulators as well as the varied approach each regulator took toward the institutions it oversaw.

Read more: “Sometimes dysfunctional and seldom used” …

According to Hill, the study provided the first in-depth analysis of the appeals process among financial regulatory agencies. Study results showed a process that was sometimes dysfunctional and seldom used, a description she said defined the NCUA's approach.

Regulators among all agencies studied varied significantly in the reviews they provided through the appeals process for material supervisory determinations, or MSDs, which were defined as evidence of financial stress or legal infractions found in the financial institutions' books, Hill wrote in her report.

The regulators did not agree on which examiner determinations were appealable or on the applicable standard of review. Even considering the state of the various regulators' appeals policy and the thousands of institutions examined starting in 1995, Hill found the number of appeals “astonishingly low.”

“The OCC Ombudsman has issued 157 decisions, the Fed has decided 25 appeals, the FDIC's Supervision Appeals Review Committee has issued 63 decisions, and the NCUA's Supervisory Review Committee has issued [six] decisions,” Hill wrote. “When institutions do appeal, they seldom win.”

The lower the number of appeals, the less likely it was that the process was understood by or functional for the institutions being regulated, she said.

The reported noted that the NCUA appeals process was largely an internal affair, while other regulators made greater use of outside resources. The OCC ranked highest for utilizing an external ombudsman to resolve disputes, but all agencies had room for improvements in their processes, Hill said.

Citing the NCUA's Interpretive Ruling and Policy Statement 11-1, Hill noted that the agency preferred first to resolve disputes informally. If that did not work, then the next step was to contact the regional office within 30 days of the examiner's ruling. The rule was unclear, however, as to whether this contact was a simple notification or constituted a formal appeal.

If the dispute couldn't be resolved at the regional level, the next step would be a written appeal to the NCUA's supervisory review committee. Hill said the material for past appeals has varied from a four-page letter to “binders of material,” a reference to the 2012 appeal filed by Commodore Perry Federal Credit Union, a now $35 million institution in Oak Brook, Ohio.

As a final step, a credit union unsatisfied with the supervisory review committee's ruling could appeal to the NCUA Board of Directors. The board's decision, whatever it was, would be considered final.

“Perhaps the most novel part of NCUA's appeals process is the scope of appealable determinations,” Hill wrote in assessing the agency's range compared to other regulators measured. “On the one hand, the NCUA's scope of appealable matters is narrow. On the other hand, in some respects, the scope of appealable matters is quite broad.”

On the narrow side, credit unions can only appeal composite CAMEL ratings of three, four and five and not individual category ratings at those levels. On the broad side, the supervisory review committee can review loan classifications if the appealing credit unions consider those classifications significant, the study noted.

Moreover, the credit unions' right to appeal didn't end by imposition of either an informal or formal enforcement action, but the credit union must comply with the action while an appeal is pending. Further, a reversal of the MSD would not necessarily terminate the enforcement action, the study said.

Data received by Hill as the result of a Freedom of Information Act request showed that during the study's 2002 to 2012 period, 140 regional office appeals were filed by individual credit unions. Of that number, 65 contacts were made for CAMEL composite or component ratings, 47 pertained to Documents of Resolution, 20 related to examiner or examination findings, and the rest dealt with other issues.

The study indicated that in spite of the low rate of credit union success at the regional office contact level, there were very few appeals filed with the NCUA's supervisory review committee. In fact, the committee issued only six decisions during the period covered by the study. In each of those cases, the committee upheld the examiner decisions.

NCUA Public Affairs Specialist John Fairbanks blamed the low numbers on the NCUA's process, which allows credit unions to appeal examination findings through formal and informal channels. 

“The process encourages resolution of problems between credit unions and examiners, believing that direct communication can often resolve issues or at least clarify points of disagreement. The process, if necessary, continues through the supervisory examiner, the regional director, the Supervisory Review Committee and ultimately to the NCUA Board,” he wrote in an emailed statement.

Hill's study made three general recommendations that all regulatory agencies should follow to improve the appeals process. First, financial institutions should have access to a dedicated appellate authority outside the institution to appeal any MSDs filed against it.

Second, the appellate authority should engage in a robust review process that considers a broad scope of appealable matters and employs a clear and rigorous standard of review. Third, regulators should release detailed information about each decision reached by the appellate authority.

