What is an NCUA Letter of Understanding and Agreement?

A Letter of Understanding and Agreement (LUA) is a bilateral document signed by your board of directors and the National Credit Union Administration (NCUA) Regional Director (RD), listing your credit union's material problems and the corrective actions you agree to take. Whether it counts as an enforcement action turns on a single question: does NCUA publish it.

Where an LUA comes from

Regional Directors often issue LUAs when a credit union hasn't adequately responded to less severe measures, such as a Document of Resolution (DOR). NCUA also requires an LUA for newly chartered credit unions and for granting permanent special assistance, neither of which has anything to do with problems (NCUA Instruction 4820, Enforcement Manual, Chapter 2).

An examiner's recommendation is typically based on an examination, follow-up examination, or onsite supervision contact supported by documentation. The LUA addresses the most significant concerns already identified in your DOR without necessarily duplicating it, and every item in the LUA has to be recorded as a DOR Issue, either at a prior contact or when the LUA is issued (National Supervision Policy Manual (NSPM) 26.0, Letter of Understanding and Agreement, p. 8).

Todd Miller and Steve Farrar, both of whom spent more than 30 years at NCUA, drafted LUAs to be skinnier than the DOR and to hit the root causes rather than every item on the list. Todd's read on what he's seeing now is that this isn't consistently how it works in practice.

Published or not published is the whole question

NSPM 26.0 puts a non-published LUA in the informal column and a published LUA in the formal column, alongside cease and desist orders and conservatorship (Types of Administrative Remedies, p. 5).

The reason is statutory. Section 206(s)(1)(A) of the Federal Credit Union Act requires the NCUA Board to publish any written agreement whose violation the Board may enforce. An LUA has to be published for violations to be enforceable, and violating a published LUA is by itself grounds for administrative action. Non-published LUAs are not enforceable. Violating one is not grounds for a formal enforcement action on its own, though it can serve as the basis for developing grounds where the underlying safety and soundness concerns or violations exist (Instruction 4820, Chapter 2).

One narrow exception exists. The NCUA Board can find that publication would be contrary to the public interest, and an unpublished LUA issued under that finding stays enforceable. It triggers a quarterly written report to Congress, and Instruction 4820 says it should be used rarely.

Every LUA has to state which of three things applies: it will not be published, it will be published, or the RD is reserving the right to publish it for a reasonable time. Read that third one carefully before anyone signs.

Todd has described the language in published LUAs as draconian and one-sided, reserving NCUA's right to remove officials and assess civil money penalties. NCUA doesn't announce publication the way it announces a conservatorship through NCUA Express. The trade press goes looking anyway, and reputation risk climbs fast once they find it.

What your board is committing to

If a quorum of directors signs, the board has accepted it (NSPM 26.0, Issue an LUA, p. 10). I've sat with boards where some directors wanted to vote no or abstain on a publishable LUA, believing that would keep them out of it. The organization voted, and every director carries the corresponding fiduciary responsibility no matter how they individually voted.

No LUA carries a termination date unless it's tied to a newly chartered credit union (p. 8). It runs until NCUA cancels it. Steve's test for whether you're there: did you complete the actions, and did the actions achieve the results intended.

You get a minimum of two business days to review the final approved LUA before signing, and the examiner is supposed to arrange delivery within 14 business days of receiving that version (pp. 10-11). A board that needs longer than two days to understand what the timeframes commit it to has every reason to ask for it. If officials refuse to sign, the examiner documents the refusal and recommends a course of action, which may be a Preliminary Warning Letter (PWL) (p. 12).

What changed, and why an examiner may not have caught up

NSPM 10.0 directed regions to issue a PWL or LUA to every CAMEL 4 and 5 credit union unless a more formal action was approved (Chapter 10, District Management, p. 319), and told examiners to draft an LUA for all CAMEL 4 credit unions absent Associate Regional Director (ARD) concurrence (Chapter 1, Administrative Remedies, p. 20). NSPM 26.0 carries no automatic-LUA rule at any CAMELS code.

Version 10.0 also required that an LUA not contain new information management hadn't already received in the examination or supervision report, and that LUA directives and timeframes be clear, specific, measurable, and easily understandable (Chapter 1, p. 20). Both sentences are gone from the 26.0 LUA section.

An examiner would fairly answer that the substance survives elsewhere. Because every LUA item must be recorded as a DOR Issue, the DOR drafting standards in 26.0 still reach it, including the SMART principle and the requirement to name who is responsible and by when (Report Components, p. 229). That answer is weaker than what 10.0 gave you, because 26.0 permits the DOR Issue to be recorded at the same contact the LUA is issued. If an item in your LUA is genuinely new to you, the current manual no longer hands you the objection.

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