Hill also had two specific recommendations for the NCUA, the foremost of which dealt with the one-year terms and revolving-door policy of the agency's supervisory review committee.

“First, NCUA should put people on the committee as a long-term assignment,” Hill said. “Changing committee members every year will not result in consistent decision-making. Second, the agency needs to releases their opinions to the public,” she added. “If credit unions knew there were only six appeals versus bunches of appeals for other regulators, they would demand change in the process.”

Fairbanks said the NCUA is unable to comply with that suggestion.

“(The) NCUA works to provide a process that is efficient, effective and transparent; however, it should be stressed the appeal process includes confidential information relating to the credit union and to supervision, which precludes its public release,” he wrote in an emailed statement. “As a matter of discretion, NCUA releases types of information where the public has a strong interest in the explanation of agency policy and deliberative process, if the interests served by disclosure outweigh other relevant interests. (The) NCUA has made such releases on occasion (under the Freedom of Information Act).”

Thomas Renz agreed with Hill's assertion in principle. However, Renz, the president and chief development officer of Commodore Perry FCU doubted that the NCUA would embrace any changes the study recommended with open arms.

Read more: “As much flexiblity in telling credit unions what they're doing wrong as possible” …

“Some NCUA staff are interested in making changes [to the appeals process], but the political appointees who run the agency and those who are police-oriented want as much flexibility in telling credit unions what they're doing wrong as possible,” said Renz, who holds a law degree.

“Any time you give due-process rights to an individual or institution, you limit the power of the enforcement organization,” he added. “Any time credit unions get more due process rights, it's harder for the NCUA to do what it wants to do.”

When it comes to filing an appeal with the NCUA, Renz knows the process from bitter experience. In October 2012, Commodore Perry FCU filed an appeal over a 2011 examination the credit union considered retaliatory in light of what had been described as harassment of employees, particularly female employees, by the examiner assigned to the credit union. In the much-publicized case, Renz navigated the entire appeals process through a hearing before the NCUA's supervisory review committee in December that year.

The committee denied the appeal on Dec. 19, 2012, and Renz's plans to appeal to the NCUA board, the final authority in all examinations appeals, were eventually scrapped, with the credit union executive citing how much time and energy the process had taken. The credit union was awarded the 2013 Credit Union Times Trailblazer Award for Political Action.

Commodore Perry FCU ultimately reached an agreement with NCUA, the results of which have been sealed.

“I can't go into the specifics about the result of our appeal because we're barred by law from discussing it,” Renz said. “I can say that despite my complete and utter disgust with the appeals process, I did find that NCUA had a number of very good people who were willing to listen once the process was over.”

Renz's legal training gave him a unique viewpoint on the experience, raising red flags about the process as a whole, as well as its lack of transparency. The inability to review and learn from the settlement with the regulator will hamstring future efforts by other credit unions seeking redress, he said.

“Precedent is paramount in law, and without some watchdog insuring there's consistency, there's an inherent problem,” Renz said. “[NCUA Director of the Office of Examination and Insurance] Larry Fazio does work very hard to make sure credit unions receive equitable treatment, but due process is never about protecting the majority, it's about protecting the minority. Without due process, how do we assure that the right steps are taken?”

As a member of the CUNA Examination and Supervision Subcommittee, Renz said he is doing what he can to bring these issues to light. Hill's study will help, he noted, but the process needs a few more teeth in it if it's going to take a bite out of the problem.

“The study's ideas are pretty strong and have a potential to help strengthen the situation, but the devil is in the details,” Renz said. “I absolutely agree with Ms. Hill's suggestions, but I'm not sure they're comprehensive enough.”

Renz has his own ideas based on hard-fought experience, and said the CUNA subcommittee will be taking steps in the not-too-distant future to address the examination and appeals process. Right now, the pending risk-based capital rule is consuming a great deal of effort. Once RBC has been decided, examinations and appeals are next on the subcommittee's agenda, he said.

Renz stressed the importance of due process, as well as the ability to hold examiners and the agency to the highest possible standards. Anything less sets a dangerous precedent for all credit unions, he said.

“If you feel like none of this matters because it hasn't affected you, then you're lucky it hasn't,” Renz said. “But if it ever does, you will sadly regret having not done more to protect your due-process rights prior to having them called into question.”